Reorienting regulation for energy customers

Australian Energy Regulator chair Paula Conboy
Australian Energy Regulator chair Paula Conboy

Australia’s energy consumers are witnessing the most significant industry disruption since electrification and the regulatory framework is yet to catch up.

Regulation must be predictable enough to minimise the major investment costs borne by consumers but flexible enough to allow vibrant innovation by both the network and the new businesses that thrive on it. This challenge, among others, was what industry leaders including Energy Consumers Australia chair Louise Sylvan, Australian Energy Regulator chair Paula Conboy and the CEO of the largest Australian gas distributor Ben Wilson gathered to discuss at Energy Network Association’s (ENA’s) Reorienting Regulation conference.

The forum focused on how energy regulation can stimulate, rather than frustrate, innovation in network services and new markets in istributed generation, storage and demand management. Importantly, it highlighted customers’ need for choice and control in their energy use.

ENA CEO John Bradley said the explosion of new service and technology opportunities in the energy market had clear implications for traditional regulation of services.

“Australia has 1.4 million household generators, one of the hottest potential markets for storage in the world and enormous opportunities to integrate cleaner energy sources to meet long-term emission targets,” he said.

“We are witnessing the most significant change in the energy industry since electrification – and that isn’t just disrupting energy markets, it is challenging traditional regulation and policy.”

Mr Bradley said key issues that need to be addressed moving forward include what energy services should be regulated now customers might rely on multiple suppliers; how regulation can avoid stifling incentives for innovative services while ensuring safe and reliable delivery of energy; and opportunities to minimise infrastructure investment costs in a rapidly changing market, with predictable regulation.

“There is widespread agreement an integrated grid will be essential to unlock a clean energy transition enabled by new technology and customer choice,” he said. “One of the key choices regulators will face in the future will be how much of our infrastructure spending is funded in longterm debt or by increasing our reliance on indexation of asset bases.

“Current regulation ‘back-loads’ cost recovery, which effectively defers costs to consumers in the future.

“It is revenue neutral for the network company, but like a home loan, there can be savings to consumers if future regulation takes advantage of the option to pay down this debt more quickly, particularly if the future is more uncertain.”

ENA released a discussion of regulatory reform options titled Future Network Cost Recovery and Depreciation at the conference, which raises the critical question: can industry better use the tools it has today – including lower financing costs – to ensure the right outcomes for consumers now and into the future?

“There are significant implications of a rapidly shifting energy services market for the traditional cost recovery approaches that have underpinned the regulation of energy networks,” Mr Bradley said.

This challenge for the global energy sector is being recognised both in Australia and by international regulators. In New Zealand, the Commerce Commission has started work with consumers and regulated businesses to collaboratively examine the impact of new technologies and services on its current regulatory approach. And, in Australia, the recent COAG Energy Council agreed to ‘stress-test’ the regulatory framework.

Mr Bradley also said the regulatory environment was critical to national energy productivity.

“CSIRO recently estimated Australia will see $850 billion to $1 trillion in energy spending by 2050, including depending on the mix of centrally delivered infrastructure and new distributed resources,” he said. “When the stakes are so high, it is vital we have a regulatory framework that serves the interests of consumers.”