Modern economies run on affordable, reliable energy.
Our climate relies on clean, renewable energy.
Squaring that circle is a challenge that confronts the whole of Australia’s energy sector, and it is much easier said than done.
The good news is that we have made genuine progress on addressing climate change this century, taking significant steps towards decarbonising Australia’s energy supply.
But still we are confronted with the question of how regulation can continue to support emissions reduction, while delivering affordable, reliable energy to all Australians.
The transformation of Australia’s energy system is one of the most significant undertakings in our nation’s history.
Faced with this transformation, it is essential that we are always testing whether our policy and regulatory settings are fit for purpose.
But it would be dangerous to jump too quickly to the conclusion that our regulations are broken. While there are plainly areas where reform is needed, even in the face of transformation, the answers to the questions that confront us do not always change.
The task before us is to understand where there is a need for regulatory settings to be preserved; where the need for regulation is debatable; and where regulation needs to be strengthened.
I would like to touch on all three of these areas today.
In every direction we look, we see growing demands for investment in energy infrastructure – and this at a time when cost pressures are climbing as countries all around the world are trying to solve the same problems.
AEMO’s Integrated System Plan maps out a program for massive investment in the transmission networks we will need to connect consumers with the generation of the future.
These new forms of generation are creating new challenges for the stability of our transmission system and impacting communities that have not traditionally hosted energy infrastructure.
At the same time there is growing recognition that gas, from traditional and potentially new sources, will continue to play a vital role in our energy system for the foreseeable future.
We are approaching four million rooftop solar PV systems - from almost nothing two decades ago - and seeing rapid growth in household batteries and electric vehicles.
This growth in consumer energy resources will increase pressure on our electricity distribution systems, at the same time as they are responding to demands for greater resilience and improved cyber security.
Yet even in this rapidly changing environment, not every debate is new.
Our electricity networks, and at least some of our gas pipeline systems, are still monopolies, where competition alone cannot be relied upon to protect the long-term interests of consumers.
This remains the AER’s highest priority – promoting the long-term interests of consumers by creating incentives to encourage and reward prudent and efficient investment, while curtailing the use of market power.
People might debate the tools we use to achieve this goal, but we haven’t heard too many argue that the goal itself is misconceived.
No one seems to be saying that prudent and efficient investment should not be rewarded, but nor do we hear the case being made for consumers to underwrite monopoly profits.
And so the AER remains – and will remain – very focussed on cost.
Some might argue that this focus is misguided – that we are, in effect, on the wrong side of history.
But what history tells us is that consumers respond very badly to rising energy costs, and that their support for the transition is at risk if they feel they are paying more than they need to pay to build the energy system of the future.
Earlier this year, the CSIRO reported the results of a nation-wide survey, finding that most Australians supported change towards an energy system that relies more on renewables, but affordability was a high priority for more than 80% of those surveyed, and most disagreed with the idea of paying more.
The risk is not that the community will stop caring about the threat of climate change, but rather they will feel they simply can’t afford to fix it.
We recognise that our electricity transmission systems are being challenged by the need for unprecedented investment in network assets, while our distribution systems are being tested by the need to accommodate and optimise the rapid growth in consumer energy resources.
It is not the AER’s role to manage energy networks. We are in the business of creating incentives to drive prudency and efficiency – incentives that cannot be achieved through competition alone.
We can, and we do, look for ways to modify these incentives where they need to adapt to the changing demands on our energy systems.
We have approved accelerated depreciation for gas pipelines.
We have recognised the prudency and efficiency of investment to address network resilience and social licence.
We have reviewed ring fencing rules, streamlining our waiver process for community batteries.
The complaint we sometimes hear is that we have not approved enough accelerated depreciation, enough expenditure on resilience or cyber security, but recognising that there are demands for new investment is not the same as endorsing a blank cheque for the cost of meeting those demands.
When the AER approves the cost of new energy infrastructure, we see ourselves as taking FID on behalf of the consumers who will be expected to pay for it.
And so the AER will remain focussed on cost. We recognise the need for investment to address emerging issues, but remain committed to ensuring consumers pay no more than they need to for the energy system of the future.
The fitness of our current regulatory settings is perhaps less clear when we turn to the issue of tariffs.
Electricity tariffs begin with the distribution networks. DNSPs assign network tariffs to different connection points, depending on their tariff polices. Retailers, in turn, offer products to customers that recover wholesale, network and retail costs and margins.
In the past this has reflected the one-directional nature of electricity supply, and the practical reality that demand response, where it has existed, was mostly supplied by large energy users.
But the nature of electricity supply to households is changing.
