1. Transitioning Australia to a low carbon economy
Paula Conboy
Chair, AER
APER Forum
29 September 2016

2. Electricity market structure
Competitive wholesale market
Regulated transmission and distribution networks
Competitive retail market
Key points:
Energy regulation designed for traditional supply chain: small number of participants, clear delineation in roles
Networks regulated as they are ‘natural monopolies’
Competition in generation and retail markets
Changes in technology and business models are challenging these assumptions
Australia’s electricity market structure
Australia’s National Electricity Market (NEM) operates on one of the world’s longest interconnected power systems, spanning Australia’s eastern and south-eastern coasts.
The NEM is built on three strong pillars: (1) reliance on competition and markets in those parts of the industry which can sustain competition (wholesale generation and retail markets); (2) structural separation of competitive and monopoly elements; (3) effective regulation of the monopoly (network) elements.
Australian governments structurally separated the energy supply industry in the 1990s.
Transmission networks carry power from electricity generators to large industrial energy users and local electricity distribution networks across the NEM. These assets are largely government owned in NSW and Queensland and privately owned in other states and territories. State-based transmission networks are linked by six cross-border interconnectors. WA and the NT are not connected to the NEM, primarily due to the distance between networks.
The NEM operates under a ‘pool’, or spot market, where the output from the market’s generators is aggregated and scheduled at five minute intervals to meet demand. Generator bids are stacked from lowest to highest for each dispatch interval, with the lowest cost energy being dispatched, subject to network constraints. All dispatched generators receive the price of the most expensive generator required to meet demand.
The market uses sophisticated systems to send signals to generators to match energy production to consumer requirements in real time, ensure spare capacity is available for emergencies, and to calculate the current energy price.
There are over 100 registered participants in the NEM, including market generators, transmission network service providers, distribution network service providers, and market customers. Electricity retailers are the main customers in the wholesale market, bundling electricity with network services for sale to end users.
The energy regulation framework was designed for traditional supply chain model: i.e. a small number of regulated participants and clear delineation between roles. Electricity was typically supplied by a few large (synchronous) generators and flowed in a single direction to passive customers.
However changes in technology and business models are challenging these assumptions.
There is lots of speculation about what the future might look like and how quickly it will occur.

3. Electricity market in transition
Image source: ENA and CSIRO, Electricity network transformation roadmap: interim program report, December 2015.
Electricity generation is moving from being synchronous, centrally dispatched, fossil fuel based to more decentralised, intermittent and renewable. Customers and end users will become more active and will have greater choice and control over how they buy, use and sell electricity - the rise of the prosumer!
Over the next period, we can expect to see:
More small scale and distributed generation
More renewable, intermittent generation
More stand-alone systems and micro grids, particularly at the grid fringe/edge.
We can expect to see the way we use and pay for network services to evolve – with electricity flowing two ways from households depending on changing circumstances and in response to different price signals.
We can expect to see a change in the services and products sold to end customers – a move away from a single bilateral relationship with a retailer to possibly multiple relationships for a household, so it can better manage its demand, and have more choice and control over when to buy, store and sell electricity.
Decreasing technology costs means we are likely to see increasing numbers of smart(er) appliances, battery storage, electric vehicles etc.
The ENA and CSIRO in their transformation roadmap show that the customer adoption of solar PV has continued strongly and the cost-curve of panels has also continued to improve at a fast rate than originally anticipated. It further notes that compared with solar PV, the uptake of energy storage remains in its infancy, but similar to the experience of solar the cost-curve has improved at a significantly faster rate than originally anticipated.
When CSIRO looked at disruptive change in other sectors, such as telecommunications, it found there is typically several waves of disruptive change rather than a single wave caused by a sole transformative driver. If solar PV is considered the first major disruption, and energy storage a likely second wave, it is anticipated that electric vehicles is a possible third wave.

