Ring-fencing guidelines: Necessary but not sufficient

A lot is made of the changing nature of energy markets. Beneath the debate on how we efficiently decarbonise the system, we have seen the rapid increase in the use of distributed energy technologies. This has been led by consumers, who at the simplest level want to save money, although some also want greater autonomy about generating and possibly storing some of the energy they use.

The rise and rise of distributed energy technologies has required a rethink about the rules that inform how these technologies are installed and used. While consumers are increasingly active, these technologies can, in some cases, also augment the network and provide smarter solutions to network constraints than conventional upgrades of poles and wires.

This emerging duality of purpose lies at the heart of the decision by the Australian Energy Regulator (AER) to upgrade its draft ring-fencing guidelines. The draft guidelines were released this week. Many network businesses are keen to explore both the commercial opportunities and grid augmentation benefits of deploying technologies like solar and storage. They are keen to grow their businesses outside of the provision of regulated services. Because their core business is operating a regulated monopoly, they have established separate commercial businesses to operate in the competitive distributed technology market.

The AER’s guidelines are designed to impose strict rules around how the regulated monopolies  operate, to prevent cross-subsidisation or transfers of valuable information between the regulated part of the network business and the new commercial entity. In essence, the guidelines are seeking to ensure that these new network commercial businesses compete with existing solar installers and retailers without exploiting any uneconomic cross-subsidisation or other unfair advantage from their proximity to the data and resources available in their parent, regulated monopoly business. Thus the term “ring-fencing”.

It’s harder than it looks.

First, it’s useful to ask what we are trying to achieve here. The central guiding principle around which optimal design of these new rules should be built should be guided by what is best for customers. The use of distributed generation technologies can straddle dual roles as both a regulated monopoly asset and also as a commercial agent that will transact the generation and release electrons into competitive markets. Each application is likely to have a different ratio of these factors. Some will be mostly network augmentation, others may be mostly commercial opportunity. How do we ensure efficiency and competitive neutrality for these uses of known and emerging technologies?

What consumers will want to see is that where these technologies are being installed by network businesses (and, therefore, paid for by its consumers), they are being installed efficiently and at the lowest possible cost. They will want to see the cost of delivering these installations is discovered by a truly competitive market. By extension, they will want to see healthy competition for the provision of distributed generation and other energy services wherever they live. Mostly that should be achievable, although this becomes more challenging in some very remote parts of the grid and beyond.

So while effective ring-fencing guidelines are an important first step to achieving this, the view of the Australian Energy Council is that more is needed. The National Electricity Rules (NER) were not drafted with this contingency in mind, and will need to be amended to ensure we get efficient and competitively neutral outcomes from this important and evolving part of market design. This would involve rule changes that encourage rather than discourage competition.

For example, networks should be required to publish all relevant data and forecasts for opportunities for the use of grid augmenting distributed generation technologies, conduct cost benefit analysis to demonstrate the value of the proposed investment, and then conduct a transparent competitive tender process to procure these services. Networks should only be able to recover through regulated revenues the cost of the preferred option as identified by cost-benefit analysis. All competitors of network-owned commercial businesses should be granted the same access to data and access arrangements. 

These types of rule changes are needed to ensure that all relevant competitive service providers are in a position to bid for the provision of these services on the same terms, and the competitive tendering will ensure the discovery of the best price. Success will reveal itself through healthy competition between all service providers, leading to innovation and greater efficiency.  For example, in the case of storage technologies, the CSIRO has found their effective and efficient deployment could have a material impact on moderating demand peaks.  This may be of critical value as the use of intermittent generation increases.  Failure will reveal itself through lacklustre competition, uneasily close commercial relationships between regulated network providers and their commercial entities, and resulting increases in costs and reduced efficiency.

Getting the right rules in place is important, as it will then allow the transformation of the energy system to accelerate and also foster more commercial thinking and innovation within regulated businesses. As we have seen with the privately-owned network businesses, they have already made significant progress in evolving a more dynamic and competitive culture, and their continued ability to continue this will ultimately be to the benefit of all consumers.