20 Dec 2012

COAG's electricity market reform

by Graeme Dennis, Faith Taylor, Robyn Farmer

The Power of Choice report recognises that both demand side and supply side actions are needed to effect change.

Significant reform of electricity market structures, contracts and regulation is on the cards, with consumers set to have an increased number of chips. The prize – a windfall reduction in costs across the National Electricity Market (NEM).

A wealth of complementary and competing proposals and policies have been published recently in respect to energy market reform – the Energy White Paper, the Productivity Commission's Electricity Network Regulatory Frameworks draft report, the AEMC's Rule changes for energy network regulation, and the Climate Change Authority's review of the Renewable Energy Target, to name but a few.

To wrap up the year, on 30 November the Australian Energy Market Commission (AEMC) presented its final Power of Choice recommendations to the Standing Council on Energy and Resources (SCER). The Power of Choice report culminates an 18 month review into developing greater demand side participation in the NEM. The publication coincided with the policy announcement made by Julia Gillard on 2 December to cut household and small business electricity bills by $250 a year by 2014.

Each of these proposals significantly contributed to the SCER's recommendations to the Council of Australian Governments (COAG) to consider in its final meeting of the year on 7 December. Demonstrating the hunger for reform, COAG has seemingly won over State opposition to many of the proposals and published a comprehensive implementation plan for reform.

The focus of the reforms is on making network use and investment more efficient and to level off or reverse the increase in peak demand, both being key factors assessed to be responsible for the significant rise in electricity prices over recent years.

COAG's final implementation plan tasks various parties with the development of the strategic frameworks necessary to effect the proposed changes. Many of the work streams mapped out have a short gestation period, with key decisions by mid-2013 and many new arrangements being effected by the end of next year.

The implementation plan includes:

  • a task for the AEMC to develop new national framework for reliability standards for implementation by the AER by the end of 2013;
  • additional funding for the AER (the Productivity Commission's recommended $23 million), with a review of its resources, independence and operations over the next 18 months;
  • establishing a national Consumer Challenge Panel to improve the engagement of consumers in energy policy and pricing outcomes;
  • deregulation of retail prices where effective competition exists, with jurisdictions to work towards this where effective competition does not yet exist;
  • a commitment to implement the National Energy Customer Framework (NECF) by January 2014 in those states yet to implement; and
  • a task for the SCER to develop a package of reforms necessary to adopt in full the recommendations in the Power of Choice report.

The Power of Choice report proposes:

Educating consumers about demand side participation and how they can take better take advantage of the new suite of options, and to investigate the ease with which customers may switch between retailers: The report skims over the use of price comparison and switch websites as a key information tool. Regulated websites and third party intermediaries are commonly used in the UK to standardise the information consumers can review, and are a useful platform to provide education on energy use and demand options. However, the use of such resources does give rise to potential competition and marketing issues, which would need to be appropriately regulated.

Phasing in more flexible cost reflective (time of use) charging and customer controls, while not replacing the traditional tariff option: This is intended to ensure that a customer is charged a more reflective price for actual cost of electricity it consumes. Other mechanisms include "direct load control" (where a customer's electricity retailer manages the services provided by appliances at agreed times) and "demand limiting switches" (where supply is cut off to an appliance if a customer's consumption goes above an agreed threshold). These tools will help to take the burden away from consumers who have a minimal peak time load, but who currently cross-subsidise heavy peak time users through their retail tariff.

Settling interval meter consumption in the wholesale market using interval data: The proposal moves away from settlement being based on the net system load profile (the average load profile of consumers in a distribution area) and will not be dependent on the customer having a time of use retail tariff.

Taking steps to commercialise demand side participation products: The report proposes to prescribe the instalment of smart meters in defined circumstances like new connections and replacements. It also backs away from a government mandated roll out of smart meters (for which there would be issues of compensation for those smart meter assets already in use in the market), and proposes these provisions are removed from the National Electricity Rules.

Making electricity consumption data more readily available to consumers and their agents: The recommendations include the freeing-up of restrictions on the access to, and use of, energy data and metering data (subject to appropriate confidentiality protections). Currently the regulation of energy data and metering data can restrict the use of smart meters provided by third parties who are not the customer's retailer or distributor.

Incentivising electricity networks to consider demand side projects as an alternative to network developments to support efficient demand management: The AEMC proposes that the National Electricity Rules should better cater for electricity network businesses to achieve a commercial return for demand side projects that deliver a net cost saving to consumers. This is indicated to provide for an allowance in the network determination process for approved demand side projects that mean the network business would receive less profit as a result of a reduction in network use due to the demand side project.

Extending the range of people that distributed generators can sell their energy to: The AEMC also suggests that tariff structures to incentivise the sale of distributed generation into the market should be developed. This is intended to tie in with a review into national approach to feed-in-tariffs.

Investigating whether distribution network service providers should be allowed to own distributed generation assets to provide network support and reduce the need for network augmentation: Jurisdictional ring fencing arrangements are currently under review by the AER, with a focus on developing uniform guidelines in the NEM that will encourage use of network-owned distributed generation, but prevent this stimulating anti-competitive tendencies.

Introducing cost reflective distribution use of network charges: At present all users in a distribution network pay the same rate (known as "postage stamp tariffs"), whether their power is hauled one kilometre or hundreds of kilometres – and in some regions this creates a cross-subsidy from urban to rural users.

This change would assist distributed generation projects, which use the local distribution network to move green energy from the distributed generator to nearby consumers in the same precinct. Such projects are currently disadvantaged by the uniform application of network tariff structures that are not reflective of the distance of network used.

Introducing greater competition for metering services for residential and small business customers: The report proposes that retailers would be responsible for ensuring that its customers' premises have a compliant meter and for engaging a metering coordinator (MC) to engage metering service providers on the behalf of the consumer (unless the customer has chosen to engage an MC directly). The MC would co-ordinate and pay the Meter Provider and Meter Data Provider, and be liable for non-compliant meters.

This would involve the unbundling of metering costs from network use of system charges in Queensland, New South Wales and Tasmania, and the unbundling of metering services from retail and connection contracts. It would also require clear regulated exit arrangements where the customer changes retailer (including the maintenance of the interval meter at the customer's premises) or upgrades the meter installed (for instance to reimburse the distributor or retailer its sunk costs).

Developing a demand response mechanism for consumers: This is proposed to allow customers (or a third party energy services provider, which will be established as a new market participant) to participate in the wholesale electricity market to bring about a change in demand (by selling demand side participation), and to be rewarded with the spot price for the change in demand.

The demand response mechanism is likely to be most relevant to large energy users (particularly those who can change their energy commitments more readily), unless a third party aggregator is used, who can hedge the risk of trading associated with the volatile spot price.

Notably, COAG appears to have steered clear of any proposal to privatise state-owned electricity assets (as proposed by the Productivity Commission and in the federal government's Energy White Paper). This is likely a result of the opposition demonstrated by the New South Wales and Queensland governments to this being made federal policy.

Quite how much of this regulatory change gets pushed through will depend on the State Governments' commitment to implementing the policies which require activity at the State level. Notably, South Australia has just announced deregulation of its power and gas retail prices from 2013. However, Queensland particularly continues to reserve its position on certain matters including price deregulation, time of use tariffs, smart meters, and the NECF. A lack of uniformity at crunch time has already been seen with the implementation of the NECF, which the States agreed to adopt by June 2012. Excepting the ACT and Tasmania, the remaining States are yet to do so and have indicated that they may require derogations, which will undermine the principle of uniformity intended to be achieved.


You might also be interested in...

Related Knowledge

Get in Touch

Get in touch information is loading


Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.