It’s great to be here talking with people interested in the future of networks. It’s a part of the sector I am very familiar with, from both an industry and regulatory perspective.
I, too, acknowledge the Jagera and the Turrbal people as the traditional custodians of Meanjin. I would like to share my respect for the knowledge and care that past and present First Nations elders hold for Australia’s lands and waters. These are the very foundations that we all rely on to generate and transmit our energy.
I feel quite at home speaking about issues for network businesses – although perhaps less at home to be up here! It’s some time since I’ve been on the stage rather than in the audience alongside you.
For many years I’ve worked in and with network regulation and businesses. From this experience, I have a pretty broad view of the sector and I’ve seen how it is changing.
Joining the Commission nearly a year ago brought another perspective to considering these issues. I have been a contributor to the AEMC’s processes in the past, and I can confirm how important and valued contributions from stakeholders are.
As you would all be aware, we make our decisions based on balancing the national energy objectives.
We are very aware that our rules can have an impact on the returns, and the opportunities to earn returns, of the businesses. And, of course, consequently on the price paid by consumers. This relationship can be vexing but, in balance, should not detract from delivering good outcomes to consumers in terms of service and prices.
Returns to be earned by network businesses – and financial incentives to earn more – provide a carrot to do better, and be better. This works best when regulatory design incentivises behaviour that delivers outcomes valued by customers. We, together with the AER, are responsible for ensuring that it does.
Designed well, this means:
prices are no higher than necessary, and
energy delivery services and customer experience meet the standards valued by consumers.
So, today I’ll talk to you about some recent reforms that are designed to give you the tools and the certainty you need … both to improve outcomes for consumers and to have opportunities to earn the returns you require to undertake the investment needed.
I’ve tried to think about what I could possibly say to this group that would be of interest to me, if I was sitting where you are. I have landed on two themes.
Firstly, the role of networks in delivering the lower-cost, lower-emission, secure and reliable energy system we need and value in the future. I will spend most time on this theme.
Secondly, encouraging you to help us keep up with the pace of change in technology and economics to ensure the rules are resilient to multiple energy futures.
To illustrate these points, I will outline some of our important recent rule changes and reviews that aim to support these outcomes. I’ll also refer to issues that we believe are emerging, but are yet to be resolved.
The emissions reduction objective
Before I get into those themes, however, I will start with one of the most important changes we have seen in 15 years - the incorporation of an emissions reduction objective into the national energy objectives. This means that – once the legislation is passed – we will be able to explicitly consider reducing emissions in our decision-making.
We are consulting on draft guidance on how we will incorporate this new objective. This describes how we would balance emissions reduction alongside the existing objectives relating to prices, reliability, security, and efficiency.
We have received a number of ‘harmonising’ rule change proposals to the gas and electricity rules to allow emissions to be considered in network and pipeline expenditure, planning and investment rules.
It’s worth knowing that if there are any existing rule change projects where consideration of emissions would be likely to have a material impact on our final decision, we will consult on that impact before making our final decision.
We encourage all stakeholders to participate in this consultation process as your insights and perspectives are invaluable. You’ll find the material on our website, and submissions are due by the 18th of August.
Theme 1 - Role of networks
Now I will turn to the first of the themes I outlined - the role of networks in delivering the lower-cost, lower-emission, secure and reliable energy system we need and value in the future.
I will address this in two parts.
Firstly transmission and delivering the capacity we need to connect the significant new renewable generation. This will bring forward savings to customers through timely and efficient delivery of transmission infrastructure.
It will also reduce the overall cost of transmission networks by ensuring new investment in transmission only occurs when needed, because new generators will make efficient location decisions and better information will support efficient planning.
And secondly, distribution, and unlocking the value of consumer energy resources – or CER – and demand response for all customers. This will reduce network capital cost through more efficient use of existing assets by enabling and facilitating two-way energy flows.
It will also reduce network operating and planning costs by utilising and sharing information to support lower-cost network operation, and support dispatch of lower-cost consumer energy resources and demand response.
Transmission networks are more important than ever to connect the significant new renewable resources that we need to meet our targets. As we all know, AEMO’s ISP estimates we need $14 billion invested in another 10,000 kilometres of transmission to meet our 2050 net zero goals.
We need to ensure the right investment conditions in a highly regulated market to support optimal outcomes in markets. That’s where we want competition to be the primary means of delivering the generation we need, at the lowest price.
Transmission planning and investment review
At the Commission, our recent Transmission Planning and Investment Review focused on:
developing certainty for networks,
reducing process and funding barriers in the regulatory system, and
improving information for communities, consumers and investors to flush out and address issues, impacts and delays associated with big infrastructure earlier in the process.
In particular, the review identified potential obstacles for networks and investors, in relation to getting the projects financed and building social licence to facilitate timely and lower cost delivery.
