24 August 2015
by Giles Parkinson

Regulators delay network saving proposals for another 5 years

Rules that could have reduced network bills have been delayed another five years, following fierce resistance from coal generators. The decision could mean higher bills, and more grid defections, as networks and retailers engage in a turf war over battery storage.

New rules that could have encouraged electricity networks and to help consumers adopt technologies such as battery storage, solar PV and demand management controls have been delayed for another five years, potentially adding billions of dollars in unnecessary network costs and to the bills of electricity consumers.

In a decision labeled by consumer advocates as a “travesty”, the Australian Energy Market Commission has decided not to ask the Australian Energy Regulator to enforce the introduction of its long awaited Demand Management Incentive Scheme (DMIS) until late 2016.

This means it will not be implemented until the next five-year spending plans for networks are up for review in 2019 through to 2021. This is despite the AER having previously stated that it intended to “… introduce a revised DMIS a soon as practicable following the AEMC’s rule change process”

The AEMC’s 2012 Power of Choice Report estimated in that demand management in the Australian electricity system could deliver savings of $4–$12 billion by 2023. (These savings, if passed on to electricity consumers, could result in bill reductions of between $120 and $500.)

These savings are now very unlikely to be delivered given this delay in the DMIS. Analysts say it could add billions of dollars to network upgrades and also to consumer bills.

The delay in implementing these new rules for the running of Australia’s electricity markets is also a set-back for network-wide adoption of technologies such as rooftop solar, battery storage, and energy efficiency – and a victory for coal-fired generators fighting moves that would lower consumption from the grid.

“This is bad for demand management, distributed generation, solar PV, energy efficiency and customer-based battery storage,” said Chris Dunstan, from the Institute of Sustainable Futures.

Dunstan says that between $4 billion and $12 billion could be saved if networks looked to adopt solar, battery storage, and energy efficiency programs, rather than rely on the traditional method of making network upgrades, and building more poles and wires. “Savings delayed are savings denied.”

Solar Citizens says the AEMC’s own research shows household bills could be reduced by $120 to $500 a year by demand management.

“It is an unacceptable to delay a commonsense rule change that helps with the cost of living for both solar and other households alike,” said Dan Scaysbrook, Director of Campaigns and Organising at Solar Citizens.

The decision comes amid a whole range of appeals and rule-changes, including efforts by NSW government owned retailers to overturn an attempt to limit their spending over the next five years, and tariff changes that have seen big rises in fixed charges, and a push to hit solar households with high network tariffs.

The delays to DMIS have not been properly explained. But they appear to be the result of fierce resistance from coal-fired generators in particular, and also highlight a growing turf war between networks and electricity retailers over access to customers.

One of the most vocal opponents was Engie, the French-based owner of the ageing Hazelwood brown coal generator in the Latrobe Valley.

The Total Environment Centre, one of the two key proponents of the rule change, noted that coal generators such as Engie stood to lose profits from lower peak pool prices and lower demand for its generation.

“In our view, the fact that a generator which makes most of its profit during high price peak events was opposed to the idea of a DM (demand management) incentive is a good indication of the benefits of an effective DMIS, and of the need to introduce one,” it wrote in its submission.

The TEC says the DMIS “could and should” have been developed before the regulatory periods that began in 2009/10, and resulted in more than $45 billion in network upgrades, and massive rises in consumer electricity bills.

“Had this been the case, consumers could have been spared some of the recent massive overinvestment in network infrastructure,” the TEC argued. “It would be a travesty if this rule change process becomes a pretext for further delay in this urgent and long overdue reform.”

Dunstan, from ISF, says it is also bad for for the value of network businesses in the long run, because they will be forced to focus on protecting the declining, traditional grid rather than supporting modern decentralised energy solutions that the market is demanding.

Dunstan says that introducing the DMIS now would have been a win-win, allowing networks to develop their business by supporting cost effective solar, battery storage, and energy efficiency programs and reducing bills for customers, rather than rely on the traditional method of making network upgrades, and building more poles and wires.

While to most it is clear that the grid will be dominated by decentralised energy – something even recognised by Engie – Dunstan argues that if there is no mechanism by which the networks can grow their businesses through demand management, then they will be unlikely encourage it.

As the TEC noted in its submission: “Rarely does the AEMC have such power to accelerate the pace of reform in the NEM so easily.”

By delaying the implementation, the AEMC “would expose the network businesses and especially their more vulnerable consumers to unnecessary risks, in particular as more flexible consumers engage in “load defection” by combining solar, batteries and energy management.”

But the rules have been caught up by the fierce resistance of some of the key brown coal generators, and an emerging turf war between network operators and electricity retailers.

The brown coal generators fear losing money. Morgan Stanley’s energy analyst Rob Koh this week highlighted just how sensitive the gentailers are to changes in market conditions. A cut of just two per cent in energy volumes per customer – due to energy efficiency and battery storage penetration, along with more competition in retail markets and more renewables in the wholesale markets, and declines in the oil and gas price, could cut the value of AGL Energy by one quarter.

But it is the turf war over how far the networks should be allowed to encroach on the customer base held – somewhat tenuously – by the retailers.

Some of the most progressive initiatives on battery storage and demand management have been introduced by Ergon Energy in Queensland, where it is virtually unique in Australia by being both a network operator and a retailer. That, says Ergon CEO Ian McLeod, makes it easier to find value in such solutions because they can operate and find value both at grid level, and “behind the meter”

But elsewhere, retailers and networks are separate entities, and the retailers are keen to keep it that way.

In its submission, Engie complained that the proposed DMIS “blurs the boundaries between the competitive market entities (retailers) and regulated entities (network operators). It said such rules will “interfere with functioning of the wholesale market (signals to consumers), and depending on the specific implementation, also retailer and customer relationships.”

AGL Energy pursued a similar tack, saying that “regulated network businesses should only provide demand management services at the grid level” and “demand management services behind the meter should be excluded from any regulatory incentive schemes.”

This is likely to be a huge battle in the future, and it will be largely fought at the regulatory level, over who has the right to pass on charges to consumers, who can deal with them, and who can identify and offer savings.

As South Australian Power Networks said last year, the emergence of decentralised generation and micro-grids will likely signal the decline of centralised generation and retailers.

But they won’t be going without a fight, and the networks are also intent on protecting their revenue streams, even to the point of making grid costs compulsory to all, even if they don’t use them.

Some analysts suggest that the rule changes proposed by the AEMC are redundant anyway, and that networks are so stuck in their ways that they only way they will change is when they recognise a ‘real and perceived threat’.

“This delay in DMIS makes it even more important to get the Rules right to allow third party access (to provide alternatives to networks), as well as providing the right price signals – ie. cost-reflective pricing,” says Rob Passey, from UNSW and the Australian PV Institute.

“It was the private sector embarking on solar PPAs etc that made the incumbents (Origin, AGL etc) move into the PV/storage/PPA area themselves. In the same way, it’ll be third party alternatives to networks (PV/batteries/DSM) that encourage networks to move into those areas and take them seriously.”

Muriel Watt, from IT Power said: “We really need to get away from thinking (and regulating) networks as ‘natural monopolies’. We have a whole range of new options available to customers now and we need a competitive market to allow them to compete with the incumbents.”Trying to create more and more rules just so that the incumbents can deal with new technologies or new supply/demand options will just result in more unnecessary complexity.”

The biggest risk for consumers is that they will again be the victim as the big players fight over the rules and seek to protect their own turf.