Energy

10.3.1 Improving efficiency, innovation and competition in the wholesale and retail markets
10.3.2 Strengthening network regulation and performance
10.3.3 Strengthening market institutions and governance
10.3.4 The SWIS and other non-market systems

Australia's electricity market arrangements are the product of over a decade and a half of continuous cooperative and bipartisan reform and market development by successive Australian and state and territory governments. The process has been guided throughout by the core objective of acting in the long-term interests of consumers.

In the case of the NEM, this has transformed a set of inefficient state-based systems into an interconnected market covering southern and eastern Australia, with business-on-business competition and highly reliable delivery of services. Two important benefits have been the more efficient use of existing system capacity and a decade of relatively stable average wholesale electricity prices.

However, investment in the electricity sector, particularly in networks, began to rise from about 2007 in response to increasing consumer demand (particularly peak demand), the need to replace and augment ageing infrastructure and meet higher reliability standards, and the implementation of energy-efficiency and renewable energy policies at the national and state levels (a breakdown of electricity costs is provided in Chapter 3: Future energy trends and challenges).

These factors together generated nominal average increases in household electricity prices of over 40% nationally over the past three years (ABS 2012c). It is difficult for consumers to influence some important cost drivers (such as reliability standards) or easily observe all of the benefits of this expenditure, so it is important for regulators to explain the reasons for price increases and to ensure that consumers continue to receive value for money.

A number of factors in our electricity markets are creating a less certain investment and operational environment. One of the most significant factors over the next decade will be future demand outlooks. While strong growth is projected for the SWIS and other non-NEM regions, largely due to the resources boom, the AEMO has recently revised its expectations for annual average and peak demand growth in the NEM; it now forecasts substantially lower growth rates and a more divergent range of possible outcomes (see Section 10.3.1).

Other factors expected to contribute to changing market conditions over the next two decades include the following:

• Rising input costs—Because of the changes underway in these markets and continuing international economic uncertainty, further rises in fuel and financing costs are expected. This will particularly affect gas, but coal will also be affected because of export competition.

• Evolving supply- and demand-side technologies—Energy generation, grid management and end-use technologies continue to evolve. Some technologies, such as advanced metering and distributed energy systems, are expected to drive profound change in business models and system management.

• The evolution of our energy systems towards a clean energy future—The legislated carbon price and Renewable Energy Target will influence investment decisions in the market. Investment incentivised by the Renewable Energy Target is likely to contribute most new capacity in the NEM to 2020. Through the market support offered by these policies and rapid cost reductions due to global economies of scale in manufacturing, renewable energy technologies are emerging as mainstream large- and small-scale generation options.

• Continuing market uncertainty—A lack of bipartisan support for carbon pricing and an uncertain outlook for longer term carbon prices make investments in long-lived energy assets challenging.

Managing this combination of factors will be challenging for businesses, regulators and governments. Electricity price rises are increasing the cost of living for many Australians, so we need to make our energy markets, regulatory frameworks and institutions more efficient and improve the productivity of our electricity systems and end-use of energy.

As the Productivity Commission has recently noted, further market reforms can generate sustained benefits for consumers through a better functioning market supported where necessary by more effective regulation (PC 2012).

The Australian Government believes that this effort should be directed at the following areas:

• improving efficiencies, innovation and competition in wholesale and retail markets (see Section 10.3.1)
• strengthening network regulation and performance (Section 10.3.2)
• strengthening market institutions and corporate governance (Section 10.3.3).

Issues relating to improving demand-side outcomes are discussed in more detail in Chapter 11: Energy productivity. Issues relating to ensuring flexibility and adaptability to integrate clean energy sources and technologies consistent with the Clean Energy Finance Corporation's objectives and the broader Clean Energy Future Plan are discussed in more detail in Chapter 6: Clean energy.

In the NEM, reform cannot be delivered effectively by jurisdictions acting in isolation. Success will require a cooperative and sustained commitment by all.

Some of these reforms are politically challenging, but they are critical steps in making electricity markets more efficient. The interaction of market competition, price and technological innovation will stimulate the development of innovative products and services for managing energy costs.

Reforms should be considered and well informed, and consultation with all participants in the energy sector, including commercial, industrial and household consumers, will be critical.

Decisions on some aspects of electricity markets, such as asset ownership, remain the responsibility of state and territory governments. In such cases, this chapter provides observations from a national perspective. The Australian Government remains committed to working closely with all jurisdictions to promote more efficient investment and better results for all consumers.

10.3.1 Improving efficiency, innovation and competition in the wholesale and retail markets

The wholesale market

An effective, competitive and robust wholesale market underpins the reliable supply of electricity and provides confidence that future electricity needs can be met at an efficient cost. So far, the NEM wholesale market has passed this test.

The NEM wholesale market has a healthy level of competition, and prices generally reflect the cost of supply. In 2010–11 all NEM regions except Tasmania recorded their lowest average spot prices in at least five years (AER 2011). In addition, the NEM has consistently met a very high reliability standard of less than 0.002% of unserved energy demand (AER 2011) and is maintaining a pipeline of investment projects that is able to meet projected future demand.

Changing patterns of demand, interacting with policies such as carbon pricing and the Renewable Energy Target, are driving an evolving and more diverse technology and fuel mix. These important measures create new business opportunities in the electricity generation sector. This is already leading to business models based on a diversified portfolio of fuels and technologies that provides more opportunities to manage fuel supply and price risks.

However, these changes are also likely to test market structures and could produce a challenging and less predictable operational and investment environment in the short to medium term.

Maintaining a sound environment that supports timely and efficient investment responses to market signals is an important part of the transition to a clean energy future. We must also ensure that the market has effective structures to manage risk, including robust prudential and forward contract arrangements.

The market should supply price signals to promote more efficient energy consumption (particularly during peak periods), so we need an effective demand-side framework that promotes efficient signals and participation across the supply chain.

Building an efficient and cleaner generation mix

The pace, scale and direction of changes to the generation mix will be determined largely by:

• the pace of growth in average and peak demand in each region of the NEM
• the impact of policy initiatives under the Australian Government's Clean Energy Future Plan, including carbon pricing, the Renewable Energy Target and the $10 billion Clean Energy Finance Corporation
• relative changes in fuel prices and technology costs
• the extent to which existing generation capacity is retired from service in the period to 2025.

Constructing utility-scale plant usually takes three to five years, so it is critical that the market can send timely and efficient investment signals and deliver the necessary capacity. This includes the ability to refinance existing generators.

