Energy Source and Distribution catches up with Andrew Reeves just weeks before he wraps up his four-year tenancy as the Australian Energy Regulator’s chair, to talk about the importance of a pro-competitive mindset in a rapidly changing energy landscape.
The booming popularity of rooftop solar, advancements in storage and the uptake of smart meters has led to a fundamental paradigm shift for the energy network sector.
For regulators, the change comes with clear challenges. However, rather than looking over the shoulder of energy businesses, the Australian Energy Regulator (AER) is pushing for innovation. At its helm since 2010, Andrew Reeves is geared towards competition – a healthy position for the chair of a monopoly services regulator.
“You cannot regulate innovation but you can create an environment in which innovation can flourish,” he says.
“We may be a regulator of monopoly services, but we have a pro-competitive mindset. One way to approach regulation is to monitor businesses and say, ‘before you build something you’ve got to take account of demand management, you’ve got to take account of tariff changes’ and so on.
“But a much better way to regulate is to provide incentives to encourage network businesses to understand their assets, to understand the market, to understand the emerging needs of consumers for services and, ultimately, to be creative in developing those services.”
ES&D: The energy model as we’ve known it for years is being flipped upside down. What will the new energy landscape look like, and how quickly will it materialise?
Andrew: With the growth of distributed generation and potentially growth in storage, the role of the network is changing from that of a one-way flow to more of a platform for trade in energy between consumers and large and small generators. Of course, this has major implications for how we regulate the sector.
One thing we want to see moving forward is network businesses becoming a platform for innovation. For this to happen, we really need to see regulation rewarding innovation via the network businesses themselves, and importantly, the network businesses allowing access to their services for others to develop new products for consumers.
ES&D: How can the energy industry prepare for the impact of disruptive technologies on the network in the next 10-15 years?
Andrew: We need to be prepared for change. We need to get the right structures in place, including how we charge for network services, and make sure those structures are robust enough to cope with a changing environment. For a decade we’ve been aware, for example, of the growth in air-conditioners and the impact that has had on costs of the network, however, we still don’t have a really robust policy response to that.
In a way, the rapid growth of solar PV has come from the very rapid reduction in costs, the extent of the subsidies from feed in tariffs, and consumers’ response to higher grid prices. The industry and policy makers were unprepared for that. Around the corner, we don’t know the rate of change that will come from storage, or from electronic vehicles, but the important thing is we get the fundamentals right and get the principles right. If we do this now, we won’t have to try to devise a response to each particular change in technology that will come along in the next decade.
ES&D: How important is the competition that is emerging from the fringe of the established energy sector as we move towards a smart grid future?
Andrew: This competition will become more and more important. You don’t regulate innovation, innovation comes out of competition. Looking to the future, I’d like to see less regulation and more emphasis on competition for services. We’re actually seeing really important moves being considered by the Australian Energy Market Commission (AEMC). For example, competition in metering is an important reform that will allow consumers to choose the metering services that suit their individual needs. Secondly, the AEMC is looking at avenues that allow consumers to access their own consumption data, so they can look at their load profiles and then find the services that allow them to have their lifestyle needs met at a lower cost. The third important move is the work AEMC has been doing on network tariffs – that is less emphasis on consumers paying for energy transported over the network and more emphasis on the demand that consumers put on the network. These three things are really important fundamental changes that set the sector up for the new environment. Of course, there is more to be done, but these are very important steps forward.
ES&D: What will regulatory success look like in this new environment?
Andrew: Success would see an environment in which new products may develop and new players emerge so that customers have access to the mix of services that meet their needs at lowest cost. Even now we are seeing some services that have been typically provided by the network businesses becoming contestable. Competition for the provision of metering services, for example, could deliver new and innovative services to energy customers.
Those who do want to engage with energy services should have access to information and the companies and services that want to meet their needs.
As regulators, we’d like to see ourselves move away from monitoring all the moving parts. We’d like to focus regulation on those things that are genuinely monopoly services and leave it to that market to deal with those services which are potentially contestable. To the extent that we are regulating those monopoly services, we want incentives for the businesses themselves to be innovative, for them to be facilitating the lowest cost solutions to meeting consumer needs.
ES&D: What about customers who choose to disconnect from the grid? With battery storage likely to become more accessible, is an en-masse move away from the grid something the energy sector needs to take into consideration?
