Reframing network regulation to adapt to changing customer needs and preferences in the electricity industry
The electricity industry is experiencing technological disruption that many other industries have already faced. With distributed energy technologies (DER) such as batteries, electric vehicles and solar PV becoming cheaper and smarter, customers are increasingly adopting technologies that provide them with greater choice and control over their energy use. This means that the drivers for, and nature of, network investment is changing and networks must adapt to changing customer needs and preferences.
On Wednesday, the COAG Energy Council released a report by KPMG that sets out options for reforming the regulatory framework that governs incentives for efficient investment and innovation by the electricity network sector. The purpose of the report was to consider how the regulatory framework might need to change to ensure that electricity network businesses have the right incentives to respond to the challenges and opportunities arising from the proliferation of new energy technologies. It is important to get this framework right as the way in which network businesses respond will influence:
- the prices that customers pay for network services;
- the level of investment by network businesses in new technologies and innovative solutions that reduce costs and so prices for customers;
- the development of the market for competitive energy services, such as demand management; and
- the emergence of new services provided by network businesses that allow customers to maximise the value of their energy investments, for example by allowing them to sell electricity back into the grid and trade electricity with their neighbours.
The report assesses a range of regulatory frameworks in Australia and overseas which seek to improve investment efficiency and innovation by electricity transmission and distribution network businesses to better manage the challenges arising from technological disruption. We found that while the current framework in Australia has worked well, there is a risk it will not keep up with the pace of change in the energy sector and could act as a brake on transformation.
Incremental improvements to the regulatory framework over time have increased efficiency in investment decisions. However, while an incremental approach to reform worked well in an environment of relative stability, it is not clear that a piecemeal approach to change will be sufficient to facilitate the necessary transition towards a new energy future. A range of new regulatory tools is required to provide network businesses with the right combination of incentives to deliver efficient outcomes, and provide new services, for customers.
A key finding from our international review was that a common characteristic of an effective regulatory framework is a clear vision for the energy sector, with a clearly defined role for networks businesses in the new landscape. This does not have to be over-specified: it is important that consumers are able to drive and shape the services that they receive through their own decisions to invest in DER. However, without a clear vision of the role that network businesses are expected to play in the future, it is difficult to define an effective regulatory framework.
Network businesses will continue to play an important role in the new energy system. As network costs contribute over 40 percent to customer bills, the effectiveness of the regulatory framework will be crucial for ensuring an affordable and sustainable electricity system that is responsive to customer needs.