Additional Comments from the Australian Greens
The National Electricity Market (NEM) has been
successful in delivering a reliable, secure supply of electricity. However,
Australians are emitting higher levels of greenhouse gas emissions and paying
much more for their electricity services than is necessary because of flaws in
the regulation and operation of the NEM.
Whilst there is a multiplicity of factors increasing
electricity prices, the primary driver underpinning the spiralling price rises
has been over-investment in networks; $42 billion has been allotted for
investment in network assets from 2010-15 even as electricity demand is
falling. The Productivity Commission notes the average NSW electricity bill
increased from $1100 to $2230 (2007-08 to 2012-13), and the network component
increased by 130 per cent from $505 to $1159 (greater than the entire bill of
Some of the investment is unavoidable and necessary (e.g.
catch-up on asset replacement),
but there is almost universal agreement (excluding the network businesses) the
evidence demonstrates there has been substantial over-investment.
Professor Garnaut’s testimony summarises effectively the
evidence presented to the Select Committee:
The big increases in Australian electricity prices began...with
the establishment of a new price regulatory system...the real price of
electricity rose more than over a comparable period in any other developed
country, and more than...any earlier period of Australian history...In my view,
there was no good public policy reason for this large increase in prices. It
happened because of the way we chose to regulate prices.
The key factors include:
(a) Excessive weighted average cost of capital and rate of return allowances
in revenue determinations;
(b) Systemic incentives to increase capital expenditure and the size of the
asset base, and the coupling of revenue with energy throughput for electricity
networks and retailers;
(c) Regulatory process failures in the oversight of networks;
(d) Disincentives and barriers to distributed generation, energy efficiency
and demand management - leading to under-investment in cost-effective
‘non-network’ solutions as cheaper, cleaner alternatives;
(e) State-based planning and reliability standards;
(f) Distortions in electricity prices that do not reflect the cost of usage
during peak periods.
Through the proceedings before the Select Committee, one of the
themes has been that networks will maintain rates of returns on assets through
higher fixed or unit prices (c/kWh) if energy demand falls. As Professor
Garnaut also noted:
We guarantee a rate of return...basically a riskless rate of
return; there is not even exposure to the market, so that if demand falls price
is increased to make sure that companies get their guaranteed rate of return.
So, as demand has fallen, prices have had to be increased even more than they
otherwise would have been. Of course, if price then goes up in response to
demand falls, then demand falls even more. A completely unsustainable situation
can emerge and I think that we are in that unsustainable situation now.
It is an unacceptable (and unsustainable) situation for
regulated monopoly businesses (public or private) to maintain returns on
redundant infrastructure by increasing unit prices or fixed access changes as
business and households improve their energy productivity or install
distributed energy – potentially negating the financial benefits, and muting market
and policy incentives for energy efficiency, demand management or distributed
There is a misalignment between climate and energy policy and
the regulation and operation of the NEM—and the NEM needs to be reformed to
drive an effective, efficient transformation to a clean energy system.
Network investment and behaviour is the product of history, and
the regulations and incentives of the NEM. The business models of the networks
(and retailers) needs to be re-cast so they are no longer engines of energy
growth but providers of energy services.
Regulatory arrangements should focus on rewarding businesses
for supplying services, focusing on providing returns for valued services and
not for the number of assets built.
Reforming the regulations and incentives of the NEM,
complemented by reforms outside the NEM, could re-direct billions of dollars of
investment from fuelling more energy consumption into building a ‘smart grid’, financing
energy efficiency, demand management and renewable energy and lowering
The Decentralised Energy Roadmap developed by the University of
Technology’s Institute for Sustainable Futures found that approximately
one-third of the capital invested in our networks could be avoided by managing
peak demand through energy efficiency, demand management and distributed
generation. In the current regulatory period alone, that is equivalent to $15
billion of network investment.
As the Australian Industry Group, Energy Efficiency Council,
Choice and Brotherhood of St Laurence noted:
Governments must take action now to reform the electricity
market. Some reforms can be implemented quickly and some will take time, but if
we don’t start the process now we will lock in billions of dollars in
unnecessary infrastructure and higher bills for years to come.
