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Anna Collyer

Implementing the ESB’s post-2025 market design reforms

07 June 2022

Australian Energy Week, Melbourne Convention and Exhibition Centre

Anna Collyer, AEMC & ESB Chair

 

Thank you and good morning – it’s a pleasure to be here 

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 know this morning there are many reasons to fix our gaze on the current environment – a change of government, some big movements in the sector, a lot of anxiety the magnitude of current  prices.

But despite – or actually, because of – those immediate, urgent concerns, it feels even more important for me to draw our focus back out to the big picture.

Because it’s the longer-term reform that’s crucial if our sector is going to serve the community the way we must, to reach Net Zero by 2050.

That means more renewables, firmed up by storage and transmission.

It means implementation moving along at a cracking pace so we give some relief to the short-term issues at the same time as building long-term solutions.

It means delivering the capacity mechanism, congestion management model, and transmission planning and investment review, with a host of interdependent work, and balancing – throughout – the benefits for consumers.

We live in a very volatile world, and we are trying to land the most significant transformation of the energy sector this generation. Today’s crisis is something we need to learn from and prepare for the next problems we face.  It’s an example of why we need to speed up reform, not slow down. And to speed up – we have to do it together.

There was a stage, not too long ago, when the phrase ‘post-2025 market design’ might have sounded futuristic.

Right now, however, there are fewer than 1000 working days until January 1, 2026.

P2025 implementation is a day-to-day practical exercise taking place in a complex environment:

  • The stakes are high – implementation aims to set Australia firmly on the road to decarbonisation.
  • There are four substantial workstreams, but between them and within them there are myriad links and interdependencies.
  • There are countless customer touchpoints in businesses, governments, institutions and homes – no one will be unaffected by this work.

So despite the topic of my speech – I’m not here to talk about what the AEMC or ESB are doing to implement the P2025 market design reforms. I’m here to talk about how we are implementing them – market bodies, governments, businesses, investors, advocates, media, academics, customers. All of us.

Because we are all in this together. I’ll say it again: we are all in this together.

Working together is how we can implement these ambitious and essential reforms to reshape our magnificently complex energy market in time for 2025, for 2030, for 2050.

Working together will give us the balanced approach we need to deliver good outcomes for our whole community.

But I’m not stepping away from the guiding, designing and constructing roles that the AEMC and the ESB and our colleagues bear in this process.

We employ many strategies to ensure we can meet the reform goals, and there are three important tools that I’ll cover this morning:

  • Firstly, how the creation of new markets becomes a mechanism driving innovation and greater efficiency in the focus and timing of your investments.
  • Secondly, how you contribute to consultation with us directs implementation in ways that we value highly, and which you may not yet fully appreciate.
  • Thirdly, how establishing social licence underpins implementation in so many ways – like agreement on decarbonisation targets and changes in personal energy consumption.

One thing that marks our reform implementation journey more than any other is that we know – usually – where we are going, but we don’t always know the best way to get there. What we do know is that market-based solutions are often the quickest, smartest way to work that out.

That’s why our reform program is around ‘market design’. We are seeking to address future problems that we can’t even define yet. Once we do – or come close - we can write the rules that create new markets, rewarding participants for solving those problems.

This is what we mean when we talk about creating a ‘space’ where innovation can occur.

We also often remind people that we are technology agnostic – we don’t pick winners. And this is true. But putting in place market frameworks that encourage innovation effectively lets the consumer pick the winner, and that has long been central to everything we do, both at the AEMC and the ESB.

As I said at the start – today’s problems are an example of why we need to move quickly, together to put in place a market design that will help us with more renewables and what is needed to firm them in the market through storage.

At its heart it will be offering rewards for providing something we need in the transition to net zero.

First, it seeks to provide confidence that we will have enough capacity as we see the massive retirement of the old fleet.  The scale of the new build required is enormous and a clear signal to guide that will support better outcomes for customers.

Secondly, it’s ensuring that we have the right mix of capacity to ensure a seamless service for customers.  We’re building capacity with the growth of variable renewables, but we need other resources and methods to come out on those cloudy, still days.

Batteries, pumped hydro, demand response and potentially hydrogen may all play a part, and, of course, the better we get at describing the problems we’re going to face, the better the solutions that emerge.

Because, in very simple terms, we can define a need for these services without defining how they will be delivered, or by who. That falls to the market, and the freedom to innovate, and this is the ‘space’ we create by designing rewards for those who come up with solutions.

  • Another example is that shortly we’ll begin work on a rule change requested by the Australian Energy Market Operator, AEMO, to look at flexible trading arrangements for consumers.
  • This could mean allowing ‘sub-meters’ to be added to household and business meter boxes – just microchips really – so consumers could choose to let a third party manage the power use of specific equipment, like their air conditioning or pool pump. On a public equipment level, it could apply to contracting out the power management for streetlights or phone kiosks.
  • The rule change, if it proceeds, would create a ‘space’ where brand new business models could step in and offer benefits to customers and the power system, while being rewarded for it financially.

A challenge for many of you today may be picturing yourselves, your established businesses, plunging into a new market like that. As an incumbent of the current market, particularly a very large operator, one of the hardest things is to innovate against yourself.

I do understand that when we create new markets, to gain innovative solutions to the problems we see coming, it can be hard to break away from the traditional successful business model. In some ways, though, we’re doing you a favour by giving you the competition you need.

How so? Because we’re also creating new ways that you could be rewarded.

Incentives for service innovation are just one way to be rewarded by participating in the new markets we need. Another way is by responding to signals to invest in infrastructure, when and where we need it.

We know in the transition we are going to need more storage and more transmission. Not one – or the other – but more of each – in a way that is efficient for consumers. 

Two ways we are looking at this is through our work on the Transmission regulatory framework and modernizing the regulatory framework so it’s fit for purpose for how storage actually works.

Combining innovation and investment signals, we recently completed our Integrating energy storage systems into the NEM rule change.

The rule facilitates innovative business models that deliver efficient market solutions to address the needs of the transitioning energy system.

It’s a first step along the path to a two-sided market, sending signals that we need more participation from demand-side resources and are looking for solutions to enable it.

The rule change created a participant category called the Integrated Resource Provider.

This category enables storage and hybrids to register and participate in a single category.

Compliance with dispatch can also be measured at the connection point.

This means hybrid facilities such as load with co-located generation will be able to consume energy behind the connection point when there is congestion on the network.

And that means lower cost energy during periods of congestion, rather than limiting on-site generation, which is what currently occurs in these situations.

The rule change also allows aggregators of small generating and storage units to move into the new category, which will allow them to participate in the ancillary services market.

This change would send clearer investment signals by allowing aggregators to provide more services.

It is a relatively low-cost change that will allow more participants access to more revenue streams, and deliver services the market needs. Essentially, this change is about providing greater flexibility for customers to get the best value out of their energy assets.

And, last week, we released a draft report and recommendations from stage 2 of our Transmission Planning and Investment Review. The draft recommendations would allow variations to the depreciation profile for big network investments in the grid, removing some financing obstacles for major construction projects.