Past investment patterns in the NEM show that it can supply effective signals for new capacity. Over the past decade, there has been significant investment in new renewable (wind) and open-cycle gas turbine peaking plants, which continue to account for most of the committed and proposed generation investment (Figure 10.2). Announced proposals include 13 000 MW of wind and 11 000 MW of open-cycle gas generation capacity (AEMO 2012a).

This generation investment has been pulled through by the Renewable Energy Target and the rapid rise in peak demand, which requires backup or fast-start capacity. The lack of investment in baseload generation reflects a longstanding overhang of supply capacity from past investment cycles and a flattening of demand since 2008–09.

Figure 10.2: Investment in electricity capacity since 2000 (MW)

Note: Includes capacity installed, under construction or in advanced planning. At the end of June 2011, 15 projects with a total capacity of 2760 MW were under construction, and 5700 MW of capacity was at an advanced planning stage. An additional 174 projects with a total potential capacity of over 43 GW are proposed.

Source: esaa (2012a).

Future investment in electricity generation will be driven by the private sector. Because of their longevity and capital intensity, these investments require a high level of confidence in the market and the policy frameworks that guide decisions. In submissions to the Energy White Paper, potential investors raised the following as material considerations:

• an unclear demand outlook, making market conditions and revenue projections less certain
• the impact of policies, such as the Renewable Energy Target, which have the potential to distort investment signals in the wholesale market so as to increase renewable energy investment
• carbon and fuel price risks (the risk of asset stranding under carbon pricing is likely to discourage new coal-fired baseload investment; rising gas prices may delay the point at which combined-cycle gas plant becomes competitive)
• changing dynamics in financial markets with lower risk appetites, which have resulted in higher costs and larger equity requirements
• continued public sector participation in the market, which increases perceptions of an uneven playing field and investor risk
• the lack of bipartisan support for carbon pricing.

A changed demand and investment outlook

For the first time since the NEM began, average annual demand in the market has flattened out after a 3.4% decline over the past two years. While accurately forecasting demand is notoriously difficult, the AEMO predicts that average annual demand under a medium growth scenario is not likely to return to 2009–10 levels until 2014–15. Future projected annual growth to 2030 ranges from 1.6% in a high demand scenario, to 1.1% with medium demand and just 0.5% with low demand. The AEMO forecasts for peak demand show ongoing growth in all regions, although at rates closer to average demand.

These scenarios, which show a difference between high and low demand growth of around 34 terawatt hours in 2020–21(roughly the volume of Victorian consumption in 2010–11), have quite different implications for the NEMs investment and operating outlook.

Table 10.1 shows the immediate impact of lower demand on the investment outlook. Under a medium growth scenario, additional large-scale generation capacity (other than that required to meet the Renewable Energy Target) is unlikely to be needed in most NEM regions before 2020. Under a low growth trajectory, additional capacity will not be needed until well into the next decade. However, if demand were to rebound under a high growth scenario, new capacity may be needed from around the middle of this decade. Businesses have already responded to this changed outlook with a number of announced deferrals of new large-scale generation projects.

Most new investment is likely to be for renewable capacity required by mandated market shares under the Renewable Energy Target, possibly supported by some additional fast-start peaking or system backup capacity.

Wind energy developments are expected to dominate as the lowest-cost source of large-scale renewable energy, while open-cycle gas peaking plants are likely to continue to be the preferred form of non-renewable investment because of their comparatively lower capital costs, ease of construction and potential for future conversion. The current higher overall costs of both forms of generation are expected to add a marginal increase to delivered electricity prices.

Table 10.1: National Electricity Market supplydemand outlook

Note: Tasmania's winter outlook is included because the maximum demand occurs during winter.
Source: AEMO (2012a).

The general operating environment for businesses may also vary depending on demand patterns. With medium or low growth in demand, the share of renewable energy in the NEM is likely to exceed 20% by 2020. Under this scenario, renewable energy is likely to begin to displace the market share of non-renewable generators. How significant that displacement will be is not clear at this point, but it could potentially challenge incumbent generators.

A set of complex factors contributes to the revised demand outlook, including changes in large industrial and manufacturing electricity demand, a continued increase in distributed solar photovoltaic systems, the impact of energy-efficiency measures, and consumer responses to higher prices (AEMO 2012b). This is likely to make business planning more difficult until a clearer picture of demand patterns emerges.

Ensuring efficient interactions with clean energy initiatives

Various climate change policies are designed to interact with the electricity market to change investment or operational outcomes.

At the national level, they include the Renewable Energy Target and the carbon pricing mechanism, which are key elements of the Australian Government's Clean Energy Future Plan and a powerful incentive for the wider deployment of clean energy technologies. The states and territories also manage a range of feed-in tariff schemes and energy-efficiency or white certificate programs.

It is important that these measures interact efficiently with the electricity market so that our energy and climate goals are achieved at least cost. This includes managing any unintended risks or impacts that might flow into the electricity market.

In April 2012, COAG recognised the need to prioritise a review of existing federal, state and territory carbon reduction and energy-efficiency measures and to remove those that are not complementary to the carbon price, or are ineffective, inefficient or impose duplicative reporting requirements on business. The Climate Change Authority's review of the Renewable Energy Target will be used as an input to the COAG complementarity review.

In the medium to long term, the growing deployment of renewable generation may make it harder to maintain efficient dispatch and effective price signals for investment. This could occur where the subsidy provided by the Renewable Energy Target allows large-scale renewable energy generators to bid into the market at lower (near zero) marginal rates than might otherwise be the case. At high levels of penetration, this has the potential to alter bid stack and market clearing price outcomes in ways that are not necessarily well understood. This is the so called merit effect (IEA 2011b).

In a recent review, the AEMC found that the Renewable Energy Target was marginally suppressing wholesale pool prices in different NEM regions (AEMC 2011b). There is no clear consensus about the impact this may have on market efficiency or investment signals. Its main effect may be to transfer rent between conventional and renewable energy generators or retail agents. However, this issue may warrant longer-term attention and will be monitored through the governments four-yearly strategic reviews of energy policy.

High levels of intermittent generation (such as wind or solar) may also pose additional operational challenges in balancing supply and demand in the system. While this is considered manageable at current and projected levels, in the longer term there may be a need for additional backup capacity or innovative system management and storage solutions (see Chapter 6: Clean energy).

Feed-in tariffs set above the market rate have resulted in inefficient deployment of household distributed generation systems. While overall deployment is still relatively thin, such systems have a disproportionate impact on delivered electricity costs, and consumers who do not have systems receive little or no benefit and effectively cross-subsidise those who do. This also imposes a greater proportional cost burden on low-income households.