Our recommendations are designed to help networks work through those obstacles, while ensuring customers pay what Rosemary Sinclair – the inaugural ECA chair – used to describe as ‘no more than is necessary for reliable, secure power’.
I’ll speak briefly about four of the review’s recommendation areas:
Beginning with financeability, we’ve recommended the AER be given the ability to vary the depreciation profile for actionable ISP projects. This improves cashflow when it is needed to avoid additional and unnecessary financing costs without increasing the regulated rate of return or overall revenue for the transmission business.
We’ve now received a rule change request from Minister Bowen to that effect. This was followed closely by an alternative rule change proposal from Energy Networks Australia, designed to achieve the same objectives but in a more prescriptive way.
The primary difference between the rule change proposals is the timing and level of AER discretion.
Relatedly, Minister Bowen has sent us a request for a rule change proposal to enable the regulatory framework to pass through direct benefits from concessional finance in prices when intended. This accepts that, particularly in the context of the Rewiring the Nation fund, concessional finance may be provided for dual purposes: facilitating timely investment, and directly reducing prices.
Our transmission review also made recommendations in relation to the ex-post review of ISP projects. There may be a greater likelihood that major ISP projects incur overruns which could trigger an ex-post review and penalties under the regulatory framework.
We have recommended addressing this risk by ensuring that ex-post reviews of ISP projects be isolated from other capital expenditure and match the timing of the ISP project expenditure. This should also help the AER in its task of reviewing the efficiency of ISP projects by enabling it to consider the complete picture.
We’ve also made recommendations that can speed up the economic assessment process for transmission projects. We recommended enabling networks to submit a separate contingent project application for early works, without first completing a regulatory investment test. This provides cost recovery certainty to undertake early works planning sooner in the process. We also expect that this will provide better information, and sooner, to all parties.
This also supports our further recommendations on social licence-building which Clare [Savage] also touched on earlier today.
These recommendations aim to:
provide greater clarity around social licence expectations
identify potential delays and issues earlier in the process, and
recognise and legitimise the costs associated with effective community engagement.
These costs would still be subject to scrutiny but they enable you to invest with confidence in meaningful and productive engagement with communities that build social licence.
We’re not trying to tell you how to engage. The aim is to make it easier for you to have confidence to decide what to do and when and how to do it.
Our transmission review also outlined a vision for further opportunities to streamline regulatory processes to be tested through the ISP review expected in 2024.
This future direction aims to build on the current reforms by reinforcing the central role of the ISP:
as a package of projects delivering the optimal path,
embedding better information from more and earlier planning and assessment in the development of the ISP, and
further streamlining the RIT-T by removing the need for an additional benefits assessment to that of the optimal plan.
This is expected to improve the consistency of benefits assessment and reinforce the value of an optimal plan over the sum of the parts.
The Transmission Review also looked at introducing contestability into the framework. Under a contestable framework, the competitive process would do the work of the regulatory framework. That is, it scrutinises efficient costs, sets an efficient allocation of risk and enforces performance against expectations and obligations.
The process would negate the need for oversight and transparency appropriate under the regulatory framework. The attraction to a contestable framework to deliver our major monopoly infrastructure is driven by two things:
A desire to increase the capacity of delivery partners to deliver major projects in the time required, and/or
An expectation that contestability could deliver lower costs than the regulatory framework.
On balance, we found contestability wasn’t something to be progressed at the time. One of the reasons was that there were different approaches across jurisdictions and in that context a national regime was not very helpful or timely.
Transmission Access Reform
I’ll also just briefly mention the former ESB’s work on transmission access reform.
We need a nine-fold increase in grid-scale wind and solar energy to reach net zero by 2050 – from 16GW currently to 141GW.
So, we require an investment environment that is financeable and investable to ensure renewable generators show up.
This means providing certainty about access to future revenue opportunities and acknowledging the challenge of different economics of new technologies.
We expect transmission access reform will address some of these issues.
It aims to support efficient investment decisions and mitigate the risk that future revenue streams are eroded by subsequent connecting generators.
It will send signals to investors about the best place to locate generation, storage and dispatchable assets, so we only build the transmission we need.
The AEMC will take the lead on this work in collaboration with the Energy Advisory Panel, before providing final recommendations to Energy Ministers in November 2023.
These reforms should also result in better and earlier information about the need for, and use of, transmission capacity to support further investment in transmission if needed.
CER suite of work
Now, while transmission has claimed most of the public attention in AEMO’s step-change scenario, the ISP also relies heavily on a five-fold increase in contributions from distributed solar resources. Much of that will come from consumer-generated energy on the roofs of homes and businesses.
It’s worth emphasising just how substantially we expect to rely on CER from those millions of rooftop assets in the future.
We’re all working out how these changes will affect the grid – networks will be in the thick of it, and we hope to work together to spot issues and develop solutions.
If we can leverage this resource, it’s a much lower-cost solution than building big infrastructure projects.
