Postcard from Australia: Melbourne

Postcard from Melbourne

Helen Poulter, IGov Team, 2nd March 2018

One issue that is being spoken about repeatedly here is how the governance structure of the National Electricity Market (NEM) of the Eastern States of Australia is slowing electricity system transformation.

Melbourne is the capital city of the State of Victoria. Victoria is different from the other States in the NEM because for a number of reasons it is able to make quicker governance changes.

It is this inability of all the other Australian states to move quickly within the NEM which may see the current mass adoption of DER, not only in the domestic but now also in the commercial sector, cause disruption in the electricity sector. This will also enable start-ups, like the GreenSyncs DeX platform, to find a market for its services. The idea of DeX is that it acts as a digital energy exchange similar in principal to how the stock exchange works. The exchange will take information from aggregators, the energy market, distribution networks or peoples home generation and give them a means to communicate and therefore the means to trade. It is possible that platforms like this, which do not need a change to the National Electricity Rules (NER) or the National Electricity Laws (NEL), will enable transformation of the electricity system from the bottom up before the people at the ‘top’ realise.

The key questions being asked by some here in Australia are (i) in a decentralised market model would there be more flexibility from decentralised governance? (ii) and at what level should this decentralisation of governance happen? These questions are being asked as the NEM is unique for a federal country in having centralised rule-making and regulation bodies.

The main governance bodies of the NEM are the Council of Australian Governments (COAG) Energy Council comprising State and Commonwealth representatives, who have the legislative powers. The COAG Energy Council has powers over the Australian Energy Market Commission (AEMC), who make and manage rule change requests; the Australian Energy Regulator (AER) who are the economic regulator; and the Australian Energy Market Operator (AEMO) who operate the wholesale electricity and gas markets.

This governance structure is the result of energy market reforms beginning in the 1990s. Previous to this electricity was provided by numerous vertically integrated state-owned corporations regulated by a state regulator. Each state had its own separate rules and regulations, as. The move to the current structure was a process following numerous reforms over a period of 20 years. The AEMC was formed in 2003 and AEMO in 2009. Previous to this the roles of the AEMC and AEMO were undertaken by different bodies. Until 2004 transmission and distribution were still regulated by the state regulators. In 2004 the AER was formed which took responsibility for the economic regulation of the electricity wholesale market and transmission networks. In 2008 the AER also became the economic regulator for the distribution networks. In 2012 the National Energy Customer Framework bought regulation of the retail market to the AER. The result of these reviews was a governance structure optimised for a centralised, top-down market.

However, the rise of distributed generation has meant that this centralised structure is not flexible enough to respond to possible rule, regulation and policy changes needed to keep pace with the speed of technical advancement. Victoria has one regulatory advantage over the other states in the NEM as it did not fully join the National Energy Customer Framework. By not joining this framework Victoria retained some of its own regulatory powers. In the other states the AER has sole regulatory responsibility for generation, transmission, distribution and retail pricing.

Victoria kept some of the regulatory burden and is responsible for licensing all businesses involved in supplying electricity and gas and also regulates the consumer service standards for distribution. This means that Victoria can change the way it licenses generation, transmission, distribution and retail without having to apply to the AEMC, or to the COAG Energy Council, for a rule change request as the other states would.

The current rule change process involving applying to the AEMC can be time consuming. For any rule change request the AEMC has to start a consultation process. Should the result of this consultation process be favourable then the rule change will be adopted into the National Energy Rules (NER) which are enforced by the AER. This process can take anything from 6 months to years dependent on the level of agreement from all involved.

Rule change requests that involve a change to legislation within the National Energy Law (NEL) need to be agreed upon by the COAG Energy Council, which means that all States represented within the Council need to agree to the proposed change. Changes to the NEL have to first be legislated in South Australia as this is where the initial Law is contained in a Schedule to the National Electricity (South Australia) Act 1996. Following this the proposed legislation then becomes law in the other states who are bound by the NEL. This process can take many years. Victoria does not need to apply to either the AEMC or the COAG Energy Council to make changes to electricity licenses or the consumer service standards for distribution. This means that Victoria has more flexibility to react to, or be in advance of, any sudden disruption to the current energy system at this level.

It is because of this ability that questions are being asked of the role of centralised governance for a decentralised energy system. Would state rule making and regulation – as it had been previously – give more flexibility; or do national rules and regulation provide consistency for ease of access across states for innovation? Would decentralisation of these processes reduce sharing of information between the States? Will innovative products, like the DeX platform, provide a solution which negates the need for any of the above? What is clear is that these questions need to be answered quickly, keeping pace with the adoption rates of DER ownership and innovation, so that all the benefits of DER can be incorporated into the transformation of the energy system whilst also protecting consumers.