Existing state-based schemes are now under review or have been wound back to provide a fair market value for generated power, which should minimise the risk of market distortion in the future. The Australian Government strongly supports the move to more efficient feed-in tariff rates that more accurately reflect the costs and benefits of energy delivery (including demand management) and is working with other jurisdictions through the SCER to develop options for a nationally consistent framework for fair and reasonable tariffs.

Managing risks and emerging pressures

The introduction of carbon pricing with a clear policy framework under the Clean Energy Future Plan provides greater certainty to the market to plan and commit to necessary investment in new generation assets. It has also changed the nature of energy markets, and the new dynamics in these markets will need time to consolidate. This may lead to a period of conservative investment and market behaviour, including a tendency towards vertical integration as a strategy for managing risk and market exposure.

Recognising the risks inherent in any major market transition and the potential pressures from ongoing turmoil in international financial markets (which will be critical sources of investment capital), the Australian Government has established the Energy Security Council and a package of energy security measures under the Clean Energy Future Plan that are intended to transform Australias energy sector from highly emissions-intensive electricity generation to cleaner forms of generation. The Energy Security Council will provide additional assurance and advice to the government if systemic risks to energy security emerge from financial impairment arising from any source (see Box 10.1).

Box 10.1: Clean Energy Future Plan—Energy Security Package

In response to the global financial crisis in 2008, G20 governments have committed to increased prudential and reporting requirements for financial markets. It is important that any measures introduced for the electricity financial markets are specifically tailored to improve the management of financial risks and their exposure to the wholesale spot price without compromising market stability. There is also scope to improve the interoperability of the prudential and regulatory frameworks for the wholesale physical market and the over-the-counter and exchange financial markets.

There is merit in SCER examining these opportunities, which could materially improve the efficiency of capital deployment and the regulatory oversight of the markets.

A sound market framework

The Australian Government believes that the energy-only market pool design and key market settings continue to be appropriate and provide a robust basis for the future efficient supply and dispatch of electricity in the NEM.

Changes in the market and the settings of key parameters should be contemplated only where there is a clearly established need. Any changes should be in proportion to the need: this is not a set and forget exercise. Given emerging market pressures, it will be important that market conditions and the factors that shape them are closely monitored to detect early signs of difficulties or loss of efficiency, and to provide confidence that consumer needs will continue to be met.

The retail market

Electricity retailers are the principal interface with the electricity market for the vast majority of businesses and households. For that reason, maintaining competitive retail markets with efficient pricing structures and the right tools to enable informed consumer participation is an essential part of delivering energy supply and services.

There are clear opportunities to improve outcomes for consumers by freeing up our retail markets to promote business competition and innovation. This should be done by implementing the National Energy Retail Law and fulfilling commitments to deregulate retail electricity prices where effective competition exists. In addition, further work is needed to make consumers more able to manage their energy use and costs effectively, including through better information, smart metering and more efficient pricing structures, including time-of-use charging. Ensuring that consumer interests are adequately represented in market and policy development is also essential.

Moving towards national retail consumer frameworks

Recognising the benefits associated with a single national retail framework, the South Australian Parliament, as lead legislator on behalf of the SCER, passed the National Energy Retail Law in early 2011 to act as template legislation for the National Energy Customer Framework (NECF), which will then be applied by participating jurisdictions. The National Energy Retail Law creates consistent and enhanced consumer protections in the energy sector and harmonises state-based regulatory frameworks for the retail energy market and energy distribution sector into a single national law and set of rules.

While the implementation of the National Energy Retail Law is a significant achievement, the Australian Government does not see implementation as an end point. The framework and associated consumer protections will require ongoing monitoring and attention. They may need revision in the future to provide flexibility and adaptability to deal with the dynamic nature of energy markets and prices, including responding to the further rollout of advanced metering.

The implementation of COAG's NECF across jurisdictions will be important in ensuring robust and harmonised consumer protection. The NECF was implemented on 1 July 2012 by the Commonwealth, Tasmania and the Australian Capital Territory. New South Wales, Victoria and South Australia have agreed to implement it as soon as is practical, while Queensland is yet to consider the matter.

Early adopting jurisdictions have already seen benefits in competition and improved information to consumers. Consumers will benefit further when all jurisdictions adopt the NECFsplintering the market, as has occurred with the delayed implementation, creates additional costs to consumers at a time when governments should be working to reduce pressures on energy prices. The Australian Government strongly encourages the implementation of the NECF by all remaining jurisdictions without further delay.

The NECF is not the only way to increase consumer participation in the markets. The AEMC's Power of Choice review will identify opportunities to remove barriers to consumer engagement and will provide recommendations for energy ministers.

Retail price reform

Most Australian states and territories have introduced full retail contestability in retail energy markets, but so far only Victoria has deregulated retail price controls.²

The Australian Government recognises that states' and territories' retention of regulatory control over retail prices remains a sensitive issue for their governments, but believes that this continues to be an area of unfinished, necessary and previously agreed reform (see Box 10.2).

Under the Australian Energy Market Agreement and the COAG National Partnership Agreement to Deliver a Seamless National Economy, jurisdictions have committed to the removal of retail energy price regulation where effective competition can be demonstrated. As part of the process, the AEMC is reviewing retail energy market competition in each jurisdiction with full retail contestability.

So far, the commission has reviewed competition in Victoria, South Australia and the Australian Capital Territory. It deemed competition to be effective in Victoria and South Australia, but not yet effective in the Australian Capital Territory. While each review has recommended price deregulation, only Victoria has implemented the AEMCs recommendation. New South Wales is currently under review. The Australian Government strongly encourages jurisdictions to act on the advice of the AEMC to meet agreed commitments.

Box 10.2: Retail price reform

The lack of progress in deregulating retail pricing has been criticised by market participants and other stakeholders. While aspects of these reforms are politically challenging, the Australian Government believes it is important to re-establish momentum and direction towards agreed goals.

Price reform to date has been resource and time intensive. The government believes that there is a need to re-examine the approach, in particular to identify opportunities for streamlining the current market assessment process. This should be framed around a fresh commitment to developing competitive retail markets with fully deregulated prices, complemented by effective consumer protections.

Where sufficiently competitive markets do not exist, jurisdictions should develop and implement transitional strategies to improve competition and move to regulated pricing structures that more closely reflect a competitive market outcome.

Jurisdictions currently differ in the methodologies they use to determine regulated retail prices, most notably in the way the wholesale energy component is set. This contributes to very different business conditions for retailers between jurisdictions and in the long term may disadvantage consumers through price catch-up pressures or sustained underinvestment in supply. The government intends to raise the development of a consistent methodology for price regulation that balances consumer and market interests for consideration by the SCER. The adoption of a consistent methodology may, in itself, require a well set out transition.

