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.

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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