As an audience like this knows, it’s not enough just to invest in more renewable energy generation. We have to transport it, too, and often from locations very different to the historic generator hubs near coal mines and gas fields.

Our current transmission network was built in a time so foreign to our own that it might have been for a different country. It’s an area ripe for the right kind of investment, and we hope we’ve taken steps towards that with our recommendations last week.

Of course, reports like the Transmission Review don’t just appear.  Many of you here, or your colleagues, may be actively involved in discussions and submissions on a raft of these papers that are moving us towards P2025 reforms.

We don’t have all the information needed to complete the implementation reform process yet. No one does. That’s another place where you come in – where we’re in this together.

As businesses, advocates, governments, consumers and researchers, we call on you time and again to consult, consult, consult.

Just this month, the AEMC will receive submissions on five projects, release four more papers for fresh consultation, and hold three public forums and many more meetings with stakeholders drawn from every part of the energy sector and government.

We rely heavily on stakeholder engagement to guide our decision-making, not just to endorse it.

But when yet another call goes out from AEMC and other market bodies for you to write a submission, attend a forum, respond to a consultation question, we also know it can spark exhaustion at best, cynicism at worst.

We get it! Both AEMC and the ESB are small organisations and we try to contribute as much as we can to the consultation calls from other bodies too.

We took a necessary decision at the end of 2021 to re-sequence our work program for this year, which gave us all some breathing space around the most significant consultation projects.

Even so, the pace is relentless and we ask that you keep on reading our work, writing your thoughts, attending the forums, and helping drive the implementation forward.

I thought I’d share an example of why it’s so important:

The ESB began consultation on its Congestion Management Model – CMM – with a solution we thought was a good starting point.

Putting it bluntly: our stakeholders hated it and we thank them – you – for that.

Because – when we then asked you for alternative models we got a much clearer articulation of the problem, and 8 or 9 possible solutions. Two of the four new models being considered came directly from you.

That’s a particularly crisp example of how genuinely we seek your views, how highly we value the additional perspectives and critiques you bring.

We are all in this together, and we don’t have much time. We could have put a great deal of effort into developing, alone, an alternative to our original CMM. Thanks to the willingness of this sector to contribute in consultation for all our benefit, we didn’t have to.

Along with innovation and investment, your imagination and experience is helping to speed the implementation of the P2025 market design reforms.

While the CMM example emerged when we took an open-minded approach to traditional consultation, I’d like to share a less conventional example of consultation from the ESB. This is the Customer Insights Collaboration, which is changing the way we think about consumer outcomes.

Consumer Energy Resources (CER – our preferred term for DER like rooftop solar) are at the pointy end of this focus on consumer outcomes, in part because it’s arguably the area of the transition in which customers are most engaged.

Ensuring we are designing a system that works for the full spectrum of customers is central to the ESB’s Customer Insights Collaboration.

So what are we doing differently?

We know we have to start with customer preferences and behaviour and see how we can ensure the system works for consumers (not the other way around).

This started life as the maturity plan but through the pilot we did last year, we realised that the actual value of the work was bringing together key stakeholders to talk about the issues from a customer viewpoint.

While we may think it’s exciting to contemplate electric vehicles as batteries on wheels, most customers buy an electric vehicle because it’s a really cool car that goes from zero to 100kph in 2.7 seconds.

And in a pop quiz I took recently at a CEC dinner, where we had a higher proportion of people with EVs than at your usual gathering, I found a range of philosophies and strategies for charging, and none of them related to the value they could provide to the grid.

So if we want to understand how customer behaviour will impact the system, and how to design a system that works best for all customers, we need to start with the customer.

What we learned when we did the pilot was that starting with the customer gave us a meaningful way for all participants to engage on complex issues and find common ground.

That’s 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.

Our current vision is for this program to run with 6 monthly releases over the next 3 years to gain insights into customer perspectives on a range of key issues.

The idea is we can then share those insights across the range of market bodies and other institutions working in this area so they can take them into account in their work.

We’re part way through the first release  – barriers and enablers to customers getting the most out of their flexible demand.  The 2 key barriers/enablers which we’ve identified are recognising the diversity of customers and trust.

While these aren’t surprising the collaborative work in highlighting them and commitment to sharing and using these knowledge-sharing reports provides a better basis to ensure they are given the necessary consideration in our work.

And in mentioning ‘trust’, I land at the third area I want to discuss regarding the way we’re implementing market design reforms. Initially, I called it a tool, but really it’s more like the door to the toolshed – you need it to be open before you get to work.

I’m referring to social licence, which is a phrase you’ve been hearing more and more in the energy sector as the transition increases in pace.

The term ‘social licence’ has been around for many years. In some contexts it’s synonymous with consumer confidence, or, simply, trust.  Businesses and governments can operate legally without social licence, of course, but typically not over long periods, or wide territories, or with resounding success.

And when we talk about the changes we need to implement P2025 market design reforms, to meet the targets of 2030 and 2050, we do need long, broad, stable trust and agreement from the community.

We need social licence at many levels to implement the reforms. We need people to be willing to change their behaviour, adopt new technologies, allow access to properties, and invest in innovative solutions.

    • Let’s talk about the link between innovation and risk. I spoke earlier about the importance of innovation to help us implement the market design reforms. However, in terms of social licence – or consumer confidence – product and service innovation also poses some challenges.
    • When a consumer invests in a product or service they are told will be good for them and also the planet, they expect it to work as it should. If it doesn’t, at present, they should be able to seek remedy.
    • But the very new nature of some energy-related goods and services means the consumer isn’t always going to find it easy to make a complaint to traditional authorities, or get action when they do.
    • We’ve had some interesting discussions lately with state-based Energy and Water Ombudsmen’s offices and where they see the gaps and potential loss of public trust, of social licence.
    • A question to consider is whether the Ombos’ remit could and should be expanded so our customers have somewhere to go for dispute resolution, the way they do for traditional energy products?
    • It might seem odd to want more ways for people to complain, but it makes sense if our ultimate goal is to build confidence in the new things we want people to buy, the new services we want them to employ.

It’s not only that consumer laws might take time to catch up to the very new innovations coming to the energy sector, it’s the sheer scale of what we’re moving towards.

Right now, and for all our history in electricity networks, the number of generators in Australia has been manageable in the literal sense. They could be counted, monitored, tested. Types could be matched to standards, maintenance could be mandated.

With the rise of CER, however, we’re looking at a future where consumer confidence in Australia relies heavily on 3 million tiny household generators – and they won’t be managed by 3 million tiny engineers!

We’ll need ways to ensure a level of quality in household generation – CER – that balances consumer needs and the power system’s requirements.

AEMC, ESB and AER each are considering standards and consumer protections within our respective scopes. Strong, enforceable quality standards encourage consumer confidence and social licence, and that in turn may enhance the implementation of some of our reforms.

The second stage of the AEMC’s Transmission review also highlights building social licence as a significant issue. It notes that obtaining community – and landowner – acceptance of major transmission projects is critical for their timely and efficient delivery.