The government strongly believes that jurisdictions should fulfil commitments made under the Australian Energy Market Agreement to remove price regulation where markets are deemed to be competitive. It considers transitional approaches, accompanied by strong accountability by individual jurisdictions, to be one means of fulfilling those commitments.

Supporting vulnerable customers

The government recognises that rising energy costs and the unwinding of cross-subsidies have uneven distributional impacts on households, and that lower-income households face proportionally greater impacts than high-income households (see Chapter 3: Future energy trends and challenges). Therefore, retail price deregulation and greater consumer empowerment must be accompanied by appropriate protections for vulnerable customers, such as effective hardship policies, strong marketing rules, select standard terms and conditions for energy contracts, and close monitoring of market outcomes.

Ensuring that consumers, particularly those who are most vulnerable, are able to manage energy costs effectively is also increasingly important. The continued provision of adequate assistance to vulnerable consumers through a sound general safety net, well-targeted jurisdictional concession regimes and appropriate community service obligations remains critical.

Such assistance should be transparent and not undermine competitive pricing structures, which reflect, as efficiently as possible, the underlying costs of supply. It is more efficient for assistance to be provided through properly targeted social policy settings, rather than energy policy settings, to ensure that energy market signals are preserved.

Empowering consumers—improving price information and transparency

Effective decision-making by policymakers, consumers and energy providers requires a better understanding of the causes and likely duration of further price increases as well as other critical information on products and services.

At its December 2011 meeting, the SCER noted the publication of the second in a series of pricing reports by the AEMC. The council agreed to institutionalise annual reporting by the commission on possible future trends in electricity prices, including the drivers of prices.

The Australian Government is also supporting a number of measures to improve energy price and use information:

• The NECF contains a number of provisions designed to help consumers understand and compare pricing offers by different retailers.
• The AER has administered the Energy Made Easy website³ since the commencement of the NECF on 1 July 2012, allowing consumers to make more informed choices about energy retail offers.
• $10 million has been allocated in the Clean Energy Future Plan to gain a better understanding of how households use energy.

The Australian Government is committed to working with the states and territories, market institutions and stakeholders to improve the consumer energy data access system, possibly by creating a hub, to improve the flow of consumption information for consumers (see Chapter 14: Energy information). The government's scoping study has identified some movement by energy suppliers towards providing customers with access to their data. However, the study also identified some major barriers that may affect the ability of consumers to make informed choices, including significant information inequality between different providers, timeliness of access to information and access by other parties approved by the customer.

Smart metering

Advanced metering technologies or smart meters potentially offer consumers greater choice and flexibility in managing energy bills and energy use, particularly at peak times. They can also provide benefits to service providers in managing network loads by providing real-time information on energy use, and may potentially enable remote energy end-use management. Smart meters, smart appliances and their uses are discussed further in Chapter 11: Energy productivity.

In April 2007, COAG committed to a mandated national rollout of electricity smart meters in areas where benefits outweigh costs, but so far only Victoria has undertaken a rollout. Support from consumers and other stakeholders has been mixed, largely because consumers have borne the up-front costs and because the benefits (which are shared between consumers, distributors and retailers) necessarily follow broad deployment and so take time to be observable to the consumer.

Some of the benefits of the Victorian rollout are now evident. For example, retailers and distributors such as Origin Energy, Jemena and United Energy have been able to provide energy-use information to existing consumers on a self-service basis through web portals. Within the next year, it seems likely that most customers with interval or other smart metering (including many outside Victoria) should be able to access their own historical consumption data by such means.

The Smart Grid, Smart City project, which has developed a community and industry engagement strategy, also offers lessons for deployment. One of the aims of the strategy is to promote the benefits and build knowledge of smart meters among residential and business customers, schools and local councils. Learning from the use of this strategy will also assist in future communications activities. The Smart Grid, Smart City project is expected to provide important information to policymakers and the energy sector from mid-2012 to inform the potential wider deployment of smart grid technologies.

To help inform future deployments of smart meters, the Australian Government is developing a framework that:

• promotes a minimum level of national consistency
• provides a basic level of functionality but does not stifle innovation in more advanced options, products and services
• sets out required market structures that support deployment in ways that are in the best interests of consumers, including by promoting competition for services and maintaining appropriate consumer safeguards.

Facilitating a market-driven rollout of smart meters in which providers negotiate deployment and costs directly with consumers may be a way to overcome concerns about mandated approaches. For example, retailers are increasingly likely to see smart meters as a point of differentiation with customers as part of combined energy management and structured tariff packages. This would not preclude jurisdictions mandating rollouts where the benefits outweigh the costs.

Promoting market competition

Competition in well-functioning generation and retail markets provides effective incentives for higher efficiency and innovation and promotes supply at least cost. Competition depends on factors such as:

• the unbundling of natural monopoly network activities from all other activities
• equal rights of access to the network for all generators and all consumers
• coordination between the parties in the supply chain to ensure that investment is timely and efficient
• competitively neutral market rules, design and regulation
• the provision of regular and transparent information to inform decision-makers
• a level playing field to encourage new entrants.

In Australian energy markets, the main mechanisms for monitoring and regulating competition are state regulators in retail pricing, and the AER and the Australian Competition and Consumer Commission (ACCC) more generally. State and territory regulators retain residual functions where they have not been transferred to the AER.

Market structure

Two key aspects of the national competition and energy market policies established in the 1990s were the separation of competitive markets (wholesale and retail) from monopoly markets (transmission and distribution) and the disaggregation of state-owned, vertically integrated energy businesses.

Since then, there has been a trend towards reaggregation in retail and generation businesses and greater cross-ownership in the electricity and gas sectors. This has been driven largely by the need for more secure balance sheets and customer bases, and the opportunities such arrangements provide to internally manage price risks and other market exposure (such as fuel costs, the cost of Renewable Energy Target liabilities or security of supply). This has led to the rise of a number of so-called gen-tailers as dominant business models and as a form of risk management.

The owners and operators of generators selling into the wholesale pool market are diverse. There are 299 registered generators in the NEM (AER 2010). Around 34 companies or groups own the 200 or so scheduled and semi-scheduled power stations with at least 30 MW capacity in the market (AEMO 2011b, AER 2010, esaa 2011). About half the output capacity of NEM generators is currently controlled by governments, although this will change with the privatisation program underway in New South Wales (esaa 2011).

Ongoing government ownership in wholesale electricity markets may be a risk factor for private sector investors, particularly new entrants. The risk (or even the perception) of distortionary behaviour, conflicting incentives or future government interventions to support public businesses creates additional investment complexity and risk in a challenging commercial environment.

