University of Melbourne, MEI Symposium 21
Anna Collyer, AEMC & ESB Chair
I acknowledge that we are on the lands of the Wurundjeri people who have been custodians of this land for thousands of years, and acknowledge and pay my respects to their Elders past and present.
I’m delighted to be speaking to so many of you in person today - it feels almost illicit to be in a shared room, in real time. My thanks to those of you joining us online too. While easy virtual attendance is one of the few great things these unprecedented times have given us, I’m sure you’ll understand our excitement at being in this room together, too.
The last speech I gave face to face was at Australian Energy Week in May. That conference was converted at the last minute to be hybrid, like today, part in-person and part virtual as a result of the emerging COVID outbreak that turned into this year’s somewhat epic lockdown.
With only a handful of weeks left, it’s fair to say that 2021 has been another memorable year.
In decades to come most of us will remember 2020 and 2021 for reasons other than energy policy. As an optimist, I have looked for the silver linings. In more usual times I’m often a stalwart on the 6am Monday morning flight to Sydney. Denied the dubious pleasures of interstate travel, I have found that taking the dogs for a walk each morning to the local surf life-saving club for my coffee is probably a better way to start the day. And being home for family dinner at the end of every day has given me more opportunity to work on the subtle art of conversing with teenagers – if anyone has mastered that craft, please let me know!
2021 was also a momentous year for energy policy. The Energy Security Board provided its Post-2025 report to Energy Ministers, who referred our recommendations to National Cabinet. From there, we have been endorsed to undertake the next stage of work on Australia’s most significant suite of reforms since the introduction of the National Electricity Market in 1998.
My part in that, as chair of the AEMC and now also the ESB, brings me to you today.
I come to this speech with one of my favourite quotations in mind – an exhortation from the White Queen to Alice in Wonderland to expand her thinking in order to change her world.
Whether it’s the year we have had or working on the dark art of talking to teenagers, believing as many as six impossible things before breakfast has become an essential skill for me – and an attitude that could stand us all in good stead as we imagine our way into the future of this rapidly transitioning energy sector.
Well, a year is a long time in the energy sector and two years is starting to feel like ancient history, but that’s how long it’s been since Kerry Schott addressed the MEI.
On the surface it might look like not much has changed today. In 2019 Kerry spoke about system security, the need to invest in the transmission network under the guidance of the new Integrated System Plan and the extraordinary impact on the network of the immense take up of household solar panels. These are the same problems we are continuing to work on today.
On the other hand we have come a very long way since then. One important change has been the Commonwealth Government adopting a net zero target before 2050 at the United Nations Climate Change Conference, COP 26 in Glasgow last month. Now all jurisdictions have set clear targets. In the energy sector we have already been decarbonising at pace, driven by existing Government policies, investors and most importantly customers.
Right now, I’d like to give you an update on what the next 12 months holds for the work coming out of the National Cabinet response to Post-2025
In each case I find it helpful to paint a picture of the future we’re envisaging, and then work backwards to what we need to do now
In each case what we want to do is to provide the right settings to encourage investment and confidence and, most importantly, innovation in both products and services as that’s what we’ll need to transform the sector
Innovation depends a good deal on where we want to be in the future. Our path cannot be restricted by what’s possible now.
I’d like to talk you through the 3 main areas of the ESB’s work program –
- Distributed Energy Resources – or DER – which is turning the role of the customer on its head
- Transmission, which we see as a crucial enabler for a decarbonised system
- and Capacity, where we want to ensure reliability of supply for customers in the transition and in our future state
Distributed Energy Resources
I want to start with distributed energy resources which I see as one of the most important aspects of the transition. As you probably all know, rooftop solar is now collectively the largest generator in the national electricity market. Nearly three million households have already installed solar panels on their rooftops, and within a decade, a further three million will follow. By 2050, rooftop solar and other types of distributed resources will contribute more than 45% of Australia’s electricity.
Consider a future for distributed energy where we have the electrification of everything. Customers have many assets connected to the network – solar panels, household batteries and electric vehicles. The internet of things also means that customers’ assets, like hot water heaters or air-conditioners, are capable of responding dynamically to signals that would make a huge difference to the supply/demand balance on any given day and therefore the overall functioning of our future system.
There are two key things we’re focussed on in relation to distributed energy resources.
First, we want to get ahead of the game.
It's fair to say that customers’ investment in rooftop solar panels has far exceeded what was originally envisaged and we have been playing catch up to make sure the grid can cope as more and more customers want to invest.