The draft report found that existing regulatory obligations for stakeholder engagement are largely appropriate for TNSPs to build and maintain social licence. This doesn’t mean a TNSP can call it ‘job done’ with a tick and flick adherence to the regs.

The task of gaining trust, of building social permissions and not just legal ones, is larger than any rules we could write.

The current issues in the sector are bad for all of us – in particular – consumers. 

We know we need to move quickly to get in place reforms that reduce the risks that we see materialising today.

To get to net zero we need more renewables, firmed by storage and the transmission to get electrons where they are needed.

The title of this speech – Implementing the ESB’s post-2025 reforms – could be misleading. These reforms are not just the ESB’s. They belong to all of us.

A capacity mechanism may not be your preferred energy market model, but we need you involved in how we design it, define it and refine it.   Continued uncertainty at a policy level just increases the risks of consumers continuing to be on the receiving end of outcomes we see today.

The implementation process is not a typical government-down approach. Neither are we leaving the field wide open, because the National Energy Objectives ensure that consumer interests will always be at the forefront.

What we are discovering in the implementation process, alongside you I hope, is that placing consumer benefits at the front of our considerations helps everyone.

When consumers are our focus, we create stronger markets that naturally reward innovation and encourage investment because there are customers waiting for those solutions.

When consumers are our focus, our consultations are more effective and deliver more meaningful and direct ideas to our work programs.

And when consumers are our focus, it’s of course easier to build social licence because we are always thinking about what will attract them and repay their trust.

We are all in this together, and it’s a great pleasure to be on this implementation path with every one of you.

Thank you.

Hydrogen and enabling innovation

31 May 2022

Australian Hydogen Conference, Adelaide Convention Centre

Anna Collyer, AEMC & ESB Chair

 

Thank you Fiona and good afternoon everyone.

I’d like to begin by acknowledging the Kaurna People of the Adelaide Plains, who are the Traditional Owners and Custodians of the land on which the Convention Centre is located.  I’d like to pay my respects to their Elders past, present, and emerging, and extend those respects to Aboriginal and Torres Strait Islander people present today.

I’m delighted to be able to speak to you in person as Chair of both the Energy Security Board and the Australian Energy Market Commission - of which I have the privilege of being the Chair for both.

It’s our job at the AEMC and ESB to help facilitate the rapid transition of the sector by reforming the rules so that markets, and consumers, can make the most of new technologies - and that includes hydrogen.

Hydrogen is fascinating from our perspective because of the way it uniquely intersects with both gas and electricity markets. It’s a future source of renewable fuel, but it’s also potentially the largest industrial customer for electricity in the NEM’s history, and a flexible customer at that, a customer that can give something back to the grid.

But for all the enthusiasm in the industry, there is also that uncertainty. Uncertainty around how hydrogen will be used, how it will be transported & how much it will cost – all these things are evolving rapidly, making it hard to gauge cost, risk, and return.

That’s why today, I’ve chosen to focus on the word “innovation”.

In each case what we want to do is provide the right settings to encourage investment and confidence and most importantly the innovation in both products and services that we’ll need to transform the sector.

Bearing all that in mind I’d like to address the big picture vision and hydrogen’s many future roles in any energy system on the road to decarbonisation, along with the steps we’re taking towards reforming the regulatory frameworks to enable this kind of innovation.

The latest ISP shows a hydrogen superpower scenario would require a seven-fold increase in the energy the NEM delivers. According to Dr Alan Finkel, we’d need an 8 fold increase in Australian electricity production if hydrogen exports are to match our LNG exports today, or a twelve-fold increase to match our coal exports across Australia. This would represent a transformational change in our energy landscape.

The interest in hydrogen is reflected in the level of investment in the sector already. Just in the past few months, we have seen a number of announcements in the Hydrogen space, including;

  • Fortescue’s announcement with the energy giant EON in Germany for 5 million tonnes of hydrogen by 2030
  • A renewable hydrogen refuelling network between NSW, Victoria, and Queensland
  • The NSW Governments Hydrogen strategy launch, including a target of 10% gas blending by 2030
  • Plans to have the first electrolysers coming off the factory floor in Queensland next year.
  • And here in South Australia, plans for a $600m hydrogen power station and storage facility in Whyalla.

In the future, we will no doubt see increasing demand for hydrogen as a feedstock for gas generators. And of course, there is the opportunity too for hydrogen to play a key role in providing system services like FCAS and flexible demand to the NEM. The system will need these services more than ever as it transitions to greater levels of renewable generation across a decarbonising network.

We can’t really predict what the future hydrogen industry will look like, but we do have some clarity about what the next steps are in terms of regulatory reform … and that’s where our role is crucial.

  • The AEMC’s hydrogen review, as well as the distributed connected facilities rule change, are critical first steps in the development of the industry. The changes to the rules will allow for low-level hydrogen blends as well as renewable gases in the distribution gas pipelines across Australia. They’ll help to create demand in the early stages of the market too.
  • The review is looking into what reform is needed so that those gases can be included in the energy framework….
  • And it also aims to enable the gases to be safely supplied through existing gas distribution pipelines - while retaining the operation of the current market arrangements.
  • The review is specifically looking at how these new gases are to be brought into the frameworks in terms of:
    • Participation in the facilitated gas markets and retail markets for gas
    • Pipeline regulations
    • Market transparency mechanisms, and,
    • Consumer protections
  • We aim to make recommendations and changes to the framework that will provide clear “rules to the game” for future potential investors, and pilot projects that are taking those key steps today. We want to ensure those investors can confidently make informed decisions that will in turn grow the sector, paving the way for a decarbonised economy.

In addition to blending hydrogen into distribution pipelines, there is also potential for our other workstreams to pave the way for growth and innovation within the industry. Let me give you some examples.

  • First, we are in the midst of a significant work program to ensure the system has the right amount of essential system services in the right places. One of the consequences of the transition to renewables is that it is leading to a reduction in these services in the system. It’s our role to define what we need in the way of regulatory frameworks which will allow emerging technology like hydrogen to provide these essential system services. For example: there is potential for electrolysers to provide essential system services. How? Electrolysers can change their output very quickly, allowing the supply/demand of the system to be kept in very close balance, which in turn stabilises the frequency of the system. We are also evolving the FCAS framework. In July last year we made a rule introducing new markets in fast frequency response and this year we are progressing the primary frequency response rule change. The existing frameworks and new rules will all have an impact on hydrogen facilities that can offer services to these evolving markets.
  • Transmission and the role hydrogen can play in addressing congestion on the grid will also be key. The ESB’s Transmission Access Reform work seeks to address increasing congestion in the grid. This work aims to provide better incentives for generators, storage, and flexible load such as hydrogen to connect to the grid and come online in a way that will help deliver new power supplies at the least cost and optimize the use we get from existing and new networks alike. It also means we maximise the utilisation of variable resources.
  • Recent rules in relation to demand response, integrating energy storage systems, and ongoing work on flexible trading arrangements as part of the ESB’s post-2025 reform process are important here too. They will also have an impact on hydrogen business models, that will interact with the grid as a customer and a supplier of demand response or energy. On that front - hydrogen can play a similar role to batteries in taking energy from the grid when it’s cheap and providing energy when it’s expensive.
  • And finally, there is the importance of hydrogen as a future source of firming capacity to the grid as we move to ever greater levels of renewable generation. Hydrogen and hydrogen-fuelled generators may play a key role in the future operation of any capacity mechanism in the NEM. This in turn would improve the reliability of the system. More work might be needed down the track around how the electricity and gas sectors intersect – specifically, understanding the role hydrogen can play in meeting peak energy requirements (and resilience in the provision of peak energy), in both markets at the same time.