The retail market in the NEM is less diverse: in October 2011, there were 22 retail companies with active licences (AER 2011). The sector is dominated by three major retailers: AGL, Origin Energy and TRUenergy. The retail market is considered to be effectively competitive in Victoria and South Australia, although the Australian Capital Territory is the only other jurisdiction to have been reviewed by the AEMC.

Concerns have been raised about the implications over the longer term if the trend towards reaggregation continues to the point at which competition is unacceptably reduced or trade between markets is eroded or compromised. This could also create a barrier to entry for merchant operators that do not have well-hedged positions in multiple markets.

Substantial vertical integration reduces business transparency and the liquidity of the contracts market, which could pose a potential barrier to the entry of new market participants. However, based on trends in the NEM, there is no compelling evidence to support claims that current market structures are uncompetitive or causing economic harm. While those structures may be different from those envisaged at the establishment of the NEM, the factors listed above suggest that Australia's optimal market structure for the foreseeable future is one that has a balance of integrated energy businesses and merchant operators.

The ACCC addresses market structure and market power in enforcing competition and fair trading provisions in the Competition and Consumer Act 2010. In addition, the AEMC is doing further work in relation to generator market power in the NEM. The ACCC's recent decision not to object to the acquisition of Loy Yang A by AGL noted the importance of competition from the remaining generators and new investors. The ACCC has also indicated that more scrutiny of such transactions is expected in the future.

A number of reforms can help to promote competition, including deregulating retail prices where effective competition exists, avoiding crowding out by a dominance of government-owned assets or the perception of an uneven playing field for private investors, reforming pricing to support demand-side participation, and identifying areas for contestable services in regulated markets.

10.3.2 Strengthening network regulation and performance

Maintaining efficient and reliable transmission and distribution networks is critical in providing a high-quality and reliable supply of power to consumers. The cost of providing these services is also a major factor in the delivered price of electricity for consumers.

The Australian Treasury estimates that network charges account for around 51% of an average residential electricity bill.⁴ In large part, this reflects Australia's large area and dispersed population, which result in the NEM being one of the worlds largest integrated electricity networks. The total length of networks in the NEM is about 790 000 kilometres, and the distribution network is approximately 18 times longer than the transmission network (AEMC 2012). As a result, distribution networks require significantly larger capital and operating expenditure than transmission networks (AER 2011).

As the cost of servicing this large network must be spread over a comparatively small consumer base, it accounts for a higher proportion of costs than in other comparable countries. For example, the United Kingdom has a similarly sized network but three times the number of electricity consumers. As a result, network costs comprise around 23% of total costs (Ofgem 2012).

The rapid rise in Australian network costs has been the most significant driver of recent electricity price increases. Most of this cost pressure is concentrated in the distribution system. The AEMC estimates that household electricity prices at the national level will rise (on average) by around 37.2% over the period from 2010–11 to 2013–14, and that network costs will account for around 40% of that increase (6% for transmission and 34% for distribution).⁵

The contribution of these costs to overall electricity price increases has focused attention on the performance of network businesses, the drivers of network investment, and the rigour of the regulatory framework for this element of the market. In particular, there are some concerns that the framework provides insufficient incentive for least-cost investment outcomes.

The increase in network costs has occurred for a range of complex reasons, most notably the need to expand and augment the grid in accordance with state-based reliability standards to meet growing demand, particularly peak demand. The need to replace ageing assets has also contributed significantly: the AEMC notes that this will account for from 22% to 35% of projected spending for many network businesses in the next three years. Other factors include increased borrowing costs since the global financial crisis and higher material and labour costs (AEMC 2011c).

Many of these pressures are expected to remain in the future. However, if demand growth remains subdued, expenditure on planned network augmentations may be deferred, which will flow through to future network determinations. Sustained lower demand (particularly at peak times) may also defer some of the near-term requirement for investment until existing capacity is more fully utilised. However, over the longer term, there will still be an ongoing need to replace ageing assets, as well as to expand the networks to service a growing population and future business activity.

While acknowledging these pressures, the government considers it essential that consumers have confidence that network costs are efficiently based and clearly targeted at providing a high-quality service. This includes assurance that network regulation is placing enough weight on the long-term interests of consumers.

The government believes that the fundamental approach to network regulation and participation is sound, but that there is scope for strengthening the network model in the following areas:

• the regulatory framework, particularly determination and review processes, demand-side reforms and competitive services
• network reliability, planning and connections.

Network regulatory framework

Transmission and distribution networks are natural monopolies. Therefore, they operate under a regulated business model that maintains structural separation between monopoly and contestable elements of the market to ensure that efficient outcomes are delivered for consumers.

Regulatory processes, which effectively set the prices that networks can charge, must minimise cost increases for consumers without inhibiting efficient and necessary expenditure by providing for a fair return on investment for network businesses.

Failure to achieve the right balance would result in either overinvestment or underinvestment. Overinvestment would impose unnecessary costs on consumers. Sustained underinvestment could potentially reduce the reliability of supply, as evidenced by disruptions in supply in Sydney's central business district in early 2009 and sustained supply failures in Queensland in 2004. Blackouts in Victoria due to extreme weather conditions in January 2009 were estimated to cost that state's economy about $100 million (Houston & Reilly 2009).

Actions underway to promote a more effective regulatory framework include the following:

• The AEMC has released proposed changes to the economic regulation of network businesses for public consultation. It will issue its final rule determination in November 2012. Proposed changes include:

  • Rate of returnA new common framework will enable the regulator to make the best possible estimate of the rate of return at the time a regulatory determination is made. This will allow the regulator to take into account changing market conditions, estimation methods, financial models and other relevant information. It will also provide for greater transparency in the AER's processes.
  • Capital and operating expenditure allowances—The ability of the AER to interrogate proponents and to review and amend expenditure proposals will be further clarified. This will give the AER greater scope for targeted benchmarking to test proposals through annual benchmarking reports setting out the relative efficiencies of the network businesses.
  • Capital expenditure incentives—Amendments to the National Electricity Rules will provide the AER with a set of tools that it can apply to provide adequate incentives for network businesses to spend capital efficiently. This includes undertaking ex-post reviews of capital expenditure above that which was originally approved in a determination to ensure that only efficient capital expenditure is added to the recoverable asset base for future determinations.
  • Regulatory process—Regulatory process changes will improve transparency and the ability of stakeholders to engage in the regulatory determination process.