Andrew: Concerns about falling electricity demand are possibly overstated, at least in the next 10 years or so, providing we take action on tariffs. The Australian Energy Market Operator’s forecasts, for example, are relatively flat in the next decade. As part of the Future Grid Forum, the CSIRO has predicted accelerating disconnection after 2035 based on the possibility of lower battery costs, among other things, but in general, there is significant uncertainty about electricity demand across the market in the next 20-30 years.
Having said this, we do need to be careful we don’t encourage people to move away from the grid because we’ve got the pricing structures wrong.
The community has some $75 billion worth of assets on the ground in the existing energy network. Investment in the current five-year cycle alone is forecast at more than $43 billion – more than doubling the value of the electricity asset base in this time. As a community we want to find the best way of making best use of these existing facilities. It makes no sense for people to abandon those facilities when they can continue to provide a valuable service.
ES&D: The role of a regulator is not only to encourage innovation but also secure investor confidence. How difficult is it to find the right balance between encouraging long-term investment and keeping pace with changes in the market?
Andrew: It’s important there be a good dialogue between consumers, the regulator, policy-makers and investors. This is a rapidly changing environment and the thing investors don’t like are surprises – and neither do consumers. We do need a sensible dialogue about the nature of the regulator contract, and we need to ask, ‘what does the community expect from network businesses?’. This gives investors confidence they are not working in a framework where there are going to be things coming out of the woodwork that haven’t been planned for.
It’s also important consumers, policy makers and the investors have confidence in the overall regulatory framework – that is work being done by the regulator and the work done by the government.
A clear long-term vision and a clear long-term objective is something that comes through dialogue and is something that gives people confidence the world isn’t going to change rapidly. Rapid change is a real concern to investors and to consumers. These are long-life assets; we need long-term policies and long-term stability in the regulatory processes.
ES&D: Does industry need to embrace the role of consumers in guiding asset replacement and expansion programs?
Andrew: Yes, and we are already seeing a shift of mindset by businesses and regulators. The rule changes made in 2012 required consumers to be part of the process of the network determinations. We’ve gone much further than that and now network businesses are embracing the conversation with consumers.
For a long time, consumers were treated as connections, rather than as people who make decisions about services. But the growth of solar PV and potentially storage means network businesses are aware consumers have a greater choice and, as such, they understand the need to be more responsive to what consumers are looking for. And, that in itself has driven greater engagement with the community. Still, there is much more to be done in this space, and much more will be done.
ES&D: Looking back at your time with AER, what are some of the projects or regulation changes you are most proud of?
Andrew: I wouldn’t put it down as a personal achievement, but a big change in the sector has been the level of consumer engagement.
The thing I’m most proud of on behalf of the organisation is the AER’s Better Regulation program. Released last year, this reform package delivered an improved regulatory framework focused on promoting the long-term interests of electricity consumers. It followed from changes to the National Electricity and Gas Rules that were published by the AEMC on November 29, 2012. We worked through about 70 workshops, including consumer representatives, to create a shared understanding of how we would approach regulation of the networks in the future – around the use of benchmarks and incentives for example, as well as deep debate on the cost of capital. I’m very pleased with the way all the parties participated and contributed to really important questions.
I think that’s a good model for how we can address emerging challenges for the network businesses. It’s really important that regulators, businesses, consumers and policy-makers have a shared understanding of what the future might look like, so we are not surprised by change.
ES&D: What is it about your role you find the most satisfying?
Andrew: I have really enjoyed the engagement with the consumers, investors and policy-makers and the businesses, particularly the debate within the organisation. Those who work within and with the AER are hard-working and committed to ensuring long-term solutions benefit the Australian community and there have been many great ideas contested as we have worked towards a smarter and more secure energy future. This contest of ideas and this openness is really important as we face new challenges.
ES&D: Which unfinished reform packages or areas of work will you keep an eye on once your time with AER ends?
Andrew: My particular interest is the challenge of disruptive technologies and on how we as a community embrace the possibilities. We will see changes in the traditional business models, changes in the structure of the market for services and changes in regulation. I will also be watching closely the drive for improved efficiency in some government-owned businesses for lower costs for consumers. Of course, we recognise some jurisdictions have particular areas of concerns and those concerns need to be addressed. But for all involved, to have one floor across a national market would really be a better solution.
ES&D: If we were to meet in 10-15 years, what are some changes in energy regulation you would like to count among the industry’s most notable achievements?
Andrew: I’d like to see a shift from a centrally-planned mindset to an environment in which consumers can make and exercise their choices. I’d like to see consumers understanding electricity services and confident to participate; consumers confident to exercise their choice and control over the services they want and use.