To conclude, the AEMC is often at pains to remind people that we are technology agnostic – we don’t pick winners. And this is true. But putting in place market frameworks that encourage innovation has long been central to everything we do, both at the AEMC and the ESB.

And we know in the case of the development of the hydrogen industry here in Australia, frameworks that are enablers of innovation, investment, and growth will be essential, both to the development of a domestic industry and the future growth and competitiveness of Australian hydrogen exports in the global marketplace.

We are taking those first steps, in collaboration with market bodies, governments, and industry. But we are also looking to the future, and the future role hydrogen will play in Australian gas and electricity markets. Hydrogen has many roles to play in our energy markets on the pathway to decarbonisation, some of which may not be fully understood or known today.

With the right settings, the mutual benefit between Australian energy consumers and a growing hydrogen sector is likely to be compelling. We look forward to working with you, the industry, and its stakeholders as you take these critical next steps on a path towards innovation and growth.

Thank you.

An AEMC update on approaches to managing the energy transition: Opening Keynote

16 March 2022

Enlit 2022, MCEC Melbourne

Anna Collyer, AEMC & ESB Chair

Thanks Laura and good morning everyone.

I’d like to begin by acknowledging the Wurundjeri People of the Kulin Nation, who are the Traditional Owners and Custodians of the land on which the Convention Centre is located.  I’d like to pay my respects to their Elders past, present and emerging and extend those respects to Aboriginal and Torres Strait Islander people present today.

It’s a delight to be here at my first fully F2F conference since the start of COVID.  All the more so as I’ve just come out a week in isolation. My teenage son tested positive to Covid last week.  Fortunately for our family, his symptoms were mild, the rest of the family managed to not contract COVID and so happily here I am today.

With everything going on in the world and in Australia at the moment, its good to be able to focus on something which is important and where we can make a difference.  2022 is certainly shaping up to be another crucial year for energy policy.

Right in the thick of it are the Australian Energy Market Commission (or AEMC) and Energy Security Board (ESB) – of which I have the privilege of being the Chair for both. As you know, the ESB was reset last year and is now made up of the heads of the three market bodies; myself as Chair of the AEMC, Daniel Westerman as CEO of  AEMO and Clare Savage as the Chair of the AER.

Speaking from an AEMC perspective, we developed a new strategic plan last year which is about our role in the energy transition. In setting the scene for my talk today I wanted to draw out a couple of themes from our new plan.

The first is the context for all our current work.  Not only is the energy sector decarbonising, it is also a critical enabler for other sectors to reach their net zero emissions objectives.

We very much see the AEMC role, including through the ESB, as contributing to the achievement of a net zero grid and a net zero economy.

Bearing that commitment in mind, I’d like you all to look at the photograph that’s on the screen behind me.

It was taken by a colleague of mine at the AEMC.  We hold an annual photography competition and all the images I’ll be sharing this morning were taken by the talented team at the AEMC.

I think this is such a beautiful photo but the reason I picked it is because it also illustrates  the second theme from our strategic plan I’ll be talking about today.

For me, this image is all about perspectives. The focus of the photo is the dandelion.  But it helps us to remember 2 things.  With any perspective, its always important to also see the bigger picture.  And its always important to remember that there are other perspectives. 

Our strategic plan recognises that AEMC makes an important contribution to achieving our common goal of net zero.  But we also realise in order to find creative solutions to the challenges we’re facing, we need to harness different perspectives by working together collaboratively.  There’s a nice quote that sums this up from American author Kenneth H. Blanchard who said, “none of us is as smart as all of us”.

Our job isn’t to have all the answers, but to deliver the right solutions together…. creatively and collaboratively.

When I looked across the program for this year’s Enlit conference, I was struck by how well it represents the broad spectrum of issues being tackled in the transition to net zero. It also occurred to me how every session in one way or another, relates to our current work program.

Bearing that in mind – I’ve picked three key areas you will be discussing over the next couple of days at to highlight areas of the AEMC and ESB work program that will contribute towards the goal of net zero.

  1. Integrating renewables into the system
  2. Electricity Networks in a 50% Renewable World
  3. Enabling Grid Integration of DER and Trends in demand response

Integrating renewables into the system

The work we are doing at the AEMC and the ESB is about getting the most out of renewables as a low-cost, emission-free form of generation – while at the same time ensuring we maintain reliability, security and affordability to achieve the best overall outcomes for consumers.

There are two key areas of this work. The first is the capacity mechanism work being led by the ESB, the second is the AEMC work on essential system services.

Lets start with the capacity mechanism.

In considering a new market mechanism for capacity, we are focussed on ensuring that we can provide seamless reliable energy for customers.

We know people are concerned that the mechanism will slow down the transition to renewables. Looking at the events of the past few weeks I think the transition to renewables is getting faster not slower.  Its being driven not only by government policy but by investors and customers. The announcement by Origin Energy to bring forward the closure of its Earring power station, and the attempted take-over bid of AGL by Mike Cannon Brookes both represent the drivers for renewables which are both economic and climate change objectives.

In this context there’s two things we’re worried about.  The first is replacing the thermal generation as it retires so we don’t end up with a gap.  The second is replacing it with the right mix of firm flexible and variable resources.

There’s a couple of different scenarios we have in mind, that mean we need this mix of energy in the system.

If you have a sudden dip in power in the middle of the day due to cloud cover or an unexpected storm reducing solar panel output, you need something that can come on effectively instantaneously. Customers shouldn’t notice a thing.

On the other hand, if we had a wind drought scenario as was experienced last year in the United Kingdom, then we would be thinking about the kind of asset that may take longer to respond but can then be available  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.

In order to focus on solving these problems, we have taken a step back in our work on capacity mechanisms this year.  We have started by taking a scan of local and international examples of capacity markets to see what kinds of features they have in common or where they are different. We’ve also had a broad range of thoughtful submissions to our consultation paper at the end of last year looking at the various features of a possible mechanism.

As stakeholders have emphasised, we need to look both at the particular features of the NEM as well as the particular context of our rapid transition to come up with a creative solutions to meet our particular needs.  And we will also be continuing to work with stakeholders to evaluate and articulate the reasons why we think any change we propose will meet those needs in a way that is better than what we have today.

The second area of work I want to talk about here is the AEMC’s essential system services reform work.

This is the other area where we need to complement current renewable technology so we can keep the grid stable and secure. This work started with the ESB deconstructing the inherent qualities of synchronous generation into clearly defined services that are needed to support the system.

The AEMC’s essential system services rule changes are now progressing this work with a strong emphasis on listening and learning.

