We are currently experiencing a time of deep soul searching for Australia’s energy markets. No part of the system to deliver energy to Australian consumers is spared scrutiny. Governments and their policies, institutions, regulators, generators, networks, retailers, investors and even the actions of consumers themselves are being examined.
So too are the existing market design and structures, their governance and the overarching regulatory framework. Most of the sessions over the next few days will be addressing these issues.
I’ve been asked to discuss fit for purpose regulation in the evolving market. Which I think is really asking – are we regulating for the future energy system? An interesting question when the future is so unknown.
I won’t delve in to the area of the future market design or structures, but I will suggest we may be standing at a crossroad of either embracing market concepts to deliver the energy system for the future, or moving towards a more interventionist approach to dictate the future energy system.
In grappling with this conundrum, I would remind everyone of Keith Orchison’s often stated argument that trying to lock in requirements looking out 30 years from here is a risky proposition – and one only has to go back and stand in 1989, peering towards 2019, to appreciate why. So with that backdrop, how do we develop fit for purpose/future regulation?
First, we look to whether the regime is effectively meeting the stated objectives of the policy that drove the creation of the regime in the first place.
The AER’s role is to administer the National Energy Laws and Rules relevant to electricity, gas and retail, to advance the National Energy Objectives, or the “NEO”. So our stated objectives are to promote the efficient investment in and use of, energy services in the long term interests of consumers, with a particular focus on price, quality, safety, reliability and security of supply.
Second, given the future is uncertain, fit for purpose regulation needs to be sufficient flexible to evolve with the market while maintaining accessibility, transparency, predictability and consistency in our work and decision making.
I think the regime is still largely fit for future but there are improvements that can, and are, being made. However the central elements of the framework that recognises the importance of markets and competition, that acknowledges that market failures persist and need to be addressed, that is capable of evolving of being adapted to capture new technologies, business models, societal expectations, are still sound.
What does this mean for regulation?
When we talk about energy regulation we often think of the regulation of gas and electricity networks – setting the 5 year allowed revenue for poles, wires and pipelines. It is a significant component of the role of an economic regulator. But in this evolving market, other areas of market – the competitive segments - need tending to in order to support the NEO.
An effectively competitive market will deliver both benefits to consumers and reward clever and industrious innovation. In order to support such a market we need to focus on transparent monitoring of market performance and enforcing compliance with the energy laws and rules in the wholesale and retail sectors. To be clear – we are not the competition regulator and our remit in energy does not extend to the Australian Consumer Law (ACL), but our activities in the competitive segments of the market do help promote competition and protect consumers as well as helping to inform the compliance of the ACL.
In the wholesale market – the move away from traditional synchronous generation to newer technologies is presenting a number of new challenges for local and for NEM-wide security. The Australian Energy Market Operator (AEMO) has a number of tools available to it to help manage security, reliability and system strength. The Retailer Reliability Obligation will operate to get firm capacity to the market. Our role here in supporting the national objectives and the evolving market is best served by systematically monitoring and reporting on the effectiveness of the market arrangements, by identifying barriers to achieving the desired state and by enforcing compliance when breaches to energy laws and rules occur. Accuracy, timeliness and transparency of information provides critical market signals to the industry, and helps to inform policy direction or rule changes that may need to be considered. In addition, community, industry and government need to trust that we will take appropriate action in response to non-compliance.
In the retail market –the retail market is becoming more complex with the introduction of new products and services and new business models. But is it more complex than it needs to be? Consumers need to be confident with the choices they make and feel protected when they don’t or they can’t exercise choice.
The retail market will continue to evolve, giving consumers even greater choice and control – but also greater risk of confusion and disengagement.
A fit for future regulator is there to support that evolution in a way that drives benefits for consumers. Allowing consumers who have access to technology to leverage it and get the most out of their energy use, while also ensuring that consumers without access to certain technology are not excluded or taken advantage of.