As we can see the prospect of electric vehicles coming towards us, we want to make sure that we are set up to help customers make the most of their assets. No doubt you have considered a scenario (once we return to some kind of regular office work) where people drive their electric cars to the station or workplace, and then come home at around peak period, plug their car into charge and head into the house for dinner. The result? Adding to the peak demand just as the sun is going down which would drive up network investment, require more generation investment and result in increased customer costs.
What about instead if we had a standard requiring smart charging equipment, that could be set to a default charging time in the middle of the night during the off-peak period. It would also be good to ensure we have tariffs to encourage the behaviour we want to reward.
Or a further possibility: what if we set up charging stations in commuter locations and office carparks, so your car is still reasonably charged when you get home. As your solar panels finish for the day you can plug your car into the house and keep supplying your own energy, then recharge the car overnight and do it all again the next day. While this kind of technology remains a long way off, we want to start thinking now about what kind of standards and tariffs can encourage innovation in the products and services we may need to realise this kind of future.
From a regulatory perspective, in DER more than any other area of reform there are many different agencies working on pieces of the puzzle. The ESB sees that it can play a valuable integrator role in order to assist these agencies as they work on different aspects of these problems. In order to do this we have established a DER roadmap that seeks to identify and map those puzzle pieces, to understand who’s doing what and to provide some loose governance to bring it together so we can strive for that objective of getting ahead of the game.
Our second areas of focus is understanding what customers really want.
Of course, in all of our work it is critical to put the customer at the centre of what we are doing. However there is a difference in a customer’s interest in frequency control (hopefully none at all if we have got our markets right!) and their interest in their own solar panels.
I’m fond of saying that customers will buy an electric vehicle because they want a cool car that goes from zero to 100kph in 2.7 seconds, not because they are hoping to arbitrage in the energy or ancillary services markets. So to achieve a future vision that sees these assets integrate in the grid in a way that supports the grid and doesn’t impose significant additional costs, we actually need to start by understanding what it is that customers want.
We ran a pilot program earlier this year where we put together a diverse mix of informed stakeholders and used design thinking methodology to consider the issue of minimum system load from the customer’s perspective. As we know, it’s equally challenging for the system to have more supply than demand, as it is for it to have more demand than supply. But we have less experience and understanding of minimum load conditions and are currently setting records on an almost weekly basis. Since turning off customers solar panels is a blunt instrument, we wanted to come up with other potential solutions to manage this emerging issue.
Our pilot program led to a real insight we can value from the very start of this process. When we approached the problem from a customer perspective, it created a mutually meaningful way for all participants to engage on complex issues and find common ground. Regardless of whether they were from industry, retail, government or consumer organisations – when we put the focus on what most benefits customers we created a shared language and purpose.
We also found this approach requires a strong focus on communicating early and ensuring we clear all our assumptions about meaning in those initial communications. For example, in our early communication on the minimum system load pilot, we worked through a framing argument about what to call the problem. It had, until then, been described as ‘minimum demand’ which we found some saw as blaming the customer – which of course narrows the range of solutions that could have been considered.
As communication evolved through the discussions we framed the problem more tightly – and correctly – as ‘minimum system load’, allowing for a broader range of solutions than switching off customer-owned solar.
These insights informed the design of new market notices, and supporting customer communications AEMO has developed to inform the industry and the public about the issue.
From the success of that pilot, and to ensure we continue to think about problems this way around, we are putting together a Customer Insights Collaboration at the ESB. We’ll be running these collaborations, focussing on particular issues, in six month releases to generate insights from the customer’s perspective. We’ll be producing knowledge- sharing reports which we can make available to the various agencies working on different parts of the problems so that those insights can be front and centre in considering solutions that will work.
Our first full collaboration is on flexible load, kicking off in February next year and exploring what barriers and enablers exist around customers being rewarded for DER and flexible energy use. For example, we’ll consider what challenges people who rent or may not be able to afford the upfront costs of DER face and how to spread the benefits, to the digging into the evidence that is emerging about how customers experience new, smart energy services in their homes and businesses and what that means for consumer protections.
In the DER implementation plan, we are looking at new frameworks to encourage new business models that can give customers the most value from their investments. And in our customers insights work we’ll be seeking to better understand what will work for customers. We want customers to have more opportunities to seamlessly and effortlessly outsource the management of their solar panels, batteries and/or appliances. The more they demand from their devices and homes, the more attractive it becomes for innovators to fulfil their needs.
The transition to smarter customer-owned devices brings many opportunities. And to unlock these, the DER implementation plan and customer insights collaboration is seeking to provide customers with access to new products and services that reward them for their flexible demand and ensure they are protected no matter how they choose to engage.
So now let’s go from one end of the supply chain to the other: the transmission network. It’s one thing to generate our renewable energy, quite another to see it gainfully employed across the network, and another step again to move it around when that can mean imposing a decades-long cost on the customer.