One example of this, is the work we are doing with industry reps and our market body colleagues for an ‘Operational Security Mechanism’ or OSM.

This piece of work is looking at how we can price, procure and schedule the essential services that we need to stabilise the grid.

At the moment these services are being provided in the market through AEMO directing units online. For example, in South Australia, AEMO is issuing lots of directions to ensure we always have secure combinations online, which in South Australia means 2 synchronous generators must be online at all times.

Our work is looking to move away from this and have a more transparent, cost–beneficial approach to procuring these services.

This would restore the directions process back to a backstop measure like it was originally designed to be.

Given the technical nature of these issues, it is essential we have people with the right expertise involved in the process.  We have technical working groups that provide us with key input and feedback on how things work practically and the real-world abilities of technology.  We also need to think about how a market can evolve from new technology and what are the impacts on customers along the way, which means we need to bring that mix of thinking in as well.

So thinking back to our dandelion picture in relation to these two key areas of work.  Its important to remember that the bigger picture for this work is the accelerating transition to renewables.  We don’t want to impede that transition but we do want to make sure that we have complementary resource in the market to maintain reliability security and affordability.

And in each case we are looking for a broad range of different perspectives because these are novel problems.  We don’t have off the shelf solutions ready to drop in so we need some out of the box creative thinking so we can develop new solutions.

Electricity networks in a 50 per cent renewables world

To give you an indication of the magnitude of transmission and generation investment we need to get to net zero, it was identified in AEMO’s latest draft Integrated System Plan that an additional 122 GW of utility-scale variable renewable energy is forecast to be installed in the NEM by 2050. Yes, we are talking about an eight-fold increase in large-scale wind, solar and hydro generation.

With this much new generation forecast to connect, it is self-evident that there is insufficient transmission network capacity to accommodate this. As Brett Redman commented last week, there can be no transition without transmission. The draft ISP anticipates actionable projects over the next 10 years totalling just under $14 billion. 

We agree that investment in, and access to, the national transmission system is a key enabler of a successful transition. But we also need to remember that these are long-lived assets that consumers ultimately will be paying for over a long period of time, so we want to ensure we’re making the best investments we can on their behalf.

The ISP reforms which came into effect a few years ago are about finding the path for the best overall development of the system.  The jurisdictions are also now putting in place arrangements to promote the development of renewable energy zones.

There are two further key pieces of work underway that will build on the ISP and REZ reforms.

First, the AEMC’s transmission review is looking at how the regulatory framework can support transmission investment in a timely way while still keeping costs down for customers.

Second, the ESB’s work on the transmission access is focussed on how to get the most out of those transmission and generation assets so we don’t build more than we really need.

Starting with the AEMC’s transmission review.

This review had the potential to be bigger than ‘Ben Hur’ and so we started by asking stakeholders what they thought the most important issues were for us to address.  Through stakeholder responses, we were able to identify our areas of focus and prioritise our work.  We’re starting with some near term issues which we think are critical, before moving to some of the broader issues which have also been raised.

One critical issue is the question of how emissions reductions are taken into account in transmission planning.

What we found was there’s currently a pretty broad range of views about how the current process works.

We have spent time working closely with our market body colleagues to understand the interaction between emissions reduction, the ISP process and the regulatory test for investment, the RIT-T process.

What we’ve found is that AEMO does explicitly build emissions reduction into its scenarios for the ISP based on jurisdictional policies or targets, and that those scenarios form the basis for the cost benefit evaluation of the RIT-T. 

By examining these processes and getting an aligned understanding of how they work, we’ll have a common baseline. We can then ask the question whether anything further should be done in the national regulatory framework.

A range of other issues will be addressed in our initial report which is due for publication in April. This includes potential reforms to support networks in the way they work with communities, as well as balancing needs for networks to be able to finance these significant projects with appropriate checks and balances on the costs of the projects.

The transmission review is a significant piece of work and we have taken a collaborative approach in working with others to both identify issues and develop policy options. Alongside our usual stakeholder engagement, we have established market bodies working and advisory groups and jurisdictional reference groups and leverage these groups for their strong subject matter expertise and keen interest in the work we are doing. This has been a successful model and one that we intend to continue to use going forward.

The second piece of work that’s relevant to how much customers will pay for transmission is the ESB work on transmission access.  This is really about getting bang for buck in relation to transmission investment.

The ESB’s put forward a proposal last year for a congestion management model – a system of rebates to provide incentives for new generation to locate in areas, or zones, where transmission capacity exists. However, listening to stakeholder feedback on this proposal, late last year we also called for new, alternative models from industry.

We received really great engagement from industry and are working with them to consider these models along with the CMM as to which should be progressed to a detailed design for ministerial consideration.

We’ve collectively identified that there’s 2 problems we’re grappling with – one is where assets are built in the first place, and the second is once built, we expect some level of congestion to remain and so how do we dispatch those assets in operational time-frame so we get the best use of assets for the benefit of customers.

We’ve also identified that this isn’t just about generation.  Its also really relevant to batteries and to other flexible load and the way they can operate in the grid to relieve congestion if they get the right rewards for doing so.

We will be continuing to work closely with stakeholders – including many at this conference – on what exactly the model will look like and how it will work.

Remembering our dandelion photo (although I do like this one as well), our bigger picture here is the importance of transmission investment to achieving net zero and getting the best deal for customers from that investment.  And both workstreams are examples of where we are using different perspectives to solve complex problems that come with the transition and our commitment to net zero. We think the steps forward we’ve achieved this year are the result of listening to each other and working through the issues from different points of view.

Enabling grid integration of DER and trends in demand response

Customers have led the way in our transition to net zero through investment in their own assets.

Whether to manage their electricity costs, make a contribution to tackling climate change or both we have the fastest uptake of solar panel investment in the world and this is set to continue.

Consumer investment in rooftop solar PV is expected to grow from 15 GW today to 35 GW in 2030. By 2050, rooftop solar and other types of distributed resources will contribute more than 45 per cent of Australia’s electricity.

We need a system that works for customers with solar panels as well as predicted new waves of investment in household batteries and electric cars.  But we need to have regard to the full range of customers as they certainly are not homogenous.  There are

  • those who are really engaged and have the app to prove it
  • those who buy the assets but want to set and forget and
  •  those who don’t or can’t participate – either way, we need to look after everyone.

The AEMC and ESB and many other bodies and institutions are undertaking a myriad  of work in this space and so I’ve just picked two areas I want to highlight.

The first is the work the ESB is leading on gaining insights into customer perspectives.

This started life as the maturity plan but through the pilot we did last year, we realised that the actual value of the work was bringing together key stakeholders to talk about the issues from a customer viewpoint.

Of course, all of the work we do, as I’ve highlighted today, is about getting the best overall outcomes for customers.  But its particularly pertinent when talking about an asset that sits on a customer’s roof or in their garage, to start with the customer’s perspective.

While we may think it's exciting to contemplate electric vehicles as batteries on wheels, most customers buy an electric vehicle because it’s a really cool car that goes from zero to 100kph in 2.7 seconds. So if we want to understand how customer behaviour will impact the system, and therefore how we design a system that works best for all customers, we really do need to start with the customer. In fact the ECA is now talking about CER ‘customer energy resources instead of the more system focussed ‘DER’.

