Enabling electricity evolution through appropriate economic regulation

The power system of the future will be quite different to that which exists in Australia today.

Environmental imperatives and rapidly changing technology are challenging all regulatory frameworks including Australia's National Electricity Market (NEM).

Regions such as South Australia have seen rapid uptake of large scale renewable generation. Individual households have continued to invest in rooftop PV thanks to the rapid reduction in the cost of PV systems despite the end of initial generous feed-in tariffs.

Achieving the greenhouse gas emission limits in the Paris agreement[1] will likely require substantial decarbonisation of the electricity supply industry.

PV coupled with battery storage is capable of transforming passive electricity consumers into active participants in the electricity market. These technology shifts are likely to see a transformation of the power grid from the traditional linear structure that exists today to an almost organic structure, where energy production, consumption and storage occur at all points along the value chain.

Technology is changing rapidly particularly compared to the time it takes to enact substantial changes to the NEM regulatory framework. Many are now questioning whether our regulations need to evolve more quickly to keep pace and avoid impeding innovation and uptake of new technology.

Regulatory changes need careful consideration

The regulatory regime faces conflicting priorities. It needs to be flexible enough to not impede the innovation required, while at the same time offering a stable and predictable environment that will continue to encourage investment. There is always a danger that government will use regulation to deliver a "chosen" outcome rather than facilitating the innovation and investment to achieve agreed objectives.

Perhaps we need to embrace a regime that puts more emphasis on key objectives, principles and frameworks while introducing incentives and discretion to allow adaptation where required.

How might that work?

The RIO framework introduced by the electricity regulator in the UK (Ofgem) provides an example of fostering innovation through incentives. For example, new performance incentives have encouraged network companies to become more customer focused[2].

The Australian Energy Regulator (AER) has introduced a range of incentive mechanisms to enhance the services Network Service Providers (NSPs) deliver. Both the AER and Ofgem schemes are intended to encourage the network companies to innovate and thereby capture rewards and avoid penalties under the incentive regimes.

Incentive regimes are only part of the story. Also needed are regulations that recognise the rapid pace of change and allow for some level of discretion to cater for the unexpected situations that inevitably arise. Achieving this requires regulations that describe a preferred operating arrangement, while allowing departures where it can be demonstrated that they would not materially contravene the fundamental principles on which the regulations are based.

Many would suggest that the existing powers of the Australian Energy Market Operator (AEMO), AER and NSPs for connection matters provide such discretion. However exercising discretion requires the organisations' officers to possess a deep understanding of the relevant technical, economic, market and customer impacts of any such decision.

At GHD we believe that regulators that are empowered to exercise discretion are essential for the regulations to work efficiently and allow participants to pursue innovation rather than impede it.

If the regulators can provide clear guidance as to the evidence they need to see to exercise their discretion it empowers participants by allowing them to self-assess the merit of any application and prepare the necessary evidence.

The preparation of evidence will be case specific and in most cases will not be a trivial undertaking. It will require experience in economics, regulation and market operation coupled with a detailed understanding of the individual circumstances. An ability to study the performance of the integrated power system and related electricity market is also essential to quantify the impact of exercising the proposed discretion.

GHD believes that significant value is created for our clients through sharing our expertise and experience in the different global jurisdictions - not just within Australia. Our core regulatory teams in Australia and the UK operate throughout the world in markets with emerging demand as well as mature regimes where the challenge is more the conflict of supply technologies rather than supplying growing demand. 

Appropriate incentives and the prudent exercise of discretion by regulators will enable the innovations required to deliver the power system of the future that achieves carbon abatement targets, while maintaining reliable supply of electricity to customers at an affordable price.

For more information, connect with our risk, assurance and regulation professional:

David Bones

Executive Manager – Risk, Assurance and Regulation
+61 7 3316 3979
Email David Bones

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