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Radical Innovation in the Electricity Sector - Darryl Biggar - Australia - June 2017 OECD discussion

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This presentation by Darryl Biggar, Special Economic Advisor at the Australian Competition and Consumer Commission (ACCC) and the Australian Energy Regulator (AER), was made during the discussion “Radical innovation in the electricity sector” held at the 63rd meeting of the OECD Working Party No. 2 on Competition and Regulation on 19 June 2017. More papers and presentations on the topic can be found out at oe.cd/1ZW.

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Radical Innovation in the Electricity Sector - Darryl Biggar - Australia - June 2017 OECD discussion

  1. 1. Public policy issues in the electricity sector in Australia OECD/DAF/COMP/WP2: Hearing on Radical Innovation in the Electricity Sector, 19 June 2017 The views in this presentation are the views of Darryl Biggar and are not necessarily the official views of the Australian Government, including the ACCC and the AER.
  2. 2. Brief overview of the Australian NEM Wholesale market • Five minute energy-only compulsory pool with a high price ceiling; • Regional (not nodal) pricing; Five prices determined across 5 states; • Separate markets for frequency control ancillary services; Regulated networks • Transmission and network businesses structurally separated; • Regulated by the Australian Energy Regulator; • Five-year regulatory cycle, building – block model and incentives; Retail market • End-customers purchase electricity from retailers; • With most states customers have a choice of retailer; • The ACCC is carrying out an inquiry into the effectiveness of competition in the retail market. Governance and Institutions • Electricity is a state responsibility (not federal); governing body is the COAG Energy Council; • Rule making body (AEMC) • Market operator (AEMO) • Regulation and competition enforcement (AER)
  3. 3. An electricity sector under pressure Rapid innovation, especially in distributed energy resources and ICT; increasing customer expectations for control and self-generation Pressure for rapid decarbonisation and integration of intermittent renewable generation Increasing network charges; concerns over affordability; price shock Policy uncertainty, especially over carbon policy; retirement of coal plant Some reliability and security events and “near misses”“We are at a critical turning point …” – Finkel review Significant increases in the price for natural gas
  4. 4. Issue #1: Distribution network pricing • End-customers face poor incentives for use and investment… • We want to achieve efficient usage of and investment in distributed resources… • But distribution networks are priced in a time- averaged and geograph- ically-averaged manner. Improving distribution network pricing is one of the most important policy issues facing the sector today (and possibly ever!)
  5. 5. Issue #1: Distribution network pricing • Ideally network prices would vary dynamically in time and space, reflecting the losses and congestion on the distribution network… • Distribution network tariffs in Australia are required to be “cost-reflective”… but are not yet fully dynamic • This would probably require a new distribution market operator…
  6. 6. Issue #1: Distribution network pricing • There has been some interest in Australia in establishing peer-to-peer trade (perhaps using Blockchain) • But the proposed schemes ignore the potential for congestion on the distribution network… • There is a feed-in tariff for solar PV but this is much lower than the typical retail price for electricity and flat (not dynamic)
  7. 7. Issue #2: Structural separation? • The reforms which established the NEM separated the trans- mission and distribution networks from generation and retailing • Should distribution networks today be allowed to provide competitive services?
  8. 8. Issue #2: Structural separation? • The problems are well known: • Anticompetitive discrimination – Favourable terms and conditions of access – Favourable access to information – Favourable treatment in the operation or investment decisions of the regulated firm… • Cross-subsidisation • WP2 is familiar with these arguments from its work on structural separation across a range of industries
  9. 9. Experience in the US electricity industry US FTC: “Several years of industry experience now appear to confirm this concern that discrimination remains in the provision of transmission services by utilities that continue to own both generation and transmission … … We support FERC’s assessment that behavioural rules have not provided the degree of competitive benefits that FERC sought to engender when it introduced competition in wholesale electric power markets…”
  10. 10. There is an on-going debate in Australia… “… we would not rely on a ring fence alone but rather prohibit network businesses from carrying out activities in very closely related competitive energy services…” “…there is a strong incentive for networks to hinder competition in alternative services …” “We have doubts whether measures short of full structural separation will provide the level playing field that is needed…”
  11. 11. Issue #3: Governance and Institutions • The reforms to the electricity sector were built around the principle of relying on competition and markets where that is feasible… • But around the world there are signs of a loss in confidence in markets to deliver good economic outcomes in the electricity sector…
  12. 12. Issue #3: Governance and Institutions • In Australia there has been increasing political pressure for governments to take action, which may undermine markets and private investment. • The public policy processes in the sector were designed for slow, deliberate reform, but may not be agile enough in the context of the sector transformation which further undermines confidence…
  13. 13. Conclusion • Radical innovation in the electricity sector is placing the existing policy frameworks under pressure… • The challenge for policy-makers is developing a policy environment which is flexible, market-based and able to adapt to innovation in the sector… • There are a number of policy issues to address including network pricing reforms and structural separation… • Maintaining confidence of government and the market through this change process is one of the challenges…
  14. 14. A myriad of policy issues Decentralisation of generation; Smart appliances; Smart Metering; Storage; Electric Vehicles; Environmental objectives Distribution network pricing Pricing embedded generation; peer- to-peer trade Integration of DER into short-term and long-term forecasting and planning Market power issues Retail market issues Stranded assets; death spiral; limits of regulation Structural separation of competitive and non-competitive sectors Markets for ramp rate and inertia Regulation of micro- grids and stand-alone networks Co-ordination of private and network investmentRegulatory governance and government confidence in the market

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