When we did the pilot last year we found that starting with the customer gave us a really 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.

Our current vision is for this program to run over the next 3 years is to gain insights into customer perspectives on a range of key issues.  The idea is we can then share those insights across the range of market bodies and other institutions working in this area so they can take them into account in their work.

The second piece of work, which AEMC will be recommencing shortly, is on smart meters. 

Through the extensive stakeholder work we did last year we think there’s broad alignment for the view that the data and operational visibility that can be delivered by smart meters are the foundations of a  connected, modern, and efficient energy system. We think they support future technologies, services and innovation for the benefit of customers. 

That is why we have put forward a policy position to accelerate the deployment of smart meters as part of our. We have 2 areas of focus for this review this year.

First, we will be working very closely with a broad group of stakeholders to consider how to better roll out smart meters in a way that benefits all customers, and where costs are met in a way that make sense.

We also want to look at ways we can facilitate better access to valuable data that can be captured by those meters while still ensuring privacy and confidentiality concerns are appropriately considered and managed.

For a review that touches on many aspects of a customer’s electricity usage, it is important to have a clear focus on the problem we are trying to solve. That is why we partnered with Energy Consumer Australia as well as consumer advocates such as ACOSS to develop a clear problem statement for the review. We have also created a cross industry reference group where people have collaboratively come up with the best possible solution to a multi-faceted problem. We have around 60 people from all parts of the electricity supply chain represented in this group.

From a big picture perspective, we believe that the future electricity system is one where the customer’s energy resources will feature highly. Making that system work for all energy users will take more than the perfect technical solution. That’s why it is important that in all our work in this area, we need to focus on gaining those different perspectives, coming up with both technical and creative solutions that work – that are implementable and that will make sense for customers.

Conclusion

Which brings me full circle back to this image.

What I wanted to do was to emphasise two things today.  The first is that we are all working towards a net zero grid and a net zero economy.

The second is that I believe very strongly that we’ll get better outcomes if we can take on different perspectives and work collaboratively together. 

I hope that you’ll experience that in our work at both the AEMC and ESB we are seeking to harness the value of different perspectives, by moving to a more collaborative model of working. We are emphasising openness, creativity and transparency to build trust – so we can develop solutions together.

There’s one more point that I hope has also come through and that I want to leave you with.  That at the end of the day the reason we are doing all of this is about human beings. The rapid transformation of the energy sector will affect almost all aspects of our daily lives.

And we think that people want to be confident the transition to a net zero grid will meet all of their needs which are for decarbonised, reliable and affordable  energy.

I’d like to finish by thanking my staff at the AEMC who are not only highly committed and smart, but also – as you’ve seen from the photos this morning - very creative.

We look forward to continuing to work with you collaboratively to develop creative solutions for the energy transition.

Have a wonderful couple of days here. Thank you for having me.

Looking back at now: viewing the energy transition through a future lens

03 December 2021

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.

Introduction

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.

Transmission

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.

Capacity mechanism

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.

Conclusion

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.

Australian Energy Week: Keynote Speech

25 May 2021

Melbourne Convention and Exhibition Centre

Anna Collyer, AEMC Chair

 

Introduction

Thanks Mathew and good morning everyone.  It’s a pleasure to be here with you this morning, both in the room and virtually.

I’d also like to acknowledge the traditional owners of the land where we’re all respectively meeting today, and pay my respects to elders’ past, present and emerging.

After having the privilege of advising many of you in the audience over the past 20 years, I’m thrilled to be talking to you today as the new chair of the Australian Energy Market Commission.  I’ve had a whirlwind few month - I’ve met with stakeholders, contributed to the ESB P2025 work, got up to speed on a raft of rule changes and spent time getting to know our team.

I’m excited to have made the leap from my role as a partner at Allens law firm advising Governments and industry participants, to one where I can make a different kind of contribution to the evolution of the sector.  And what a time to be able to do that!

While I don’t underestimate the challenges for one minute, I also see the huge opportunity for all of us working together to create something new which will deliver great outcomes for energy customers.

It’s also an honour to be one of your first plenary speakers at this conference and what I’d like to do is take the opportunity help set the scene.  I know that we’ll be spending the next few days discussing and debating the challenges and opportunities I’ve just mentioned.  So rather than me focussing on ‘what’ should we be doing, I’d like to spend some time with you this morning talking about ‘how’ we can best work together to achieve these outcomes for energy customers.

I’m going to start by telling you a bit about the photo that is on screen. 

I took the photo a couple of weekends ago at my daughter’s Lacrosse match.  She had an away game and as it turned out the grounds were next to the Gardiner’s Creek urban wetlands that my husband James had been involved in designing and planting back in the 1980s.  So, the two of us took a walk while the team was warming up to have a look.

For completeness I’ll note that on this beautiful Autumn Melbourne morning, our older teenage son was still at home fast asleep in bed.

I originally took this photo as the wetlands had to be built around the transmission tower and I wanted to show how well that had been done.

We all have our strengths and I would suggest that photography isn’t one of mine.  Luckily, market design isn’t done in photographs.

What you can’t see in my image, which I’ll ask you to imagine, is a wonderful landscape of Australian native plants, complete with wetlands, ducks, a bird hut and lots of walking trails.  It was developed as part of the extension of the south eastern freeway.  Melbournians in the room will be familiar with that freeway and the south eastern suburbs it passes through.  The vision for the wetlands area was for it to be more than just a buffer but to create this kind of urban sanctuary and it involved a lot of planning and plain hard work to turn that vision into a practical reality.

And so, after taking the photo I started to make some links with what I intend to share with you today, which centres around collaboration, innovation and pragmatism.

We’ve already reflected this morning that our energy sector is going through a fundamental transition.   The grid is decarbonising at a rate of knots.  We are working on complex changes to the way we deliver energy.  Customers are getting more actively involved in the energy system through changes in the way they like to produce and use electricity.

And of course, we don’t have a single homogenous customer.  I’m sure there are people in this room or who have solar panels and home batteries and use their app regularly to see how much it is saving them.  However, we also have families for whom energy is a significant and challenging part of their household budget.  We have huge users like aluminium smelters and steel mills, who have to compete internationally to sell their products.  And I’m sure you can think of many more.

All of us in this room have a collective goal, and a responsibility, to make the energy transition deliver successful outcomes for energy customers.  The pace of change is greater than any of us predicted, our work is complex and urgent and there is an enormous amount to do.

In this context, I want to talk to you about how I see the AEMC working with our market body colleagues, with jurisdictions, with all of you and most importantly with customers, to deliver the best possible  outcomes for customers.

At the AEMC we’re shifting our ways of working to meet the current challenges.  And the way we want to work with you can be characterised in a similar way to the design, planting and development of the urban wetlands you can’t quite see in my photo.  There’s three things we want to do.