Over the past two decades, rooftop solar has become the gateway technology to an emerging suite of consumer energy resources, or CER, that include household batteries, electric vehicles and small-scale aggregation of these technologies in the form of virtual power plants.
A great many consumers have had positive experiences installing and using these products, enabling them to begin unlocking the value of CER.
But CER continues to evolve.
The next steps involve innovation in services that will increase the value of shifting demand, whether by charging electric vehicles in off peak times, increasing the value of storage through price arbitrage, or having controllable loads optimised for when prices are lowest.
All consumers will benefit from a system that fosters the growth of products that reduce the demands on our distribution networks, by encouraging the efficient use of those networks and reducing the need for network investment.
On the other hand, all consumers will be worse off if there are no incentives to charge large loads, like electric vehicles, at times when the network is best able to meet that demand.
For those consumers who are able to engage with CER, the transition of our energy system holds out the possibility of reducing their energy costs, but this is only possible because those consumers are offered tariffs which encourage and reward consumption when electricity is cheapest.
And to benefit from those tariffs, an interval (or smart) meter is essential.
Unlocking the value of CER will require the continued roll out of smart meters. They are crucial to accurately measuring the time-sensitive, bi-directional flows of electricity that will become more prevalent over time.
The sooner these technologies can deliver visible benefits to consumers, the sooner they will be embraced by consumers. This will create a more efficient and a more reliable electricity system.
So what’s the problem?
If the benefits of smart meters are so apparent, why don’t we all have them yet? Why is it necessary for the AEMC to consider rules to mandate the accelerated roll out of smart meters? Why do we see so many reports of consumers who feel that smart meters and time of use or demand tariffs are only making them worse off?
The fact is that, today at least, the benefits of the energy transition are not accessible to all.
There are too many consumers who cannot benefit from CER because they don’t own a roof to which they can fit solar panels. They don’t have a place to charge an electric vehicle, or can’t afford to install a battery. In many cases they are residential or small business customers who are unable to shift their consumption in response to price signals.
It is imperative that we find ways to make the benefits of the transition more widely available.
Community batteries, for example, can allow renewable energy to be stored and consumed locally, reducing demand on the distribution network as well as costs to consumers.
Reducing household demand can be transformed from a control imposed through the network, into a product a consumer can sell.
The key to these changes, however, is a meter that can record the time at which electricity is, or is not, being consumed.
The roll out of smart meters across the NEM will not guarantee that the benefits of the transition flow to all consumers, but a failure to roll out smart meters will almost certainly guarantee that they won’t.
The installation of a smart meter, however, should not mean that a consumer is deprived of choice.
There are still many residential and small business customers that cannot easily shift their consumption to benefit from time of use or demand tariffs.
Why would we expect a consumer in this position to embrace a smart meter? Who here wants the job of forcing them to do so?
The assignment of a network tariff to a connection point by a network service provider does not dictate the type of tariff that the retailer must charge to its customer.
A smart meter can accommodate a flat tariff as easily as a time of use or demand tariff.
To date, we have relied on competition between retailers to ensure that consumers can shop around for the products, including the tariffs, that best suit their needs. But increasingly we do see and hear that consumers are losing choice when their meter is replaced and a time of use or demand tariff is assigned to their connection point.
While some consumers already choose to be exposed to wholesale prices, for the foreseeable future most will not. Retailers have always played a critical role in managing volatility and risk on behalf of their customers, and will continue to do so.
But they will also need to innovate to find ways to reward customers for responding to price signals, while ensuring they are not overwhelmed by complexity in an increasingly complex market.
Right now this is an area where regulation is still relatively light handed.
The National Energy Customer Framework does not generally require retailers to offer flat tariffs to all customers. The question is whether we can continue to rely on competition, or whether there is a need for regulation to be strengthened?
The AER supports the principle that the benefits of regulation should always outweigh the costs, and we see this as an area where the costs and benefits of regulation need to be ascertained and weighed.
But for the AER the destination is clear.
Smart meter roll out is essential if the benefits of CER are to be fully realised, but this can only be achieved if consumers are brought on this journey, and that will only be possible if this journey empowers consumers to choose the energy services that are right for them.
Even with tariff reform and smart meters, investing in technologies like solar panels, batteries and electric vehicles will remain beyond the means of many households, and all consumers will be challenged by an increasingly complex energy market.
Yet energy remains an essential service, where cost pressures usually weigh most heavily on those least able to afford it.
Cost-of-living pressures and growing complexity highlight the importance of a consumer protection framework that is fit for purpose in the 21st century.
