Forum on Sustainable Energy, Good Governance and Electricity Regulation Regulation’s role in demand management and renewables: reflections from the experience in Australia Eric Groom Principal Advisor, IPART Singapore, 17 March 2008

Regulation’s role in demand management and renewables: reflections from the experience in Australia

Eric Groom

Principal Advisor, IPART

Singapore, 17 March 2008

Drivers for DM and RE Societal/externalities Environmental Access Local development Affordability Wholesale/retail Network

Societal/externalities

Environmental

Access

Local development

Affordability

Wholesale/retail

Network

Role for regulator Context/country specific Depends on – for example Institutional/political framework Market structure Varies over time … and between different activities of regulator?

Context/country specific

Depends on – for example

Institutional/political framework

Market structure

Varies over time

… and between different activities of regulator?

IPART’s role Established 1992 – multi-sector utility regulator ‘ Long’ involvement in DM issues 1996 review Delineation of role of regulator Hybrid revenue cap 1999 review Full revenue cap Pricing principles 2002 DM and RE review for government 2004 review Price Cap + D factor Emissions Trading Scheme

Established 1992 – multi-sector utility regulator

‘ Long’ involvement in DM issues

1996 review

Delineation of role of regulator

Hybrid revenue cap

1999 review

Full revenue cap

Pricing principles

2002 DM and RE review for government

2004 review

Price Cap + D factor

Emissions Trading Scheme

Network regulation Two key aspects Form of regulation and the incentives created Pricing ‘ positive pricing’ i.e prices that reflect costs by locations ‘ negative’ pricing or payments to reduce load on networks to reduce congestion and avoid capex

Two key aspects

Form of regulation and the incentives created

Pricing

‘ positive pricing’ i.e prices that reflect costs by locations

‘ negative’ pricing or payments to reduce load on networks to reduce congestion and avoid capex

Network regulation and DM and RE Many challenges to DM and RE – not least are cultural and planning biases But regulation can also create bias in short term Price cap is a strong disincentive due to the lost revenue In long term Uncertainty over treatment of capex and perceived bias towards traditional options And regulators have a role in ensuring bets practice planning process and opportunities for participation of DM and RE projects

Many challenges to DM and RE – not least are cultural and planning biases

But regulation can also create bias

in short term

Price cap is a strong disincentive due to the lost revenue

In long term

Uncertainty over treatment of capex and perceived bias towards traditional options

And regulators have a role in ensuring bets practice planning process and opportunities for participation of DM and RE projects

IPART’s experience with network regulation IPART started with hybrid revenue cap and full revenue cap ‘ Best solutions’ to short term bias but ineffective. Why? Long term uncertainties remained Strong bias to selling more electricity in utilities Difficult concept for advocates within utility to sell

IPART started with hybrid revenue cap and full revenue cap

‘ Best solutions’ to short term bias but ineffective. Why?

Long term uncertainties remained

Strong bias to selling more electricity in utilities

Difficult concept for advocates within utility to sell

D factor In 2004 Tribunal adopted price cap with D-Factor. D Factor is an add-on designed to correct for problems of price cap. Adjusts for impact of lost revenue from foregone sales allows for recovery of direct expenditures on DM up to cost of network alternatives allows for the retention of cost savings by the utility for the regulatory period

In 2004 Tribunal adopted price cap with D-Factor.

D Factor is an add-on designed to correct for problems of price cap.

Adjusts for impact of lost revenue from foregone sales

allows for recovery of direct expenditures on DM up to cost of network alternatives

allows for the retention of cost savings by the utility for the regulatory period

Network DM projects under D-factor

Impact on network investment Program is still small But relative to the size the capex savings are significant Over 2 years EA avoided $11m and IE avoided $12m Trend: small (eg sub $1m) deferred indefinitely, larger projects for 1-2 years

Program is still small

But relative to the size the capex savings are significant

Over 2 years EA avoided $11m and IE avoided $12m

Trend: small (eg sub $1m) deferred indefinitely, larger projects for 1-2 years

Emissions Trading

Outline of the scheme Obligation to reduce greenhouse gas emissions attributable to retailers Target: reduce from 8.65 to 7.27 tCO2e per capita by 2007 Emission reduction certificates can be created through low emission generation energy efficiency carbon sequestration large user changes to production process Interstate activities included Certificates are tradeable Obligations met by acquitting certificates Penalty: $10.50 per tCO2-e(not tax deductable) if target not met

Obligation to reduce greenhouse gas emissions attributable to retailers

Target: reduce from 8.65 to 7.27 tCO2e per capita by 2007

Emission reduction certificates can be created through

low emission generation

energy efficiency

carbon sequestration

large user changes to production process

Interstate activities included

Certificates are tradeable

Obligations met by acquitting certificates

Penalty: $10.50 per tCO2-e(not tax deductable) if target not met

Role of the Regulator The regulator (IPART) Monitors compliance with the target reductions in emissions and imposes penalties Performs the scheme administration role Scheme administration is not a regulatory function and need not have been given to IPART IPART established it as a separate stand-alone activity to facilitate a future change in responsibilities

The regulator (IPART)

Monitors compliance with the target reductions in emissions and imposes penalties

Performs the scheme administration role

Scheme administration is not a regulatory function and need not have been given to IPART

IPART established it as a separate stand-alone activity to facilitate a future change in responsibilities

Structure of the Scheme

Issues in Implementation Responsibility for making good ‘bad certificates’ is with creator Certificates, once registered, are ‘good currency’. Benchmarks for existing generators and concern at ‘windfall gains’ Inclusion of inter-state activities Measurement and verification of energy efficiency programs

Responsibility for making good ‘bad certificates’ is with creator

Certificates, once registered, are ‘good currency’.

Benchmarks for existing generators and concern at ‘windfall gains’

Inclusion of inter-state activities

Measurement and verification of energy efficiency programs

Assessment Targets achieved 200 accredited providers – over 100 in DSA 60 million certificates issued – 1/3 for DSA Implemented with few resources, relatively quickly Reliance on third party auditors has developed capacity, aided learning Main criticisms: generous rules on allowed generating activities – but policy issue; administrative ‘learnings’ stand Facing critical transition – oversupply, declining price and uncertainty about future. Key Transition to national cap and trade scheme on emitters Separate EE certificate scheme

Targets achieved

200 accredited providers – over 100 in DSA

60 million certificates issued – 1/3 for DSA

Implemented with few resources, relatively quickly

Reliance on third party auditors has developed capacity, aided learning

Main criticisms: generous rules on allowed generating activities – but policy issue; administrative ‘learnings’ stand

Facing critical transition – oversupply, declining price and uncertainty about future. Key

Transition to national cap and trade scheme on emitters

Separate EE certificate scheme