COVID-19 brings reform challenges

The COVID-19 pandemic threat and the Government’s response to it have introduced extraordinary changes to our communities and our economy. As businesses deemed non-essential were forced to close, and others restructured to idle towards the proposed ‘snap-back’ on the other side, energy businesses have ramped up their capability as they simultaneously restructured their entire operating model – thrown into chaos by the closure of borders, safety and hygiene requirements and new flexible work arrangements to keep their workforces safe.

As providers of essential services, energy businesses – generators, retailers, and networks – understand their responsibility to deliver for Australian homes and businesses. Retailers are at the front line, responsible for managing the customer experience of residential and business customers alike. In the past three weeks more than 780,000 people have lost their jobs[i], and over 850,000[ii] businesses applied for Government’s assistance[iii]. The strain expected to fall on retailers tasked with helping these impacted customers maintain connection and mitigate unmanageable debts will be remarkable.

Generators are facing different challenges. As operators of large plant, generation businesses have had to develop processes and procedures that would maintain supply and system security during the height of the pandemic. This remains a logistical challenge, and one likely to continue for many months, irrespective of the number of new cases of COVID-19 found in the population. As the Australian Energy Market Operator (AEMO) seeks to ensure the grid remains stable, essential maintenance approaches must be reconsidered, fuel loads managed, and the planning of large outages faces the challenge of exactly how and when to get access to expert contractors – some of which are based overseas. At the same time, generators have been required to procure enough PPE to keep their teams safe should an outbreak occur at what is critical infrastructure for a functioning economy.

There is also a broad range of proposed and existing regulatory changes underway many with looming deadlines that impact the resourcing of energy businesses.   In the last few years, the market evolution has been marked. Rule changes and market reviews are constant, with implementation windows booked some years in advance. Given the pace and volume of current regulatory reforms, the AEC wrote to the COAG Energy Council seeking a review of the regulatory reform roadmap to ensure that critical supply and reliability could be prioritised, focusing on delivering the outcomes customers expect today.

In a letter to COAG Energy Ministers dated 19 March 2020, the AEC sought the delay of a number of pending reforms to allow energy businesses to redeploy committed project teams to where they were more critically needed. These reforms included:

  • Mandatory Primary Frequency Response Rule Change[iv]: This rule change is scheduled to be enacted on 4 June 2020, with technical implementation occurring over the following months.  This will impact key operational staff directly involved in maintaining generation supply.  Sites will be further impacted by policies of restricting contractors to sites and travel bans that will restrict the ability of overseas based technical experts to be deployed. The AEC recommends that the program to implement the final rule be delayed by three months, and should now begin in September 2020.
  • Five Minute (5MS) and Global Settlements (GS)[v]: The AEC acknowledges that significant work has already been undertaken to progress these major reforms, however AEMO and AEC members continue to employ major resources to prepare for and implement the rule change by its required date of July 2021.  The AEC believes that while the COVID-19 threat remains, these resources should be focussed on operational matters, and hence we suggested there should be analysis of the opportunity to postpone rule implementation by six months. Last week the Australian Energy Market Commission and other energy market regulatory bodies also proposed a change to the timing of this reform (discussed further below).
  • Energy Sector Consumer Data Right (CDR)[vi]: Whilst a start date for energy remains to be confirmed, significant preparatory work is required to enable the CDR to commence in the second half of 2021.  Given the extent of, and complexity of the tasks to be completed, the AEC recommends that the effective date of the legislation be postponed until at least March 2022.
  • Customer Switching Times[vii]: Whilst this project has undergone a lengthy consultation process, the final decision left its implementation open.  Delivery to the initially proposed date of December 2020 would be problematic in the current resource-constrained environment and a delay should be given consideration in order for resources in the meantime to be focussed on customer support.

Since the COAG EC meeting on 20 March, the market bodies have taken these proposals on board, and are reviewing the appropriateness of the reform agenda in light of the impacts of COVID-19.  The AEC strongly supports this current pragmatic approach.

Where to from here

Energy businesses have now been operating in crisis mode for more than six weeks. During this time businesses have gradually decentralised their operations from central offices to a more dispersed workforce with staff working from home. This transition has been made exponentially more difficult by the global impact of COVID-19, and in particular on those retailers with significant reliance on offshore infrastructure.