The Australian Energy Market Commission (AEMC) projection that
network investment will increase by $240 billion by 2030 highlights the
potential cost of business-as-usual.
The Australian Greens support the recommendations in the
Committee Report. However, further regulatory reform is required to reduce
electricity bills and develop a regulatory system and electricity market geared
to the challenge of low-carbon transformation.
The Australian Greens have additional recommendations and
comments in the following areas:
Recommendation G1: That the National Electricity Objective be
re-written to include an environmental objective and an Objective there are no
regulatory barriers to demand management, energy efficiency and distributed
Recommendation G2: That the Standing Council on Energy and
Resources, in consultation with the AEMC and AEMO, develop reforms and
rule-changes to establish AEMO as a single NEM-wide planning agency.
Recommendation G3: That the AER implement revenue caps for all
Distribution networks to de-couple network revenue and energy consumption.
Recommendation G4: That the Department of Climate Change and
Energy Efficiency and the Department of Resources, Energy and Tourism, in
partnership with the Australian Energy Regulator, commission an independent
study into the costs and benefits of a peak demand target and design options.
Recommendation G5: That the SCER directs the AEMC to review
the costs and benefits of introducing a capacity-market, or capacity-elements,
into the NEM to facilitate higher levels of demand-side participation.
Recommendation G6: That a standard connection, fair pricing and
licencing regime for distributed generation be established, supported by a
distributed generation ombudsman within the Australian Energy Regulator.
Recommendation G7: That the Federal Government implement a national
energy intensity target and the National Energy Savings Initiative.
The Select Committee on Electricity Prices is one of several
inquiries and reviews occurring into electricity prices and the regulation of
the NEM. The Council of Australian Governments (COAG) will meet on December 7
to consider a package of energy market reforms. The Greens support the Select
Committee recommendations, but there are additional recommendations that should
form part of the COAG energy market reforms.
Reforming the National
Electricity Objective (NEO): incorporating environmental and demand management objectives
The Australian Greens welcome the Select Committee
recommendation that the AEMC consider how environmental considerations can be
incorporated into the operation and regulation of the NEM. It is recognition
that environmental considerations are not presently being adequately
Re-writing the NEO is necessary for environmental
considerations to be incorporated at all levels of the NEM. As the Clean Energy
The National Electricity Objective is the fundamental driver
behind decision making processes undertaken by regulators in the national
electricity market. However, this objective does not consider the requirements
for sustainable development (economic, social and environmental needs). This
limitation means that the long-term interests of consumers cannot be fully
considered by regulatory decision makers. The National Electricity Objective
should be amended to ensure that it fully reflects the concept of sustainable
The Australian Energy Market Agreement (2006) included
‘address(ing) greenhouse emissions from the energy sector’ as one of its
objectives, but this has not been translated into any regulatory frameworks
governing the NEM.
As the Clean Energy Council further notes:
When asked, the AEMC will clearly state their belief that
policies to reduce emissions and promote renewable are simply externalities. Despite
the transformative influences of these policies on the market which is being
regulated by the AEMC, their firm view is that they have no responsibility to
consider them or even to enable them to be met at least cost, for the long term
interests of consumers.
The Total Environment Centre highlighted some of the effects of
the absence of an environmental objective in the NEO:
The current NEO does not support climate and renewable energy
policies, and struggles when their implementation appears to conflict with the
overarching objectives of the NEM ... This disconnect is apparent, inter alia, in
relation to the costs and connection times associated with renewable energy
projects at all scales, from humble rooftop PVs to the largest wind farms. It
is also apparent in the current push by some retailers to attempt to restore
revenue lost via the boom in PV systems by increasing fixed charges, making new
PV systems less financially attractive.
The United Kingdom has incorporated an environmental objective
to ensure alignment between the operations of the electricity market and
climate change and environmental policy. Australia also needs an environmental
objective in the NEO ensure alignment between the NEM and public policy, and to
ensure that regulators do not implement decisions that will impact on efficient
carbon reduction or renewable energy targets.
Additionally, a demand-management objective is necessary to
ensure the regulations and market operation balances investment in network
infrastructure with non-network solutions – and doesn’t privilege building
network infrastructure over demand-side solutions.