4. Changing generation mix
Generation capacity 2016
1.58M
Wind, solar bulk of recent generation investment
SA has seen the fastest growth
1.58 million solar PV systems
15% penetration rate across all Australian households
Image sources: AER analysis and State of the Energy Market report; Clean Energy Regulator; Australian Energy Council; Clean Energy Council.
Electricity in the NEM is still mainly produced by burning fossil fuels such as coal and gas, supported by hydro generation (from the Snowy Mountain scheme and Tasmania).
However, government polices to mitigate climate change have seen a shift to renewable generation technologies.
We have seen renewable energy generation in Australia continue to grow. Across the NEM there is a total of 3,688 MW already installed with a further 365 MW committed or under construction.
Wind and solar PV have made up the bulk of recent generation investment in the NEM and currently meet around 5 per cent of demand.
South Australia has seen the fastest growth in renewable generation, with 38 per cent of demand met by these generators in 2015–16.
In particular, SA has the biggest share of wind farms, accounting for 1,475 MW. (A further 102 MW will be added this year when the Hornsdale Wind Farm is completed.)
In May 2016 wind accounted for 49% of SA’s electricity demand in the month. On some occasions, wind energy provided more than 100% of electricity demand.
Rising energy cost pressures have provided the other impetus for growth in alternatives such as demand side response and small scale local generation, like rooftop solar PV.
Australia now has highest penetration rates of rooftop solar PV in the world. The Clean Energy Regulator reports that there are now over 1.58 million solar PV panel systems installed.
What is significant about Australia’s solar capacity is that it is almost entirely located on Australian rooftops. By 2015 more than one in seven Australian households had installed solar photovoltaic (PV). This is a 15 per cent penetration rate across all Australian households. In South Australia and Queensland the household penetration rate is 25 and 24 per cent respectively. Some suburbs in greater Brisbane and Adelaide have recorded household solar PV penetration rates above 50 per cent.
While the electricity generated from rooftop systems is not traded through the spot market, it acts to reduce demand from the market. Generation from these systems was forecast to be the equivalent to 8 per cent of installed capacity in the NEM (around 3 per cent of demand) in 2016.
Rooftop solar power is starting to change the patterns of supply and demand across the country. Maximum demand for power in South Australia previously occurred around 5.30 pm, but the increased use of solar power means this has been pushed back an hour to around 6.30 pm. Queensland and Victoria are expected to follow a similar trend.
Solar power is significantly reducing the demand for power in South Australia on sunny days. Based on the expected future installation of solar power, by the technology is expected to be capable of generating enough electricity to power the whole state when the sun is shining.

5. South Australia: a case study Were renewables to blame?
Spot electricity prices – winter 2016 and long term averages
Key drivers of June & July high wholesale energy prices
Weather cold snap = higher demand for heating
Limited wind generation (57% below historical average)
Reliance on gas fired generation and high gas prices (LNG demand pressures)
Network outages due to interconnector upgrade
Highlights importance of integrated energy climate policy
South Australia has become a world leader in the integration of intermittent renewables. The state now has around 41 per cent of its electricity generation supplied by wind and solar. This is more significant given South Australia sits at the edge of the NEM, with no access to hydro or other zero emissions firm generation, and only constrained (25 per cent of peak demand) interconnection to Victoria.
Recently the South Australian electricity market has been under intense scrutiny following big increases in wholesale electricity prices which resulted in the South Australian Government asking for an extra gas power station to be brought back into service. This impacted the costs paid for electricity and raised questions about the role of the high levels of renewable energy.
So what were the key drivers for the unseasonably high wholesale electricity prices in June and July 2016?
In mainland NEM regions, prices were around 2.5 times the long term monthly average for June. These prices were the highest since summer 2013–14 (when carbon pricing was in place). Prices generally eased in July, though remained above long term averages. However prices continued to rise in South Australia, to 4.5 times the long term average—approaching levels not seen since February 2011.
The high June electricity prices were mainly driven by supply issues; electricity demand was similar to the previous year and transmission congestion (including on interconnectors) was not a major factor.
The key price driver in June was a reduced availability of electricity generators across all regions. Total coal plant capacity available to the market was around 2,200 MW less than in winter 2015, due to planned maintenance of coal fired generators (1,800 MW) and plant closures (400 MW at South Australia’s Northern power station). This change in coal plant availability required the dispatch of additional gas-fired generation at a time when gas prices were high. Prevailing supply conditions and high fuel costs (for gas plant) led generators to shift bid offers from low to higher price bands.
Coal-fired generators out for planned maintenance began returning to service from late June, with most capacity back online by the second week of July. The return to service eased pressure on electricity prices in Queensland, New South Wales and Victoria.
But regional issues caused prices to remain high in South Australia during July. The key drivers were high demand due to cold weather, interconnector outages and a lack of wind generation at peak times. Planned work to upgrade the Heywood interconnector between Victoria and South Australia, which began in September 2015, frequently reduced South Australia’s import capacity during July While this major upgrade was flagged to the market, its impact on Heywood’s operating capability was at times not clear. South Australia’s reduced ability to source low price electricity from other regions coincided with low wind generation.
Wind output in July was 57 per cent below the historical average for that month. In combination, these factors required the dispatch of local gas powered generation to meet demand, at a time when gas fuel prices were high. With the closure of the Northern (coal-fired) power station in April 2016, South Australia’s generation stock consists primarily of gas and wind plant. As a consequence, South Australian prices diverged materially from other regions for around 60 per cent of the time in July 2016, with gas plant typically setting the spot price at these times.
Across June and July, gas-fired generation in the region was 32 per cent higher in 2016 than during the same period in Spot gas prices have steadily risen and become more volatile since 2015, with the continuing expansion of Queensland’s LNG industry drawing greater volumes of gas from the market. In combination, these conditions meant gas production facilities were operating close to full capacity in winter. Additionally, stored gas and higher marginal cost LNG was being called on more regularly. Short-term outages at some production facilities and pipelines forced some participants to seek additional gas from the market, placing further upward pressure on prices.
It was this combination of factors that resulted in the high prices.
Were renewables to blame? Importance of holistic energy and climate policies
SA’s renewable energy policies have been successful at encouraging investment in wind and solar generation, and therefore have also begun to affect the viability of the existing fleet of thermal (gas and coal) generators.
Many of the larger and older thermal generators have begun to close Playford power station was mothballed in 2012 and Northern closed in May this year. These closures reduce supply without any material change in demand and this in turn increases the baseload wholesale price for electricity.
This also presents a number of other challenges: first, intermittent generation cannot be guaranteed to be available at times when it is most needed, like cold snaps and heat waves. This means reliable alternate sources of generation need to be found. In the case of South Australia, relying on the interconnection with Victoria is likely to be increasingly risky in the future, when some of Victoria’s older brown coal power stations close. Declining flows into South Australia after 2019 are forecast in anticipation of this. Second, wind farms and solar are not able to provide power quality services to manage the frequency of the electricity grid so it can present power system security challenges.
These issues highlight the importance of having durable, holistic energy and emissions policies to aid the integration of more clean energy sources, like renewables, into the grid while maintaining reliability and keeping costs as low as possible.