This year we issued our first Default Market Offer (DMO), in response to ACCC recommendations following concerns with unjustifiably high standing offers. The DMO is designed to protect the consumers on standing offers, but in a way that seeks to maintain and preserve the benefits of retail competition. The reference bill - the extension of the DMO – in addition to a range of other initiatives, will help to increase transparency in the retail market and simplify engagement in way that is material and meaningful. Fit for future regulation will support a retail market that provides consumers the information they need, in a form they can access and understand. Consumer decision making is the bedrock of competition. Engagement should not be hard, and confusion as a competitive tactic should be called out for what it is – behaviour that is anti-consumer, and ultimately, detrimental to the functioning and resilience of the market. This is fit for purpose regulation, whether by the AER or the ACCC.
The need for consumer trust and confidence in its regulator have never been more important than it is now; consumers need to feel confident that everyone is playing by the rules. And to this I would say we need more effective penalties to enforce energy market rules– progress has been made but it is slow going. We also need better market monitoring and information gathering powers. To be blunt, the AER’s powers and penalties are simply not comparable with those available to other sector specific or economy wide regulators – and are therefore not in line with community expectations.
Turning to networks – increased renewable generation requires a rethink about transmission investment. First, because more renewable projects are looking to locate in remote parts of the network, increasing congestion. Second, because increased variability in generation will place greater importance on the ability to share resources between regions through increased interconnectors. Of course, transmission should not be mistaken for generation. There is a separate, and equally important, discussion about the sequencing and risk management of these co-related assets.
This is where Coordination of Generation and Transmission Investment (CoGATI) comes in. Last year the AEMC completed its review to coordinate generation and transmission investment, with the intent to deliver investment signals that enable efficient coordination of generation and transmission, and proposed regulatory frameworks that shift risk away from consumers and on to those parties better able to manage risk.
The other end of the transmission bookend is the inaugural Integrated System Plan (ISP) released by the AEMO in 2018. Like an architect’s drawings, the ISP outlined the blueprint for future network planning, leaving the final approval for investments to be considered by the AER. Our focus remains on ensuring any regulated asset benefits energy consumers. That consumers will pay no more than necessary for safe, secure and reliable energy.
The regulatory investment test for transmission (RIT-T) has become a polarising term. For every lament that the RIT-T takes too long or is too cumbersome, I hear cries that it is more important than ever to ensure its robustness into the future.
The RIT-T is a cost benefit analysis – simple as that. And I don’t think anyone would dispute the need to undertake a rigorous cost benefit analysis before committing millions or even billions of dollars on such long lived transmission assets, especially in a time rapid transformation of and developments in the market.
The ESB has undertaken work to streamline the RIT-T process and its subsequent review. At the AER we are committed to looking for ways to further streamline the process.
I believe fit for purpose regulation necessarily includes the type of cost benefit analysis contemplated under the RIT-T. It allows us to identify NEO efficient costs that are in the long term interests of energy consumers from broader policy social or environmental policy objectives.
The CBA of the RIT-T gives consumers confidence that they will only be required to pay for market benefits through their electricity bills, leaving other policy objectives to be funded through other means. Consumers paying their electricity bills need to have confidence that infrastructure proposals have been scrutinised by an independent regulator holding more than just a rubber stamp, acting in their long term interests.
To conclude, regardless of which direction we chose from this crossroad, any fit for future regulator will still be faced with a range of demands, often contradictory in nature, as Malcolm Sparrow aptly puts it:
- be less intrusive – but be more effective;
- be kinder and gentler – but don’t let the bastards get away with anything;
- focus your efforts – but be consistent;
- process things quicker – and be more careful next time;
- deal with important issues – but do not stray outside your statutory authority;
- be more responsive to the regulated community – but do not get captured by industry”.
The response to these demands? The response to these demands is to ensure a robust governance framework. The AER needs to have a reputation for being trustworthy.
This means a fit for purpose or for future AER is independent; it operates with a proper and clear purpose, within authority and ensures it has the relevant expertise, conducts effective consultation and communications, and above all remains transparent and accountable. Objectives we continually strive to achieve.