First, we want to be more forward thinking – we need to have a vision of the future and design towards it

Second, our solutions need to be more pragmatic – solutions that will deliver the outcomes we’re looking for, and we need to be prepared to change if something is not working

Third, we want to be more collaborative – we need to listen to and learn from the vast range of perspectives on these issues, which will contribute to coming up with better solutions.

I’m going to illustrate this with examples of some of the most important things we’re working on at the moment:  Essential System Services and Distributed Energy Resources.  And, as these three objectives are also pretty resonant with a good innovation process, I’ll also draw on some of my recent experience as head of innovation at Allens.

Forward thinking

As I’ve been meeting with stakeholders and asking what they want from the AEMC, this is the one that comes up the most often.  How did the rules get so out of date with what is actually happening in the system?  What we really want from the AEMC is to be more forward thinking in its approach.

Of course, this isn’t necessarily easy in such a rapidly changing system.  And energy is certainly not on its own here.  One of the initiatives I was most proud of as head of innovation was a partnership Allens formed with the UNSW law school:  the Allens Hub for Technology, Law and Innovation.

A group of academics had come together to consider exactly that question – how can the law get better at dealing with rapid changes in technology and the innovation that goes along with it?

They were looking at things like the development of increasingly intelligent AI and how to manage the huge proliferation of data we are now able to gather.  Whenever I had the chance, I would always say that the energy sector is in exactly the same boat.  The changes in technology and customer preferences and the opportunities for innovation are the hallmarks of many other sectors that have been through the kind of disruption and transformation we’re seeing now.

So how can we try and get ahead?  How can we be more forward thinking?

I’ll use essential system services to illustrate how we’re thinking about this objective.  I believe it’s the most important thing AEMC is working on right now.  These are a suite of services we have defined, that are necessary to keep the system stable as we shift from our traditional generation fleet to new technologies.

As with our wetlands example, I think the starting point for us to be forward thinking is to have a shared future vision of what we are trying to achieve.

You could call it the light on the hill.  Without a light on the hill, it’s easy to get stuck in the weeds, to lose your way in the dark or take the longer road.

In this case, setting that shared future vision is the role the ESB has played in developing the P2025 report. I believe the outcome of this work will provide us with that high-level picture of where we are heading.  From an ESS perspective, the ESB work has done the heavy lifting in unpacking something that was  simply part and parcel of producing energy by synchronous machines to defining  this suite of inter-related services that we are now working on.

Forward thinking applies as much to implementation as it does to planning.  Once the design work is done, the activation takes time – not as a fault but as a necessity of sequencing.

The wetlands vision was achieved through designing and then methodically planting many different species over time – if you’d done it all in one go, various aspects would have failed, with not insignificant consequences that could have been avoided.

As with the energy market, we’ll be making constant step changes towards achieving our vision.  As Kerry Schott has said, we can’t do it all at once in a big bang.  So while the ESB’s P2025 program continues, we’ve been working in parallel to deliver the most urgent ESS changes – because they just can’t wait.

At the moment we have multiple inter-related changes on the go  There are also other related changes in play which impact on our work, such as the reliability part of the P2025 work.  We’re very conscious about how much is going on for stakeholders and we’re trying to balance working in manageable individual pieces, while still keeping hold of the bigger picture and how it all fits together.  We want to make this easier for you and will keep working on ways to demonstrate how we are moving towards the long-term vision as we work on each piece of the jigsaw puzzle.

Another way to be more forward thinking is to ensure our rule changes allow for innovation. Defining the suite of essential system services was a critical step in moving towards our future state.  The reason we have done it this way is so that our frameworks will allow those services to be provided by new technology in the future, without us knowing exactly what that is today.  By defining the outcome, we want rather than the precise way it is to be provided, we’re encouraging innovation in order to allow for the best way of delivering those services to develop over time.

The final thing I want to mention in relation to how we can be forward thinking is the idea of putting rules in place before we need them.  Although this sounds obvious, I’ve quickly discovered it can be a hard thing to do.  We’ve got a couple of rule changes on the go at the moment where the feedback we’ve had from stakeholders is that we don’t think we need those changes yet.

With the fast-paced change of this energy transition, I can see why some stakeholders feel uncomfortable about the uncertainty of any challenge emerging.  Conversely, if those challenges do arise, they’ll do so very quickly, and it may not be possible to develop a solution in time.

So, we are balancing two risks here.  The first is the risk of making a potentially significant and costly change which is not eventually needed.  The second is we don’t make a change and when the circumstances arise where it is needed, we don’t have it.  So, we’ll be aiming to be forward thinking while balancing these 2 risks and we’re looking at different mechanisms like trials, transition periods, trigger mechanisms and other devices to do this.  This is something that will be important for us to continue to grapple with as the pace of change accelerates.

Pragmatic

Which leads me nicely into my second objective which is for the AEMC to adopt a more pragmatic approach to its work.

In a period of rapid change, many of the issues we’re trying to solve do not have one right obvious answer – and I’ve been heartened that many of the stakeholders who I have met have agreed on this.

We are predicting both the future problems as well as the potential solutions to those potential problems.  And sadly, none of us has a crystal ball.  Modelling and data and analysis can give us a lot of insight but at the end of the day we need to make judgement calls on what we think is going to happen.  We also need to be prepared to take stock and change tack when things aren’t working.

If I draw you back to the wetlands again, they started with a mathematical formulation of what species should be used, in what combinations, to deliver the optimal outcome.  Funnily enough, the people doing the actual planting had to get a lot more pragmatic than that as they worked with the reality of digging, planting, ground conditions, weather conditions, you name it.

Then, over time, species which were planted may have thrived, or not.  Where they weren’t doing well, instead of being sentimental or fixated on one solution, the approach was again pragmatism.  They would take out what wasn’t working, observe what was working and use this knowledge to try something different.

I’m going to illustrate our thinking about being more pragmatic by our work on metering.  My old Allens team will be laughing at me talking about metering.  It’s something I’ve worked on for many different clients over many years.  And it’s not easy to convince a junior lawyer that metering is a fun and interesting thing to work on.  However, as I would tell them, and as we all know, metering is all about data, which is absolutely fun and interesting, and important.

Data is a key ingredient for our future market.  Smart meters can help unlock the potential of batteries, rooftop solar and electric vehicles.  Data can help new service providers, with appropriate customer protections, help customers get the most out of their assets.  Data can help us with better forecasting and predicting the future and support better choices and policy design.

In 2014 the AEMC made the Power of Choice rule change which was designed to use competition to drive a greater uptake of smart meters.  I think we would all agree that we haven’t seen the results we would have hoped for.  So, we’re currently undertaking a review which will relook at our objective and how it can be achieved. 

And we’re going to do some things differently this time.

First, we want to be clear that we do have a shared objective of what we should be aiming to achieve.  We’re going to be working closely with Energy Consumers Australia to engage with consumers in a different way on this review.  We’re not going to ask them what they think about metering.  I think we all know what customers think about metering.  In fact, I’m ashamed to say that I live in Victoria and do not actually know where my smart meter is located.  However, what we do think customers can tell us about is how much they value the things we think smart meters can deliver.

Second, we’re going to apply more pragmatism in our analysis of the problem and potential solutions.  Sound economic principles and technical precision will remain our starting point.