• The SCER has brought forward a statutory and independent review of the current network regulatory appeals process (the limited merits review regime) to ensure that it is delivering outcomes that are fair both for consumers and for network businesses. In its Stage 1 report, the review panel noted the comparatively high use of limited merits reviews and identified a number of areas of potential weakness in the appeals arrangements. The SCER will consider the recommendations of the final report before developing its policy response ahead of the next round of regulatory determinations.

• The Australian Government has tasked the Productivity Commission to advise on the possible benchmarking of regulated network businesses and to examine whether the transmission regulatory regime is delivering efficient levels of interconnection to support the market. The commission's report, which is due in 2013, will inform the governments position on the SCER's energy market reform agenda.

• The AER is investigating ways to improve its data on network business operations to better equip it to make more informed regulatory decisions, including through the use of benchmarking. This process involves the AER engaging with network businesses through its Network Information Strategy. Any issues identified by the AER in this process would be referred to the AEMC through a rule change request, or to the SCER if policy clarification is required.

• The AEMC, through its Power of Choice review, is recommending possible reforms to network regulation to promote efficient demand-side outcomes. The SCER will consider the review report at its December meeting.

Many of these workstreams are scheduled to allow any changes to apply before the next round of five-yearly network determinations, which commences in mid-2014 for New South Wales, the Australian Capital Territory and Tasmania.

While the basic network model will continue to include monopoly service providers, there may be some services that could be made contestable (that is, open to third-party providers). They could include network connection (mainly in distribution, although the current arrangements for transmission may also require modification), and services such as street lighting and some aspects of metering. In this context, the SCER is investigating ways to develop a national framework for the provision of contestable distribution connections. Such a framework would ensure that the costs of those services would be set competitively and be borne by the direct users.

Where market circumstances change significantly within a determination period, it is important to ensure that network businesses have the right incentives to adjust their expenditure plans. This requires a balance between the need to provide certainty for business planning and the need to ensure that investment is efficiently targeted. Ideally, this should be driven by sensible commercial disciplines; however, the government will consider whether the regulatory framework remains robust in such circumstances.

The SCER will consider the recommendations of the review of the limited merits review regime and the AEMC Power of Choice review, and will report on the recommendations to inform COAG's response to these and related energy market reform issues at meetings scheduled for October and December 2012. This is in addition to the separate but complementary work of the COAG taskforce looking at competition and regulatory reform, which is working to the same timeframes. Sensible, timely reform in these areas will promote efficient investment in our networks, thereby minimising the costs passed on to consumers.

Network reliability

The need to meet specified network reliability standards plays a large part in determining levels of investment in new, replacement and upgraded network infrastructure. Providing a high-quality, reliable service is a core element of Australia's national energy objectives, but increases costs for consumers.

In recent years, some state governments increased network reliability standards largely in response to a series of dramatic supply disruptions, particularly the poor reliability of the Queensland network in the lead-up to the 2004 Somerville inquiry and the blackouts in Sydneys central business district in 2009.

While the higher standards have improved the reliability of supply, those decisions were made without public understanding of the costs involved and have added to the costs that must be considered by regulators (Somerville 2011).

Given the impact of these standards on costs to consumers, it is important that the standard-setting process is transparent and considers both the costs and the benefits of different levels of reliability. It is also crucial that network businesses have greater flexibility in how they achieve required outcomes, as this can result in substantial cost savings for consumers (Somerville 2011). Because of reliability standards complex interaction with other important market and investment parameters, they are best set through a holistic assessment of costs and benefits across the supply chain. The standards should specify reliability outcomes, rather than prescribe specific investment behaviours or equipment.

The Australian Government is working through the SCER to investigate the methodologies that underpin distribution network reliability settings and to assess the most effective approach, which could be applied nationally through the AEMCs national workstream in its Review of Distribution Reliability Outcomes and Standards. The final report is expected in 2013, subject to SCERs advice on the areas that the AEMC is required to cover.

As part of this review, the AEMC also undertook a workstream specific to New South Wales that included a study of consumers' willingness to pay for a given level of reliability. This was based on a methodology used to assess Victorian consumers willingness to pay, which was used to inform planning. The final report for the New South Wales workstream, released in August 2012, showed that consumers in that state place a relatively high value on reliability of supply. The aim of this work was to inform the state government's reliability standard setting process. Where other states and territories set such standards, the Australian Government encourages them to consider following the New South Wales example and seek advice from the AEMC about distribution reliability levels and trade-offs between meeting the required level of reliability and the reliability performance experienced by consumers.

Network planning

In the NEM, the AEMO oversees the strategic development of the national electricity grid. It prepares independent demand forecast and network development information and examines expenditure on new transmission infrastructure using an economic costbenefit framework that strikes a balance between network costs, reliability and market operating benefits.

New transmission network planning functions and rules have been in place for a relatively short time. The AEMO's National Transmission Network Development Plan was first published in 2010, and a new regulatory investment test for transmission (known as the RIT-T) has been in place since 1 August 2010. The RIT-T is an economic costbenefit test used to ensure that regulated electricity transmission network development proposals are the most economic options and deliver broader benefits to the market while meeting mandated reliability standards. The RIT-T process involves extensive consultation and greater transparency and consistency in the prescription of market benefits and costs.

Based on the limited evidence to date, the Australian Government believes that the RIT-T has been effective. However, there may be scope to alter these arrangements in the future, based on evidence of their performance, such as by more effectively integrating the investment test with the economic regulatory framework.

The AEMO's National Electricity Forecasting Report provides annual energy and maximum demand forecasts over the next 10 years for each of the five NEM regions. In its inaugural 2012 report, the AEMO made major revisions to its demand forecasting methodology. Because the report is an important input into network planning decisions, the government strongly supports regular revisions of the methodology to ensure that it remains robust.

Two reviews currently underway are testing whether incentives for generation and network investment and operating decisions are effectively aligned to deliver efficient overall outcomes:

• The AEMC's Transmission Frameworks Review is examining arrangements for the provision and utilisation of electricity transmission services in the NEM. The review is focusing on transmission investment; network operation; network charging, access and connection; and the management of network congestion. The AEMC has issued an interim report, which identified five possible pathways for further reform. Its final report is due in March 2013.
• The Australian Government has commissioned the Productivity Commission to review transmission interconnections to assess whether optimal levels of investment are being delivered. The commissions report is due in April 2013.

As noted above, the AEMC is working on rules to establish a national framework for distribution planning and expansion in response to a proposal from the SCER. The aim is to deliver a clear and efficient planning process, encourage demand-side engagement, and provide transparency on distribution network service provider planning and investment activities (including the introduction of a regulatory investment test for distribution). The AEMC expects the framework to be in force by the end of 2012.