Generators have focused on contingency planning, building up stockpiles of PPE, developing risk mitigation strategies including implementing multiple shifts at generating units, and reconsidering outages and maintenance.

Due to the latency of energy billing cycles, retailers are anticipating impacted customers to increasingly seek help during the latter months of the pandemic. Customers on quarterly billing cycles might not realise affordability issues and broader vulnerability until May, June, and July. Of concern to energy retailers is winter consumption, and in particular the impacts of high heating usage during the cooler months as more customers are isolated in their own homes.

The regulatory roadmap consultation being conducted by the market bodies represents a significant step in mitigating the risks facing energy consumers. At the same time, the changed market conditions caused by the pandemic creates an opportunity to prioritise and optimise the future reform agenda. The AEC is not seeking to re-litigate the merits of key reforms, but rather, ensure they are sequenced in a manner that will allow efficient resource allocation during this time of crisis.

Since the AEC presented its view on 19 March, the market bodies have confirmed one major change to the reform agenda – a 12 month delay to the 5MS and GS implementation[viii]. Whilst this is a longer delay than the AEC had contemplated, it is recognised that a January start for 5MS would have been problematic.

In addition to the reforms outlined above, there is also a long list of proposed major reforms suggested for implementation over the medium term – the next five years. Some, such as those proposed recently by the COAG Energy Council associated with reliability, were done without open consultation, in hasty response to forecasts of market conditions that are likely to now be considerably changed with the economic conditions. Others are associated with various lines of activity regarding “ahead markets” and locational pricing. It is appropriate for the Energy Security Board (ESB) to now take stock and reconsider the urgency of this schedule.

AEC priorities

Whilst the 12 month delay of the 5MS and GS implementation have garnered the most attention, the AEC is aware that a number of electricity businesses have already locked in resources to the current timelines that would take some effort to unpick. What is unanimously supported however is that 5MS and GS are fundamental reforms that should be carefully sequenced with other reforms currently in train. Of particular note is the need to implement the wholesale demand response mechanism after 5MS is implemented to avoid effectively building out the reform twice.

Not addressed yet however is the AEC’s key concern - the implementation of the Mandatory Primary Frequency Control program throughout the 2020/2021 financial year. This reform will require significant engineering and technical capability to occur on site, often using international expertise to model and reprogram the generator’s governors to deliver changed performance. In an environment where international travel is prohibited, and domestic travel extremely constrained, onsite development will be next to impossible for a period of some months. The AEC believes that a delay of at least a quarter to AEMO’s implementation schedule is unavoidable.

The retail reforms are less defined, with implementation dates still up in the air for key projects such as the consumer data right, reduced customer switching times, and the MSATS standing data review. The latter two projects should be implemented at the same time to avoid the need for multiple scheme changes. In addition to 5MS, implementing these projects separately as per AEMO’s proposed schedule would result in three separate schema changes in a 6 month period. This would be extremely burdensome for retail businesses rightly focusing ensuring customers remain connected during this pandemic and beyond.

Challenges create opportunities, and the AEC strongly considers that now is the time for optimisation of the future works program. With some minor amendments to the sequencing of immediate reform projects, and reconsideration of the agenda for more major reforms, significant costs could be avoided, and the long-term interests of consumers enhanced. 

 


[i] https://www.theaustralian.com.au/business/economics/rbas-philip-lowe-tough-months-ahead-before-recovery-begins-in-september/news-story/825da1248457c3125f7ecddaaf0d9779

[ii] https://www.abc.net.au/news/2020-04-20/australia-coronavirus-jobkeer-payments-open/12164242

[iii] https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/jobkeeper-payment-supporting-millions-jobs

[iv] https://www.aemc.gov.au/rule-changes/mandatory-primary-frequency-response

[v] https://www.aemc.gov.au/rule-changes/five-minute-settlement

[vi] https://treasury.gov.au/consumer-data-right/energy-sector-consumer-data-right

[vii] https://aemo.com.au/en/consultations/current-and-closed-consultations/nem-customer-switching

[viii] AEMC notice Delayed implementation of 5 minute settlement; AEMC, AER, AEMO letters Prioritising implementation timeframes