The rise of CER also means the role of the distribution network becomes even more critical to unlock the significant value of lower-cost renewable generation, storage and demand response.
It also provides opportunities to lower network costs through more efficient operation and use of existing assets.
At the Commission, we have four key pieces of consumer energy resource work in front of us that will enable and encourage growth in those areas:
First, our review of CER technical standards is nearly complete. Improving compliance with these standards will improve the ability to operate a network with millions of tiny generators of different makes, ages and installations.
Secondly, we’re also close to completing the metering review – a recommendation of which is to accelerate the roll out of smart meters across the NEM. If knowledge is power, smart meters literally turn power into knowledge. This is the information consumers need to decide if, and how, they participate in the new energy markets. And manage their energy costs. This information is also valuable to networks to manage the characteristics of power and manage the impacts on the system. We expect to wrap the review up well before the end of this year and move on to rule changes shortly after.
A third project in this suite is being finalised this week – Unlocking CER Benefits through flexible trading. As the name says, it proposes solutions that leverage the benefits of consumer energy resources interacting with the system. From both a large and small consumer’s perspective, we need to understand which incentives and safeguards encourage participation whilst ensuring no deterioration in customer protections.
The fourth project will open for consultation this week. Initially called the Scheduled Lite Mechanism, it describes a low-cost, light-touch way to participate in the markets, it’s now titled Integrating price-responsive resources into the NEM. You should find a link to the project in tomorrow’s AEMC newsletter.
Seen together, these reforms present a platform to allow customer assets and response into the system, at a time and in a way that they can have the most impact.
Making responsive load visible, and providing incentives for it to be made available, offers benefits to those who choose to interact. At the same time, it increases opportunities to deliver lower network and energy costs for all customers.
Theme 2 – help us to help you
Turning now to the second of my themes, and that is: encouraging you to help us keep up with the pace of change in technology and the economics of new generation. This means early recognition of emerging issues and barriers, and help with nailing down the rule changes that can address issues without introducing new ones. We want to make rules that will endure through multiple futures.
The title of my talk is how networks can support the future energy system. A big part of that is also how bodies like the Commission can support you to do that. And, how together we really can make good decisions that better support the outcomes we need and value.
It’s a real ‘help us to help you’ scenario.
Now, more than ever, we need a coordinated approach to get to net zero. We need feedback from every quarter – industry, investors, governments, consumers – to solve the implementation challenges we all have.
For a start, we don’t claim to have a monopoly on all the good ideas! Our best reforms begin with you.
We encourage you to talk with us even if the solution may not look straightforward, which is often the case. We do not focus myopically on one particular part of the framework with each rule change project.
Our decisions must take into account the broader implications of how everything works together. We do not expect everyone to keep all of these interactions and activities in their heads. But we do, and we can assist others understand them when needed.
Our energy system is unlikely to have the same distinctions between generators, networks and retailers as it has in the past. So, if you see consequences for networks and your customers in any of our work, please check in with us.
We recognise people can be frustrated with the time it takes to run a rule change process. However, proper governance and oversight of the rules delivers a more robust and defensible system consistent with our national energy objectives.
With the increasing complexity of the system, we need to make sure our rules are sustainable and resilient to different futures. Consultation and research helps us better understand the likely impact of proposed rule changes and try to avoid unintended consequences.
That leads to an approach where we focus on efficacy and potentially having fewer – but more ambitious – rule changes, that step us up and into the future. Nevertheless, we must avoid additional unnecessary costs.
In short: you helping us can mean coming forward with your perspectives and solutions – while us helping you can mean creating effective, ambitious rules that get regulation out of your way unless absolutely necessary.
Before I conclude and we move to questions, I wanted to flag a few other issues that are looming large in our thinking:
First, we recognise there’s work ahead on the future role of gas and what that means for networks and system supports. Clare touched on this earlier. Gas networks have played a critical part in our energy delivery system to date and gas remains in the ISP in some form well into the future.
Secondly – how do all our renewable technologies and related use of information change the economics of investing in new generation and networks? How do we meet this challenge and mine the opportunities?
We must also be cognisant of the impact of jurisdictional policies on the operation of the rules and what we can learn from these approaches to improve the effectiveness of markets and the work that they do.
It is all of our responsibility to speed up the pace of regulatory reform and project delivery.
We need to have the courage to do things differently, given the changing technology and economics of our energy delivery system.
We need a forward-looking, flexible, but resilient, rules framework to guide decisions.
To return to my call-to-arms – all of you can help us be nimble and develop rules that keep up with the pace of change and support multiple futures:
You can identify opportunities, as specific as possible, to make new rules more resilient and enduring.
You can talk to us about how new rules might progress, and work in with other changes underway.
And, it is helpful if you can anticipate and address alternative views and perspectives with supporting information.
But most of all, we must all be open to do things differently, with wisdom and with courage.