In theory, the requirement to make decisions in the long-term
interests of consumers should ensure this is the case, but as the AEMC, the AER
and industry stakeholders have noted this is not occurring. To ensure
cost-effective non-network alternatives are placed on equal footing to network
investment, relevant provisions within the National Electricity Law and
National Electricity Rules should be re-written to require regulators and
networks to do so.
That the National Electricity Objective be re-written to
include an environmental objective and an Objective there are no regulatory
barriers to demand management, energy efficiency and distributed generation.
The Australian Greens have additional comments in support of
Recommendation 3 and 5.
The NEM is in practice a group of inter-linked state markets
with major variations between states on the regulation of network services.
In relation to reliability standards, the Productivity
(a) there are major variations between jurisdictions which does not
efficiently optimise reliability standards across the NEM;
(b) there is a conflict of interest if transmission businesses are both
responsible for setting and meeting reliability standards, and evidence of
massive over-engineering of standards in some States (e.g. the Productivity
Commission estimates $1.1 billion alone could be saved in one regulatory period
in NSW for the distribution networks, which implicitly values electricity at $9
(c) ‘deterministic’ approaches used in some states encourage building rarely-used
lines as redundancy into networks and discourage cheaper demand-side solutions.
The AER has also noted there are ambiguities in the
deterministic reliability criteria which ‘make it difficult for the AER to
assess whether the capital expenditure proposals of [transmission network
service providers] are genuinely required to meet reliability requirements.
The risks of political consequences for networks and state governments
from outages also encourage extreme conservatism. Reliability standard setting
should be undertaken by an independent agency across the NEM.
AEMO, AEMC and the Productivity Commission have also noted that
state-based transmission planning creates a potential bias against
inter-connection between regions.
The Energy Reform Implementation Group previously identified in 2007 that:
...investment decision making is biased toward investment
within each state rather than, where it is efficient to do so, having a true
national character ... in an interconnected alternating current AC electricity
grid, additions and subtractions of generation and network capacity at any
point within the system affect conditions in other parts of the network ...
Efficient system wide development requires planning to be coordinated across
generation, transmission and load.
Efficient flows of energy between regions can reduce prices
and assist in maintaining network security with higher penetrations of
renewable energy. The establishment of a NEM-wide planner is an important
reform to facilitate transition to a low-carbon electricity system.
The AEMO currently publishes the annual National Transmission Network
Development Plan (NTNDP) but it cannot direct a transmission network to
undertake investment in the plan. The exception is in Victoria where ownership
was separated from network planning, and the AEMO undertakes network planning
and procurement. The Productivity Commission notes:
The Victorian transmission planning framework appears to
support efficient options for meeting reliability constraints. The decisions
about what, where and when to build are made by AEMO, or are subject to
competitive forces through tendering. AEMO, an expert, independent,
not-for-profit planner, has little incentive to make inefficient investment
decisions ... AEMO also has no reason to prefer network or non-network
solutions since it is not influenced by the need to meet deterministic
standards. As a result, it can identify the most efficient option, which may be
a network or non-network option, or a combination of both.
Establishing AEMO as a NEM-wide planner can also therefore create
scope for an integrated resource assessment which examines both network and
non-network solutions, and open up the tendering process to third-parties
offering non-network solutions. Rule changes would be required to enable the
AER to accept AEMO’s advice on preferred network and non-network options.
As in Victoria, AEMO could also operate competitive tenders
which are likely to deliver more cost-effective network augmentations. The Clean
Energy Council says cost over-runs and excessive quotes are commonplace for
network augmentations for large-scale renewable energy.
The Productivity Commission has noted some concerns about the
costs of under-taking tenders and that in most cases the network proposal was
selected. This is likely to reflect an under-developed third-party provider
market and market competition can be expected to improve over time.
AEMC has proposed a hydrid-model which the Productivity
Commission considers a ‘second best alternative'.
The hybrid-model retains deterministic standards, and would establish new
bodies within each state to set reliability standards. This does not create a
genuinely NEM-wide framework and deterministic standards discriminate against
The AEMO should be established as a ‘single planning agency for
the entire NEM that is independent of individual governments and network
businesses, which are conflicted in their role as planners and reliability
The Garnaut Review also recommended the establishment of a national
transmission planning and reliability framework.