However, we want to give more focus to practical realities – like the fact that metering is the last thing most consumers want to think about -  as well as weighing up the benefits we want to achieve with the costs of pursuing those benefits by a particular means.

This is another area where I’ve had a lot of stakeholder feedback as something that needs to be a critical component of our thinking.  On all our reforms we’ll be working closely with AEMO so we can get the best understanding of system costs, and will look for your input on this too.

And third – in the same way that the wetlands team was not sentimental or attached to a species that wasn’t working, we will be pragmatic and be prepared to do something differently if our original solution isn’t working.  Of course, our first best option is to make the right call on all of our work.  But given the pace of change around us, I want us to not to get hung up on making a change if it becomes clear that’s the right thing to do.  On metering, we do have to start where we are, as we don’t have a sheet of blank paper.  However, within those boundary conditions, we’re absolutely open to finding a different solution which will get a better outcome for customers. 

You can expect that we’ll be applying this type of pragmatism to all of our future work as we sharpen our primary focus to that work that delivers the best outcomes for customers.

Collaborative

Last but certainly not least is collaboration.  Solving complex problems requires different perspectives. 

After nearly 4 months of meeting stakeholders I’m very clear on two things:  first, everyone in the energy sector is passionately committed to improving the energy sector, and second everyone in the energy sector brings a different perspective to the best way to do that.

Now, I don’t have any insights to offer on the work that went on to develop the extension to the south eastern freeway or how that led to the development of the Gardiners Creek wetlands.  But I’m guessing if I went back in time I’d find some decisions that had to be made taking into account a range of strongly held diverse points of view.  You can imagine people at the end of the extension may have had a different view to the residents of the suburbs it had to pass through.

In the same way as we have strongly held diverse points of view on the best approach to something like facilitating greater integration of solar panels.  So I’m imagining that it was a collaborative approach considering those diverse points of view that resulted in something that ultimately provided benefits to all stakeholders.  Which is the same thing we’d like to aim for here.

In our context let’s look specifically at how we’ve been taking a collaborative approach on distributed energy resources.    

Starting with customers, the AEMC has always been committed to a customer focus.  However, what is changing is that the nexus between Australia’s energy rules and mum and dad energy customers is getting closer.  Many of those customers are now generators as they sell their excess solar back to the grid, which gives them a direct linkage that wasn’t there before.

So in terms of collaboration this is going to have to look very different.

We’re going to stop those activities that aren’t adding value and look for other and better ways to engage with customers.

Those involved in customer engagement will tell you the science of how to do it has really shifted in recent years and we’ll be aiming to modernise our processes. 

Engagement with customer advocates is invaluable to us and we derive enormous benefit collaborating with Energy Consumers Australia, for example of the metering work I’ve referred to earlier, as well as our current DER Access and Pricing reforms.

This is in fact a great example of broader cross sector collaboration.   Last year a group of four proponents requested that we consider reforms to DER – they were St Vincent De Paul, The Australian Council for Social Services, the Total Environment Centre and SAPN.  They were brought together by ARENA’s Distributed Energy Integration Program. The proponents all want to integrate and enable more distributed energy but from slightly different angles – equity, keeping the network stable and decarbonisation.

The collaboration the ARENA program engendered in seeing industry, consumer groups, and governments work together on these issues is something we wish to learn from and continue to bring to all our work.

I also want to mention jurisdictions in this context – states, territories and the Commonwealth are also key to our collaborative approach.  You don’t need me to tell you that the environment the energy sector is in is radically different to the one in which the NEM was established.  However different it is, the value of national frameworks, interconnectedness, learning and improving from one another in a Federal system still hold true.

Right now, Australia’s energy system is changing faster and more substantially than anywhere else in the world.  All Governments are deeply concerned about how we manage that and cope with those changes to deliver for consumers.

While each state and territory has slightly different priorities, goals and risks in terms of price, reliability and emissions that doesn’t prevent reform as long as we are pragmatic, collaborative and forward thinking.  Our work and that we do with the Energy Security Board is absolutely critical in that. The support Ministers are providing for the Post 2025 work is fantastic and repeated to me every time I meet with an Energy Minister around Australia.

It may go without saying but collaboration with our market body colleagues in AEMO and AER is critical.  We each have a distinct and important role in the energy sector and in the energy transition.  The best outcomes will be achieved by collaborating effectively with each other.  We have some great examples of how we’re doing this already. On all of the ESS work we have been working closely with AEMO, given the critical perspective of the system operator on how to solve these issues.  On our DER access and pricing work we’ve worked closely with the AER, given their critical role in implementing decisions under that reform.  In each case we believe we got better outcomes by working through the issues with our different points of view.  I’m really looking forward to working with Daniel and Clare and their teams as we move forward.

Last but of course not least is all of you.  As I said, I’ve met a lot of you in the last few months and all of you do have different perspectives and strongly held views.  However, I do like the phrase that none of us is as smart as all of us.  We think part of our role at the AEMC is to hear all of those perspectives and navigate through those disparate views.  We hope you agree that the AEMC has always been committed to extensive consultation to deliver rigorous rules and advice.

Your input is vital for is in our work, and we’ve heard from you about the sense of change fatigue you’re experiencing. We’ll keep trying to find new methods of collaborating with you, whether it’s through working groups like we have set up for our system services work, ad hoc roundtables which were really beneficial on our current DCA rule change  or using technology to make our forums much more accessible and efficient like we did last week for DER access and pricing.

We’re also keen for one on one opportunities with you as we know how important this is to build trust.  And for those of you who have offered lunch and learns for our teams, our response will always be ‘yes please’. 

Conclusion

Let me come back to my photo now and our enjoyable Sunday morning.  As we were walking in the park, a woman who was also taking a walk through the area stopped and smiled at us.  She didn’t know us and certainly had no idea James had been involved in the development of the wetlands.  However, she was just wanting to share with someone, which turned out to be us, that she had never been there before but that it was a wonderful experience and she was so happy to have discovered it.  As you can imagine that was also pretty wonderful for my husband to hear. 

Wouldn’t it be fantastic if that’s how our customers felt about the energy services they were receiving?  That they were surprised and delighted to realise what a great service they were getting without perhaps having thought too much about it.  I know the delight of walking through a beautiful urban sanctuary on a sensational Autumn morning may be too high a bar for energy services, but we do want customers to be happy and pleasantly surprised about how easy new services are to access and use, to not worry about their bill impacting their weekly budget or their international competitiveness and to appreciate perhaps without noticing how we’ve gone about ensuring we can facilitate decarbonisation of our grid.

We’d like to work with all of you to deliver those outcomes for customers.  Just like the wetlands team  30 years ago we recognise we need to be forward thinking and have that picture of the future, we need to be pragmatic and get our hands dirty and do what works and we need to collaborate as we recognise that it’s not just one person or one voice that solves problems in times of complexity.  Its how you harness the wisdom and abilities of many to get to that long-term future.  That’s my aim as chair of the AEMC - and I’m looking forward to working with all of you to deliver great outcomes for customers.

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