6. Meeting Australia's climate change goals at least cost to the community
Electricity sector contributes over one third national greenhouse gas emissions (due to Australia’s high reliance on coal fired generation)
Energy policy focus has been on the ‘long term interests of customers’ with respect to price, quality and reliability
Climate policy has focused on reducing emissions or increasing renewables to meet targets
Recognising the two are inextricably linked, Australian Governments have made an explicit intention to integrate climate and energy policy
Mechanisms to achieve energy and emissions reduction policy objectives have not been designed in concert to-date.
Electricity sector contributes over one third of national greenhouse gas emissions (due to Australia’s high reliance on coal fired generation)
Recognition that efforts to meet government-set emissions reduction targets will require transformation of the electricity sector.
Starting to see, and consider how best to holistically address, the challenges that this can present. Such as those illustrated in South Australia.
We are also seeing the merging of these portfolios in governments.
Durable policy settings will require consideration of how to achieve emissions reduction targets AND a reliable and secure electricity supply at least cost.

7. Council of Australian Governments Energy Council
The national policy and governance body for Australia’s energy markets
National Electricity Law / National Gas Law / National Energy Retail Law
National Electricity Rules / National Gas Rules / National Energy Retail Rules
Responsible for Rule making and market development
Responsible for enforcing the Rules and economic regulation
Responsible for market and system operations
[Briefly explain roles of COAG EC and market bodies]
Australian energy market governance
COAG EC and energy ministers
Laws / Rules / Regulations
Roles of the market bodies – AEMC, AER, AEMO, ECA
NEO / NGO / NERO – efficiency focus (no environment objective)
Objective: to promote efficient investment in, and efficient operation and use of, energy services for the long term interests of consumers of energy with respect to price, quality, safety, reliability and security of supply.