Network connection and integrating new technologies

Over the next several decades, Australia's electricity system will be required to integrate a broader range of power generation and management technologies than it was originally designed for. In particular, wider deployment of intermittent and distributed generation is expected over the next decade, as well as a wider take-up of electric and hybrid vehicles.

Some of these technologies are already creating challenges in connection and grid management. For example, highly intermittent output from large wind power developments can contribute to localised congestion, and increasing photovoltaic and other distributed generation can place stress and costs on distribution networks that have not been developed to handle large two-way power flows. These problems are currently being managed case by case by distribution businesses. The AEMO, with assistance from the Australian Government, has made major investments to improve forecasts of wind generation to augment market operating systems, notably through the $14 million Australian Wind Energy Forecasting System.

The AEMC's Power of Choice review Stage 2 report found that the flexibility allowed to distribution companies in determining minimum technical standards for small generators is causing delays and increasing costs for embedded generators. This issue should be addressed through the adoption of appropriate minimum technical standards for embedded generators, and by resolving how to allocate any network augmentation and connection costs appropriately between distribution companies and the installers of small generators.

The market's understanding of the operation of these technologies has improved greatly, and work is underway to overcome barriers to the integration of distributed generation, new energy storage technologies and electric vehicles into the energy system. These matters are being investigated in the AEMC's reviews of demand-side participation and of energy market frameworks in the light of market penetration by electric and natural gas vehicles (which could result in an added source of demand, with implications for the grid).

Through the SCER and the COAG Select Council on Climate Change, the Australian Government is assessing the feasibility of technical standards for network connections to complement a rule change proposal currently being considered by the AEMC. The SCER is also working on an improved framework for new connections to electricity (and gas) networks. This is being introduced as part of the National Energy Customer Framework and will deliver a range of functions that are now enshrined in legislation, including a right of connection for embedded generators and disclosure provisions for information on connections.

Connecting remote generation

New entrants in the generation sector already face a number of challenges. This is particularly the case for generators in remote locations, where the additional cost of connection to the transmission grid (often at the end of the line) can be significant.

The cost of connection is an important factor in determining the least-cost and most efficient combination of generation and network investment. Investment should be firmly based on market and technology-neutral locational signals (including the carbon price, which covers emissions associated with generation and transmission and distribution losses). The AEMC is examining the efficiency of connection development as part of its Transmission Frameworks Review.

The AEMC has indicated that there may be a continuing barrier to efficient connection in areas where a number of generators connect to the electricity network over time (known as nodal development).

In June 2011 a rule for Scale Efficient Network Extensions was introduced to allow the sizing of connections to meet future expected generation capacity. The AEMC amended the rule (from the original rule change proposed in February 2010) to bring it into line with the National Electricity Objective (part of the National Electricity Law), which ensured that any risks and costs of stranded assets would not be borne by consumers. The impact of the rule change will take time to become clear.

The Australian Government will monitor this issue through its four-yearly strategic reviews of energy policy to assess whether there are ongoing barriers to efficient connection and the development of the network.

Pricing of network augmentations and connections

Network businesses vary in their approaches to pricing network augmentation and connections. This reflects historical differences in jurisdictions regulatory approaches and the differing physical characteristics of local networks. While a general national framework now applies to most network businesses, it remains subject to differences in interpretation and application. Greater consistency in the approach to network pricing (in the case of connection to the network or augmentation of the network) could be beneficial.

Consistent access to reliable and robust information on network business costs is also necessary to improve energy productivity. The current rule change proposal to establish a consistent distribution network planning framework will help to achieve this. In addition, current work by the AEMC on behalf of the SCER to develop a national transmission reliability standard framework and approaches for delivering distribution reliability will improve consistency and transparency across jurisdictions.

There may also be some longer-term challenges to current network pricing models. In particular, the increasing deployment of distributed generation systems (and the longer-term effects of local distributed storage), combined with a potential sustained reduction in average demand, may mean that network costs (which reflect peak load and thus may not decline proportionally with average demand) are spread across a declining revenue base. This could lead to higher costs per kilowatt of electricity sold. This issue is being considered by the SCER, as it could have large effects with more distributed generation and storage.

10.3.3 Strengthening market institutions and governance

Sound and robust regulation is critical to ensure that energy markets are delivering efficient outcomes that are in the long-term interests of consumers. The creation and ongoing work of the AER, the AEMC and AEMO have been significant steps forward in COAGs energy market reform agenda.

However, the rapid increase in costs in the regulated component of the NEM has focused attention not just on the regulatory framework but also on the roles of the AER and AEMC and their ability to balance business and consumer interests. Governments, regulated businesses and consumers need to be confident that the national rule-making and regulatory bodies can perform their functions effectively.

The creation of an independent, national, energy-specific regulator along with a separate rule-making and advisory body was a pillar of COAG's energy market governance reforms, and remains at the heart of a truly efficient and national regulatory system.

As Australia's electricity market has evolved, the AER has played an increasingly complex and national role in the regulation and oversight of activities throughout the energy supply chain wholesale, network and retail and that role can be expected to grow further in the future. Therefore, it is increasingly important to ensure that the national regulator continues to be resourced adequately. Similarly, the scope of work undertaken by the AEMC (often at the request of governments) has expanded since the commission's inception.

The experience of recent determinations, and of processes currently examining the rules underpinning the AER's regulatory determinations for network businesses and the limited merits review process, will provide useful insights into opportunities to further enhance the AER's capabilities. The Australian Government will examine closely the recommendations of those reviews to identify opportunities to strengthen the capabilities, capacity and accountability of the AER where it can. It will give similar consideration to the AEMC.

The government strongly supports regular assessments of the accountability and performance of the three national institutions. COAG has determined that the performance of the new energy market governance arrangements should be examined five years after their commencement. It will be important that this review is on time and transparent.

In the longer term, the government also believes that national governance arrangements should be extended to cover all Australian electricity and gas markets in order to make market oversight and development more consistent and efficient.

Ensuring effective consumer participation in market processes

The consumer voice should be heard effectively in policy development and in all energy policy reviews. Specific recommendations on how this might be achieved are being considered through the review of the limited merits review regime.

The Australian Government believes this also creates an opportunity for consumer advocacy organisations to participate more effectively in the national reform agenda, and will work with them to allow more effective and nationally focused engagement.

Providing more effective management and oversight of government-owned businesses

The behaviour of energy businesses can have significant implications for consumers, particularly for their energy bills. Government or private ownership of these businesses can be an important determinant of their business costs. In particular, different cultural practices or approaches to managing risk may result in an overemphasis on engineering objectives at the expense of business efficiency or optimal commercial outcomes.