Consider a future grid that connects the diverse resources that underpin a net zero system. Not only have we electrified everything and invested in a more interconnected grid to integrate renewables, but we will have created a hydrogen economy which has more than doubled the size of the grid from the one we see today.
We have multiple workstreams on the go across the market bodies in relation to transmission. I’ve picked two areas to talk about, which both relate to investing in the network in a smart way.
The AEMC releases an annual report which looks at trends in household electricity costs. In this year’s report, which came out last week, we saw falling household costs over the next three years, driven by falling wholesale costs, as a result of new resources coming into the system. However, an important trend we noticed was that these falls are being slightly offset by increases in network costs. At this stage, this is just the kind of BAU investment needed to keep the poles and wires secure.
To give you an indication of the magnitude of investment we could make in the foreseeable future, the current regulated asset base of the transmission assets in the national electricity market is $21 billion. The value of the assets which are in AEMO’s Integrated System Plan actionable projects over the next 10 years is around $13 billion. That is, we’ll be adding more than half the current network again in the next decade or so. And that’s before we start thinking about a hydrogen economy.
As network costs make up somewhere between 40 to 50% of an average households bill, it really highlighted to me the importance of the way we manage the investment we need in transmission.
First, we want to ensure we build the right assets
The last time we saw this kind of investment in transmission assets, those assets were all in State government hands. There are some different considerations arise in undertaking this venture where there are multiple private sector interests involved and it is the regulatory regime that defines the parameters under which investments are made and rewarded. It’s also worth noting that our regulatory regime has gone through various iterations of encouraging and discouraging investment (I’m sure you all recall the gold-plating concerns of the last decade), and was originally conceived for more incremental change than what we have in front of us.
A significant step forward in our approach to transmission investment for the transition was the development by the Australian Energy Market Operator of the Integrated System Plan which I’ve just mentioned. The ESB implemented reforms to the regulatory framework to turn that plan into action. Before that, we had a regime where each jurisdiction’s TNSP was responsible for determining, in accordance with its regulatory obligations and incentives, what it should build in response to known needs on the network. In contrast, the ISP considers future development across the NEM and identifies the network investment that will deliver optimal outcomes for customers, in anticipation of those needs emerging. However, we now have a slightly mis-matched regime where there is a central plan, but the decision to build remains with the TNSPs.
It also remains critical that there are processes in place to ensure robust assessment of the costs and benefits of any investment in the transmission network, so that customers only pay for assets which do deliver benefits to customers over the long term. Currently these investments go through a number of different processes, which have different objectives. AEMO is looking at the least cost, or optimal, overall development path. For any particular asset, the proponent will then undertake a rigorous cost benefit analysis which needs to meet the requirements of the regulatory regime. There is a further feedback loop built into the ISP process to confirm the investment, or preferred option, is still on the optimal development path and delivers the maximum net benefit to consumers before it proceeds. These processes are designed to protect consumers by ensuring only assets which deliver benefits are built. But we also need to ensure that as we go through the transition that these processes are efficient and we are building these assets on time.
The AEMC is currently undertaking a review to consider these and a range of other issues arising from the transmission network planning and investment regulatory regime. One of the solutions that has been suggested is to create more contestability in the provision of assets. We haven’t formed a view on this yet as there are certainly arguments that are being presented from stakeholders on both sides of the debate.
One of the interesting models which has been presented to us comes from Canada, where contestability starts early in the process. Instead of identifying the preferred solution and then looking for contestable ways to deliver that solution, it identifies the problem and then looks for contestable and innovative solutions to that problem.
On that last point, one of the best questions I’ve had this year is whether network companies should be shifting their focus from simply building more poles and wires to thinking about data and AI and how that forms part of their business. I think the answer is yes.
Second, we want to ensure we use the network wisely – so we only build what we need
The problem we can see emerging is that the transmission network does not have infinite capacity. So when all the renewable assets we need seek to connect, they often locate in sunniest or windiest location near to the existing grid. When this happens they can crowd each other off, which means renewable energy goes to waste. Batteries can really help here, as they can soak up excess renewable energy when the grid is constrained, and then can discharge that energy when there is capacity again, like when the sun goes down.
We want to ensure that when we build new network we’re making the best use of it. Many of the State governments are now working on building renewable energy zones, which provide new network in locations likely to be good for wind and solar farms. Those processes will regulate in some way, for example by auction, how many power stations, batteries or other resources can locate in that part of the network. We want to ensure that investments in those areas retain their value, and we want to reward assets, like batteries that can alleviate congestion when they charge and discharge accordingly to local conditions.