8. COAG Energy Council reform agenda
Advice on energy and climate policy integration
Aims: mutually reinforcing, maximise benefits and avoid unintended effects on prices and the energy market
Implications of higher levels of renewables, both grid scale and distributed, on wholesale energy prices and power system security
Gas market reforms
Empowering consumers – consumer choice and protection
Efficient investment and operation of electricity infrastructure
Throughout the transformation and decarbonisation of the energy sector the fundamentals of the NEM structure will remain relevant i.e. (1) reliance on competition and markets in those parts of the industry which can sustain competition; (2) structural separation of competitive and monopoly elements; and (3) effective regulation of the monopoly elements.
The current reform agenda in the energy sector is seeking to achieve:
Competitive markets that lead to lower price, better quality products and services, greater efficiency, more choice - all of which benefit consumers.  
Regulation should be ex ante performance based to ensure the efficient provision of infrastructure.
Efficient and transparent wholesale electricity and gas markets
The need to ensure that consumers are able to engage confidently in the retail market and make well informed choices. This includes having robust consumer protections in place.
Specific COAG reforms to action these outcomes include:
Energy and climate policy integration
At the December 2015 Energy Council meeting, Energy Ministers tasked officials with preparing advice to allow the Energy Council to better understand the potential impacts of climate change policies on the National Electricity Market (NEM). The AEMC, along with AEMO, has been asked to assist with this work.
Increasing renewable generation will have a range of implications for the wholesale market, including decisions on electricity generation, maintenance and investment in capacity, and when and which generators exit the market.
Increased variability in generation (such as with wind and solar PV) combined with lower amounts of generation that can be centrally dispatched will make it more challenging to manage network flows and the security of the power system.
Power system security
The AEMC, working with AEMO and the AER, have recently commenced a review to consider solutions to address technical issues which could arise from increased variation in generation (i.e. intermittent wind and solar) combined with lower amounts of generation that can be centrally dispatched. This change in generation mix will make it more difficult to manage network flows. The review will incorporate a holistic consideration of a range of rule changes submitted to the AEMC to address various issues and security challenges that may arise. We are participating in the steering committee and technical working groups.
Gas market reforms
Heard from the AEMC yesterday on this.

9. AER’s roles in energy markets
Wholesale
gas & electricity markets
Transmission
networks & pipelines
Distribution
networks for gas/electricity
Retail
& other distribution
Monitor and enforce market rules
Regulate revenues of transmission and distribution businesses
Regulate non-price retail activities
[set out briefly what AER’s roles are]
Discuss the important of efficiency in delivering the long terms interests of consumers and how this drives all our work – across the whole supply chain
Efficient energy markets are essential in maximising competitiveness for the benefit of Australian consumers, small business and industry, which in turn promotes jobs, growth and opportunity

10. AER role in the evolving market
Promoting transparent and efficient wholesale electricity and gas markets
Monitoring wholesale prices
Investigating high price events
Monitoring and enforcing compliance with Law and Rules
Helping customers make informed choices
Authorisations and exemptions framework for selling energy
Energy Made Easy price comparison website
Robust consumer protections
Energy specific or general consumer law

11. AER role in the evolving market cont.
Efficient investment and operation of electricity infrastructure
Ex ante regulation
Incentive regulation (STPIS, EBSS, CESS)
Regulatory investment tests (RIT-T, RIT-D, repex rule change)
Technology neutrality
Demand management incentive scheme
Network tariff reform
Competition in metering
Ring fencing guidelines
Reliance on competition where possible
Structural separation of competitive and monopoly elements
Effective regulation of monopoly elements
Throughout the transformation and decarbonisation of the energy sector the fundamentals of the NEM structure will remain relevant i.e. (1) reliance on competition and markets in those parts of the industry which can sustain competition; (2) structural separation of competitive and monopoly elements; and (3) effective regulation of the monopoly elements.
The current reform agenda in the energy sector is seeking to achieve:
Competitive markets that lead to lower price, better quality products and services, greater efficiency, more choice - all of which benefit consumers.  
Regulation should be ex ante performance based to ensure the efficient provision of infrastructure.
Efficient and transparent wholesale electricity and gas markets
The need to ensure that consumers are able to engage confidently in the retail market and make well informed choices. This includes having robust consumer protections in place.
Specific COAG reforms to action these outcomes include:
Energy and climate policy integration
At the December 2015 Energy Council meeting, Energy Ministers tasked officials with preparing advice to allow the Energy Council to better understand the potential impacts of climate change policies on the National Electricity Market (NEM). The AEMC, along with AEMO, has been asked to assist with this work.
Increasing renewable generation will have a range of implications for the wholesale market, including decisions on electricity generation, maintenance and investment in capacity, and when and which generators exit the market.
Increased variability in generation (such as with wind and solar PV) combined with lower amounts of generation that can be centrally dispatched will make it more challenging to manage network flows and the security of the power system.
Power system security
The AEMC, working with AEMO and the AER, have recently commenced a review

12. The Regulator’s life in Australia
All our work is done under a microscope! Energy policy has become very topical and news–worthy!
Policies and regulatory initiatives are increasingly news-worthy events for main stream media. Particularly in the 24hr news/social media cycle and environment.
Intersects with issues of critical important to everyday consumers – cost of living concerns, affordability, bushfire safety.