Government ownership has the potential for conflicts of interest in operational or investment decisions, dividends and equity margins. Capital markets can provide an important discipline for private businesses, but are not always able to do so for state-owned businesses.

Better corporate governance of government-owned businesses, particularly network businesses, is essential to drive higher productivity. This must include greater transparency about dividends and other payments to governments.

In government-owned network businesses, a cultural shift may also be needed in their approach to their business task—that is, delivering supply reliability at least cost-while also facing appropriate incentives to drive productivity improvements. The Productivity Commission is currently looking at whether there are barriers in the existing framework that prevent network businesses using tools such as benchmarking to improve performance.

One of the ways to achieve that cultural shift is for government to adopt more flexible, evidence-based approaches where it is required to make decisions that affect the business, such as setting reliability requirements for distribution network businesses. Whether state governments also remove themselves from ownership to reinforce this change is a matter for them. The New South Wales Government has taken a positive step by asking the SCER to task the AEMC with looking into reliability standards in the state as part of its review of distribution reliability outcomes and standards. The review's final report, which was released on 31 August 2012, will inform the state government's setting of reliability standards. Another positive move has been the NEM jurisdictions'' agreement to a national transmission reliability standard framework that ensures that the body that sets the standard is separate from the body that applies the standard.

Similarly, the Electricity Supply Industry Expert Panel commented on what was required for effective corporate governance of publicly owned companies:

The Shareholder Ministers' oversight of State Owned Energy Business performance should provide a sufficient level of accountability to drive continuous improvement in the efficiency and effectiveness of the business. The economic regulatory framework will only partly drive efficiency in the businesses. There is, therefore, a clear responsibility on the Shareholders, through their interaction with the Boards, to provide additional impetus for efficiency. (ESIEP 2012)

These are critically important steps in giving consumers confidence that expenditures by these businesses (and therefore their costs) are aimed at efficiently meeting service delivery requirements.

10.3.4 The SWIS and other non-market systems

The South West Interconnected System

The design and regulation of the SWIS creates challenges different from those in the NEM. They include ensuring that wholesale price signals drive efficient investment in new generation, fostering greater market competition, creating a more level playing field by removing government from the market, and the continued cross-subsidy of retail prices.

Decisions on these matters are the responsibility of the Western Australian Government, which published its Strategic Energy Initiative on 28 August 2012. The Australian Government supports further reforms to develop a more efficient and competitive electricity market, noting the very strong links between this market and the western gas market.

The Australian Government also notes that while there are a number of fundamental design differences between the NEM and the SWIS (which are likely to remain), there is also growing convergence in many aspects of market operation and regulation. This suggests that there may be benefit in considering the opting-in of this market to national arrangements as provided for in the Australian Energy market Agreement.

Wholesale market

The development of a separate wholesale energy market and a capacity market (through the reserve capacity mechanism) was intended to provide an efficient mechanism for allocating supply and a guarantee of payment to investors who build and secure capacity. However, having separate markets for capacity and energy means that there are separate price signals for each.

The Independent Market Operator has begun a review of the reserve capacity mechanism to identify potential changes to improve the economic efficiency of investment signals. The Australian Government supports that review. A related review of the price-setting methodology for the reserve capacity mechanism, which is almost complete, is expected to recommend changes with the potential to reduce prices associated with the mechanism by 10%–15%.

Retail prices

Regulated retail prices in the SWIS are not yet at cost-reflective levels, and there is a shortfall between the income received and the cost of supplying electricity. Since 200910, the shortfall has been funded by a community service obligation payment (ERA 2011). While price adjustments will have impacts on consumers, the Australian Government believes that there would be benefit in developing a clear pathway to efficient pricing levels, coupled with protections and support for vulnerable customers.

Networks

The AEMC has identified a number of inefficiencies in the connection process and transmission network planning in the SWIS (AEMC 2009). The commission has recommended the introduction of a formal regime for transmission connection and augmentation, and reviews of the workability and clarity of regulatory approval processes and the network augmentation charging regime.

The Western Australian Government has considered network issues in its Strategic Energy Initiative. In its final report, it stated its intention to:

• integrate energy infrastructure planning, funding and augmentation with whole-of-government strategies focused on the development of the state
• design, augment and use essential energy infrastructure in an efficient and safe manner to promote competition and investment.

The Australian Government supports those aims and encourages the Western Australian Government to continue to engage with its stakeholders and, where relevant, the national energy institutions, in developing its reform package.

Competition

The SWIS has a concentrated ownership structure in which Verve Energy, a state-owned utility, accounts for more than half of generation capacity. The entry of new, privately owned generators since the market began is expected to continue. In June 2011, there were 12 active retail licences in the SWIS; however, most generators are contracted to the state-owned retailer, Synergy (Global–ROAM 2011).

The growing Western Australian economy will increase the demands on the SWIS. Attracting investment to meet those demands will be important if the market is to continue to maintain a secure and reliable supply of electricity.

Continued government ownership of energy assets could be a barrier to effective competition. Regulators should ensure competitive neutrality in all circumstances.

Other non-market systems

Off-grid electricity generation in Australia was estimated to be 12 803 GWh in 2009 (BREE 2012a). Growth in mining operations, particularly in Western Australia, has led to an increase in off-grid generation, most of it from diesel- or gas-fired generators.

While the lack of comprehensive data for remote power generation makes forecasting overall growth difficult, it is clear from industry forecasts that resources developments are fuelling rapid growth. For example, electricity demand in the Pilbara region is projected to increase by around 12 000 GWh by 2015, mostly from gas-fired self-generation. Growth in the Mid-West region will add an additional 4000 GWh, about half of which is likely to be off-grid (CMEWA 2011).

This expansion creates both opportunities for regional development and challenges in promoting the development of common-use infrastructure. In particular, rising fuel costs and improvements in hybrid renewable-fossil generation technologies suggest that there could be good opportunities for large-scale commercial systems.

The Western Australian and Northern Territory governments are working with local communities and the minerals industry to balance public and resource sector infrastructure needs while achieving the most efficient outcomes for the community. This includes further work to collect better information on energy use and needs in non-market regions and to explore options for securing greater productivity and efficiency through the development of common-use energy infrastructure in larger regions. The Australian Government fully supports that work.

² Tasmania and Western Australia have not introduced full retail contestability in electricity markets, although Tasmania has announced an intention to do so from 2014.
³ www.energymadeeasy.gov.au.
⁴ Including GST.
⁵ This will differ between jurisdictions (see AEMC 2011c).