The transition to demand forecasting by AEMO should also be
completed. Transmission businesses produce the forecasts for New South Wales,
Queensland and Tasmania that are used as the starting point for network
planning and revenue determinations within the AER. This creates potential for
over-stating demand in the context of the incentives which exist to over-investment.
AEMO, which currently produces the forecasts for Victoria and South Australia,
should also assume this responsibility across the NEM. AEMO processes should be
more transparent and open to specialist input, especially on energy efficiency
and distributed generation where forecasting capacity is relatively
If AEMO is to assume further NEM-wide responsibilities, it is
also timely to consider if its membership-funded model is appropriate to ensure
there are no real or perceived conflicts of interest.
That the Standing Council on Energy and Resources direct the
AEMC to examine arrangements for AEMO to be the single planning agency for the
NEM with responsibility for forecasting, network planning, national reliability
standards and operating tenders for integrated assessment of network and
Further regulatory reform:
de-coupling revenue and energy throughput
Overall, the recommendations in the Select Committee report and
relevant reviews and rule-change processes (Power of Choice review, the Economic
Regulation of Network Service Providers rule change and the
statutory Limited Merits Appeal review) represent a significant,
The reforms should be implemented as soon as possible to
provide regulatory certainty and ensure they are incorporated into the next
round of revenue determination processes for network businesses.
However, the reforms currently proposed do not fully address
the systemic incentives and disincentives identified as underpinning
inefficient investment and privileging network over non-network solutions.
The Select Committee's Recommendation 4 is for the AEMC
consider measures to de-couple network revenues and energy throughput. The AEMC
has already noted the incentives to over-investment and over-recovery of
revenue created by the linkage between profits and energy volume:
When a network business develops tariffs which are based on
consumption volumes, its profits could depend upon the level of actual volumes.
Under such a tariff structure, the business would have no incentive to pursue
any form of DSP project (or energy efficiency project) which decreases volumes.
Revenue determinations for most distribution networks (NSW,
Victoria, South Australia) are regulated using a weighted average price cap
instead of a revenue cap (maximum allowable revenue) - which the AEMC observes
is ‘largely’ a result of the AER’s decision to continue with the previous mechanisms
used by jurisdictions.
Under a price cap, the AER divides revenue requirements by
projected units of sales. Unlike a revenue cap which incorporates ex-post
adjustment to revenues (which ensure networks recover the specified revenue –
no more, no less), a price cap is set annually, and there is no subsequent
adjustment; if volume is higher than anticipated, the networks earn additional
profits – and vice-versa. Under price caps, there have been cases of serious
over-recovery (e.g. the AER estimated an over-recovery in the Victorian 2006-10
regulatory period, there was an over-recovery of $568 million) and it creates dis-incentives
for demand-side activity:
In the short-run, under a revenue cap when demand is
increasing, revenue remains constant. Networks therefore have an incentive to
encourage energy saving measures ... in order to reduce costs, thereby increasing
profits. Where a price cap is in place, on the other hand, when demand is
increasing networks will increase their revenue by encouraging more consumption.
It is notable there is a higher level of demand-side activity
in Queensland which operates under a revenue cap.
The AEMC and the Productivity Commission have expressed a
preference for price caps over revenue caps. The Productivity Commission argues
that it creates a stronger incentive to efficiently price electricity to
discourage peak consumption, and now that reforms are in motion for time-of-use
pricing to remove distortions it should be retained.
Time-of-use pricing is part of the solution, and the Australian
Greens support their introduction in a phased manner with consumer education
and protections for vulnerable consumers. However, there will be limits on both
the extent to which pricing is genuinely cost-reflective for equity reasons,
and the capacity and motivation of consumers to respond to price signals –
especially low-income consumers. As the Productivity Commission notes, it is
likely that the roll-out of time-of-use pricing, smart meters and other associated
reforms will take quite some time.
In the meantime, the AER should move to implement revenue caps
for all distribution networks. This could be reviewed if and when it is clear
the pre-conditions for effective implementation exist for price caps to be implemented.