The AER is concerned that current regulations will not rise to meet all of the challenges we will face in the years to come. This is one of those areas where we see reform as essential.
The AER has already done a lot of work in this area.
In 2022, we released Towards Energy Equity. This is our strategy for reducing barriers to participation, and helping to support the growing number of consumers who find themselves in vulnerable circumstances.
We have found that the causes of vulnerability are varied, and not always obvious. People can move in and out of vulnerability throughout the course of their lives, and people who had never thought of themselves as vulnerable can find themselves in need of support through circumstances they had never imagined.
The AER believes we need a system that recognises and responds to the fact that anyone can find themselves in vulnerable circumstances.
Towards Energy Equity sets out steps the AER will take to help make this system a reality.
One of the projects flagged in Towards Energy Equity was to develop a suite of reforms which we have called “Game Changers”.
Last November we submitted to Energy Ministers a series of proposals developed with the aid of consumer and industry voices.
This is a package of measures designed to break the cycle of energy debt, including through early identification of customers in difficulty, financial counselling, access to concessions and debt relief for customers facing financial hardship. We have suggested that these measures be underwritten by a shared funding pool, because we see this responsibility as one that belongs to the entire sector, not just retailers.
We call these measures “Game Changers” because we aspire to do more than just make things a little better. We think there is a need to fundamentally change the way our energy sector supports consumers, and we think there are many who agree, although we recognise there are differing views about precisely how this should be done.
Last November we also completed a comprehensive review of consumer protections for future energy services. Our advice to Energy Ministers recommended the development of a consistent framework that will encompass the conventional supply of energy, as well as new energy services such as virtual power plants, aggregation and home energy management.
In 2024, the AER has been looking at how to ensure that the growing number of electricity consumers supplied through embedded networks are afforded the same protections and rights as other consumers.
Our market design is based largely on regulated networks and retail competition. This design is challenged when a growing number of consumers are supplied through unregulated networks by sellers who face little threat from competition.
We recognise the benefits of embedded networks, but we also see the potential risks for consumers, especially where the AER’s own tools are limited.
Right now the price protections of the default market offer do not apply to all embedded network customers; it is more difficult to ensure that embedded network customers receive the same protections as other customers; and there is no mechanism to guarantee continuity of supply should an exempt seller fail.
The immediate issue for the AER is the future shape of our exemptions framework, under which embedded networks can operate without being registered as network services. We are aiming to finalise this review later this year.
Finally, the AER has just released an issues paper reviewing the payment difficultly protections provided under the National Energy Customer Framework.
Our goal is to examine what changes might be needed to ensure that consumers experiencing payment difficulty are proactively identified, engaged early and supported appropriately with effective assistance that is tailored to their circumstances.
We are also considering the debt threshold for disconnection, and opportunities to improve engagement so that disconnection is truly a last resort.
So, just as we worry about costs, we also spend a lot of time worrying about consumers.
The AER sees consumer protection as an area where regulation will need to be strengthened if the consumers of today are to be protected through the transition of our energy system, and the consumers of tomorrow are to benefit from protections that are adapted to the way new services will be supplied.
We certainly appreciate that this is much easier said than done, but the scale and complexity of these tasks underscores the urgency of this work.
Before I conclude, I would like to just take a few moments to recognise the AER’s Deputy Chair, Mr Jim Cox.
As I’m sure many of you know, Jim will be retiring from the AER in a few months, after serving for 11 years as a member of the AER’s board, the last four as the AER’s first Deputy Chair.
Jim’s institutional knowledge and experience at the board table has been critical to the AER’s success. He has earned the respect of all stakeholders for his independence and impartiality. He is the wisest of counsellors and the finest of colleagues.
I do not think Jim will be lost entirely to the energy sector (although he may wish it so) but at the AER he will be missed, and his contribution to our work, and to the nation, long remembered.
In closing then - let’s go back to one of the questions asked in the conference program. How do we ensure that the regulation of the entire market remains fit for purpose?
The different laws that empower the AER are underpinned by a common objective – promoting the long term interests of consumers. That is how we answer this question – by putting the long term interests of consumers at the heart of everything we do.
We emphasise the words ‘long term’.
The long term interests of consumers require energy businesses that are profitable, and markets that attract and reward efficient investment. They demand markets that foster innovation, but also ensure that the benefits of innovation are enjoyed by all.
Our energy supply chain is incredibly complex, but every part of it is relevant to the transition, and every part has its work to do. Effective regulation must look at every component of that supply chain, and ensure that each is working towards achieving that overarching goal.
That is how we ensure that the energy system of the future is better than the energy system of today.
Thank you.