We want to work closely with industry on a regulatory framework for managing access to the transmission network in a way that seeks to address these issues, so that customers get their money’s worth from the significant transmission investment underway.
Having designed clever and cost-effective ways to deliver renewable energy around the network, we still cannot control when the sun will shine or the wind will blow. Our mission is to keep the lights on – which means reliability is the third major priority of our work.
Consider a future with a net zero grid where the vast majority of our generating assets will be renewables – sun, wind, hydro – cheap and emissions free. We also have the right mix of resources to keep the lights on during expected changes when the sun goes down each day, and unexpected changes in the weather like sudden cloud cover or an extended wind drought or a week when it rains all week in Queensland.
This area of our work program has attracted the most attention and I think there’s 2 reasons for that. The first is a concern that it is focused on keeping old assets in the system, and that it could slow the progression of decarbonisation. The second is a passionate debate over the right economic answer to the problem of getting the right mix of resources into the sector. In tackling those 2 challenges – of decarbonising while also having the most efficient mix of resources to deliver security and reliability – we need a market that is fit for purpose in the current rapidly changing world and also in the new paradigm we are heading towards.
What we can all see occurring is a fundamental transformation of the sector. The current fleet of plant is scheduled to retire progressively over the next 2 decades and will need to be replaced. In fact, to accommodate our net zero goals across the economy its likely we’ll need significantly more resources overall than the current fleet which highlights again the importance of distributed energy resources.
It is critical to manage these retirements and replacement investment in a way that best meets customers overall needs for decarbonisation as well as affordable and reliable supply. A range of measures have already been adopted, including requiring generators to now provide 42 months' notice of closure, to allow the market to prepare for that closure. The price trends report I mentioned earlier covers the next 3 years, which includes the closure of the Liddell power station in NSW. Our analysis indicated that wholesale prices and household costs would see a slight increase in 2022 and 2023 as a result of this closure, taking 2000MW out of the system. However, by 2024 we have more than double that in new resources coming into the system, which is a mix of solar, wind, batteries and gas. We see wholesale costs and therefore household costs fall again so an annual household bill in NSW in 2024 could be $50 less than it is today.
In considering a new market mechanism for capacity, we are focussed on ensuring that the needs of the system are being met, and ensuring we can therefore provide a constant source of energy to customers. The type of scenarios we’re looking at will lend themselves to different types of technology being able to respond and meet those identified needs. If you have a sudden dip in power in the middle of the day due to an unexpected storm reducing solar panel output, you need something that can come on effectively instantaneously. On the other hand, if we did have a wind drought scenario like the United Kingdom experienced earlier this year, then we would be thinking about the kind of plant that may not be needed very often, but can then respond quickly and operate continuously over a potentially extended period of time. In some ways this kind of arrangement could be considered more like an insurance product where you may not need it often but when you do you’ll be happy that you had it there.
From a markets perspective, we want to provide very clear signals of the services that we need in the market so that encourages both investment but also innovation. At the moment, the technology we think can fill the needs is a mix of batteries, pumped hydro, gas and a mix of demand side responses. But to fully decarbonise we’ll need to see developments in these or possibly other technologies, which could very well include more sophisticated services.
I don’t yet have the answer for this problem but I have confidence that other smart people will be able to develop it. What we want to do, in the same way as I’ve described above for distributed energy resources and our transmission investment, is to ensure that we provide market settings that reflect the future we are moving towards and signal the value in the resources we will need through and beyond the transformation. After all, it is customers, investors and innovators who drive any transformation and energy is certainly no different to other sectors. This is what we have seen to date and we want to create the conditions to ensure it will continue.
We will also be keeping this in mind. We are expecting that the bulk of the investment that will be made in order to transform the grid will be in variable renewable energy. There are a range of government policies that are supporting this transformation and we need to be working in the context of those policies so that signals we develop for the complementary resources will interact effectively and support rather than detract from that ongoing investment.
Above all of this, our mandate is to ensure the development of the system for the long term benefit of customers. What customers want is not new and is eminently sensible. Customers want to be confident the transition to a net zero grid will meet their need for decarbonised, affordable and reliable energy.
At the ESB and AEMC our job is to create the frameworks that allow the market to do its work to achieve this sensible future. We need to establish the conditions which encourage innovation, support smart investment, and fulfil both customer needs and government objectives.
We aren’t going to have all the solutions – that’s not possible no matter how good our future lens is. But if we keep our focus on supporting innovation and providing customer benefit, we will be on track to help many other people to find the solutions. No doubt many people in this room and virtual room will already be working on a better way to charge a car or store hot water, or send hydrogen through a natural gas line. We’re looking forward to seeing how our vision for the future unfolds.