That the AER implement revenue caps for all Distribution
networks to de-couple network revenue and energy consumption.
A peak demand reduction
target for networks
An effective response to rising electricity prices must address
aggregate and peak demand:
The current state of rising electricity prices is primarily
driven by a failure to manage peak demand, both at a network and a generation
level. The inability or reluctance to properly engage the demand side of the
market has lead to over investment in and inefficient operation of the
The Decentralised Energy Roadmap developed by the University of
Technology’s Institute for Sustainable Futures found that approximately
one-third of the capital invested in our networks could be avoided by managing
peak demand. In the current regulatory period, that is equivalent to $15
billion of network investment.
The AEMC (reflecting stakeholder submissions, including
networks) has found the existing Demand Management and
Embedded Generation Connection Incentive (DMEGCI) scheme is not working. The
allowance under the DMEGC represents just 0.1 to 0.2 per cent of network
revenue, and still only 15-20 per cent of approved expenditure has been spent
The AEMC proposes reforms to the operation of the Demand
Management and Embedded Generation Connection Incentive (DMEGCI) scheme. Reforms
to the DMEGCI are unlikely to be effective (or at least optimal) in the context
of on-going systemic incentives and barriers which will take time to fix. There
are also powerful forces toward inertia and under-investment due to factors
- Network culture: the AEMC observers there is an ‘internal bias to
engineering solutions’ within the networks; and
- Low demand-side capacity: network skills and experience in
implementing demand-side solutions is under-developed, and the external,
third-party demand-side market is immature.
The United Kingdom and 14 US states have legislation or
regulations for network peak demand reduction schemes – explicitly setting
targets for networks to address part of forecast growth in peak demand through
A range of submissions from industry, clean energy bodies and
community/consumer organisations advocated mandating a minimum peak demand
reduction target for networks in Australia.
Targets are important, because they set expectations and
focus management’s attention. A regulated business can choose to ignore an
incentive scheme, or make only a token effort...judging by the results of
previous attempts to incentivise DSP, there is a risk of this happening with
the proposed incentive scheme.
Develop a proposal to set distribution network companies
minimum targets to reduce infrastructure driven by new peak demand. Network
companies have a lot of experience in building infrastructure to meet demand,
and very little history with peak reduction projects that can be much cheaper. On
their own, incentives will take a long time to change this. Setting network companies
a minimum target...would help them develop the experience and skills to use
Many networks companies are still building infrastructure
based on the assumption that energy consumption is rising, when in fact it has
been declining for the last few years...While some network companies have made
some effort to improve their demand-side skills, the culture and skills sets of
every network business in Australia still substantially favours network augmentation
over peak reduction...the NEM now has a 15-year history of tinkering in this
area, which has failed to address this issue. It is clear that far more
directive action is required. Such directive action is common in energy markets
in the US and Europe.
A range of models for a peak demand target were proposed. For
(a) Mandated peak demand reductions through the DMEGCI: the AER would
oversee an obligation for networks to meet a minimum proportion of forecast
peak demand through non-network measures. This would be implemented through the
(b) A peak demand reduction fund: a national peak reduction target
would be allocated between networks, and an independent body such as AEMO or
the Clean Energy Regulator would oversee a tender process from the networks and
third-party specialists for peak demand reduction projects. A price-cap for
tenders based on the value of network augmentation would provide a safeguard against
inefficient investment. The up-front costs could be funded by a consumer levy,
with the price cap ensuring there is benefit-sharing between networks and
consumers, or through a program such as the Clean Technology Innovation Program.
(c) A peak demand reduction white certificate scheme: a network
obligation akin to existing state-based energy efficiency retailer obligations.
Networks would be required to acquit certificates, self-generated or sourced
from third-parties, to meet a mandated peak demand reduction target.
(d) A network productivity target scheme: a mandated target based on
network load factor or ratio between peak/average demand, administered by the
AER or the Clean Energy Regulator.
