Creating the new National Electricity Market

The transition underway in the energy market has two big drivers, the digitisation of the customer experience and the inevitability of our path to a decarbonised future,” AGL Energy Managing Director and Chief Executive Officer, Andrew Vesey told a CEDA forum.

“We are convinced that … a large amount of renewable technology will be added to the grid and in the near term that will be wind,” Mr Vesey said.

“The question is: how does that happen in a market where you’re 7000 megawatts oversupplied? Because we do not believe in anything but market fundamentals to reward capital from those investments.

“So what do you do? You have to have the supply and demand in balance; you have to make room for the new investments; you have to allow market conditions and wholesale prices provide a return that’s adequate to attract new capital.”

Mr Vesey said that “the old days are gone” and the traditional pathways to financing new infrastructure will not work anymore.

“We believe that innovative financing models have to be emerging … and that will be something we’re going to be working on in the first quarter of next year because it has to happen.

“The counter factual is that if retailers like AGL don’t step up and offer something into the market to see these very clear policy objectives met … government will find ways of getting it done, and it may not be in the best interests of my shareholders or my customers at the end of the day,” he said.

“Once you start to think about large-scale renewables – intermittent, non-synchronous – what do you do to enable that in the grid? How do you continue to add security and reliability?”

“If we think about large-scale renewables, we need to think about how we’re going to encourage the other stuff … advanced batteries large or small-scale, high-speed gas turbines, something to make sure the system stays secure and reliable.

“How do you do that in an energy-only market?

“The number one policy objective is you have to find ways to pay people in an energy-only market … the first and most important one that we’ve been advocating is the progressive closure of older plant, not just because it will make room for new investment, but it will deal with the other issues of the modernisation of this infrastructure.

“Over 75 per cent of the existing baseload capacity is beyond its original design life. The system is becoming less and less reliable.

“If you’re going to build something new in this country … it’s going to be renewables – it’s going to be wind. The technology’s there. Ultimately it will probably be large-scale solar.

“We have to find a way of rewarding people for the right investments and we have to make sure that wholesale markets reward.

“And I’ll say again that we do not believe in paying people for closure. We have not, we will not.”

In relation to the other driver, the digitisation of the customer experience, Mr Vesey said, “There will be a tremendous amount of activity in what we call premises-based investment … the distributed energy ecosystem. It will blur the lines between the premises and the networks.

“You want to talk about disruption? That’s disruption. We have to think about it differently – the components, the digitisation, the information flow, the technology that’s coming to the customer, the value is shifting to the customer.

“It’s an area that’s ripe for reinvention and re-thinking.”

Australian Energy Market Commission Chairman (AEMC), John Pierce said that the strongest feedback theme arising from the AEMC’s extensive consultation is the critical importance of policy integration, especially given the relationship between environmental policy and energy policy.

“But, this is not the only challenge we must address: we are also seeing changes in technology on both sides of the meter; new business models based on offering services and not just selling kilowatt hours; and changes in consumer preferences for how they source and use the various services,” he said.

“Change is a constant but what’s important in the policy and regulatory space is that change is managed, and that it’s transparent, based on clear objectives, and is relatively predictable.”

Clean Energy Regulator (CER) Chair, Chloe Munro said the CER is an economic regulator with an environmental objective, responsible for implementing the government’s emissions reduction fund.

“The energy sector must play a major role in Australia’s effort to reduce greenhouse gas emissions because most of Australia’s emissions (33 per cent) come from the production and use of energy,” she said.

“After the extensive debate and analysis that accompanied the review of the Renewable Energy Target in 2014 … two things are abundantly clear: that there is a widespread view in the Australian community that renewable energy is a good thing in its own right and, all other things being equal, they would prefer more of it.

Ms Munroe said that Mr Vesey’s remarks earlier, “really embody the new positive and optimistic spirit”.

“I’m really delighted that so many of our major corporations are making stronger statements now than they were two or three years ago and they’re signing up to initiatives like We Mean Business, and taking concrete action to reduce the emissions from their own operations,” she said.

“Our emissions reductions objectives must be part and parcel of the National Electricity Objective considerations of efficiency and the long-term interests of consumers.

“The market-based schemes that we administer are significant drivers of transition in the National Electricity Market, though by no means the only drivers.

“It’s not a matter of trade-offs: the economy and the environment are not at war and I believe we can have great outcomes for both.”