The AEMC agrees there is under-investment and the networks are
poorly positioned to undertake demand management – but does not support a
target because of the risk of networks under-taking inefficient investment for
the purposes of meeting a target. Submissions to this Inquiry indicate these
concerns can be addressed through effective scheme design such as safeguards
within the DMEGCI or price-caps for peak demand reduction projects.
The risk of consumers over-paying for investment in non-network
solutions to meet peak demand targets appears considerable lower than the risk
consumers will continue to pay for the failure to invest in cost-effective
energy efficiency, demand management and distributed generation.
That the Department of Climate Change and Energy Efficiency
and the Department of Resources, Energy and Tourism, in partnership with the
Australian Energy Regulator, commission an independent study into the costs and
benefits of a peak demand target and design options.
Facilitating demand-side participation
There was widespread support for the recommendations in the
Power of Choice review to facilitate demand-side participation in submissions
and public hearings, such as enabling demand-side bidding into the wholesale
However, the major Australian demand-side aggregator (EnerNOC)
and the Energy Efficiency Council also submitted that the benefits of the
change proposed by the AEMC may be limited unless a capacity-market, or
capacity-market elements were introduced into the NEM.
Effective participation will require the capacity to respond
very quickly to fit with the 5-minute bid periods of the ‘energy-only’ wholesale
market. EnerNOC notes that whilst there are some demand-response activities
that can take advantage of the proposed change, the high short-run marginal
costs of most demand-side activities will limit the ability to take advantage
of the opportunity:
Some demand resources are able to dispatch at short notice,
in 5-10 minutes or less. These are customers whose operations are simple, or
whose loads can be remotely controlled. Demand response on these terms is
relatively expensive, because dispatching such resources tends to be
disruptive. Increasing the notice period greatly increases the number of
customers that can participate ... truly broad participation can be achieved if
1-2 hours of notice can be given.
A capacity-market includes payment for availability
irrespective of energy output, plus a payment for dispatched energy. It would
guarantee payment to demand-side participants. Western Australia, which has a
capacity-market, has a 7 per cent contribution from demand response relative to
3 per cent in the NEM:
If a capacity market was introduced into the National
Electricity Market, an energy consumer could sell their demand-response into
the capacity market instead of the wholesale energy market. Capacity markets
appear to unlock greater volumes of peak reduction than other mechanisms but...any
decision to introduce a capacity market requires detailed consideration.
That the SCER directs the AEMC to review the costs and
benefits of introducing a capacity-market, or capacity-elements, into the NEM
to facilitate higher levels of demand-side participation.
Connection processes and
pricing of distributed energy
As the Productivity Commission has noted, distributed
generation is ‘constrained by regulatory obstacles’;
connection processes are costly, uncertain, complex and lengthy.
The Australian Greens welcome the Select Committee recommendations,
but believe a distributed generation ombudsman within the Australian Energy
Regulator may be more effective. If effective processes are not established
within State and Territory Ombudsmen and Territories, the Commonwealth
Government should fund the establishment of a distributed generation ombudsman
within the Australian Energy Regulator.
That the Commonwealth Government should fund the
establishment of a distributed generation ombudsman within the Australian
Energy Regulator, if satisfactory progress is not forthcoming on empowering and
resourcing State and Territory Ombudsmen and/or tribunals.
Energy efficiency programs
outside the NEM
Reforms outside the NEM are also required to drive improvements
in energy productivity, reducing aggregate and peak demand.
The recommendation of the Prime Minister Task Group on Energy
Efficiency to set a national 30% energy intensity target for 2020 should be
implemented. A national energy intensity target would create a focal point for
a policy framework to improve energy productivity. The Department of Climate
Change and Energy Efficiency would report annually on progress towards the
target and be required to develop a plan to achieve the target.
The National Energy Savings Initiative (a national energy
efficiency trading scheme) should be implemented, replacing schemes operating
in NSW, Victoria and SA. The review of the NSW Energy Savings Scheme by IPART
found it to be delivering cost-effective energy savings, and the first round of
modeling on the NESI estimated it could reduce household energy bills by $87 to
$296 a year by 2020, including $3.5 billion - $12 billion in deferred
generation and network costs.
Recommendation G7: That the Federal Government implement a
national energy intensity target and the National Energy Savings Initiative.
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