15 August, 2018
56 recommendations to fix policy problems of the past
What you need to know
The Australian Competition and Consumer Commission's (ACCC's) Final Report into Australia's retail electricity pricing sets out 56 recommendations spanning the entire electricity supply chain which will "reset" a "broken" National Electricity Market (NEM). Overwhelmingly, the identified cause of those problems is poor regulatory design rather than misconduct.
At a high level, the Final Report seeks to put downward pressure on retail electricity prices by recommending measures that are designed to:
- increase, over time, the number of generators participating in the NEM through a combination of breaking-up Queensland's State-owned generators, preventing incumbents from growing larger through acquisitions, and Government support for new generation;
- reduce network costs through State and Federally funded cost reductions because of past "over-investment" in networks driven by reliability standards, increase non-network reliability solutions (particularly demand-response), and reducing jurisdiction-specific taxes;
- increase retail competition by introducing measures to make energy pricing and discounts easier to understand and compare, simplify customer transfers, and reduce the opportunity for retailers to "save" customers who have decided move;
- increase customer energy literacy and hardship protections, particularly for individuals and small businesses; and
- increase the powers of the Australian Energy Regulator (AER), including in relation to market monitoring, hardship, and network regulation, together with much higher civil penalties for breaches of the National Electricity Rules and National Energy Retail Rules.
The ACCC has also declared support for developing the National Energy Guarantee as a means for encouraging investment in diverse generation capacity, diluting market concentration and promoting competition to supply retailers while achieving carbon emission reductions at low-cost.
What you need to do
The ACCC is focussed on the energy industry, and is likely to encourage the AER to take a similar, law enforcement approach. Market participants should make sure their compliance arrangements are in order, particularly regarding energy trading and retail advertising.
Many of these recommendations will require support, cooperation and funding, from the Council of Australian Governments (COAG). There will be significant opportunity to engage with COAG to try and shape the reforms that are ultimately pursued and implemented.
The ACCC has released its blueprint for resetting the National Energy Market (NEM), entitled "Restoring electricity affordability and Australia's competitive advantage". The report opens by declaring that that the strain on household budgets and business viability from high electricity prices is "unacceptable and unsustainable", and that that the policy, regulatory design and promotion of competition in energy has not worked for consumers. It makes 56 recommendations across the energy supply chain to reset the NEM.
Those recommendations will require considerable support, co-operation and funding from the Commonwealth, States and Territories to design and implement, and so there will be a long road ahead before the reform program is clear. However, it is significant that the competition regulator has called for significant market intervention.
What led to this report?
The Federal Government, as part of the broader strategy to maintain energy security and affordability, directed the ACCC to commence an inquiry into retail electricity pricing on 27 March 2017. As the inquiry is conducted under the Competition and Consumer Act 2010 (Cth), the ACCC had the power to compulsorily obtain information and documents from market participants, and has used those powers extensively, issuing over 110 notices in the course of the inquiry.
The ACCC also gathered and reviewed information from public and private submissions, public forums, research and analysis conducted by external consultants, consumer surveys and stakeholder feedback.
The Final Report is consistent with, but goes much further than, the preliminary report that it released in September 2017. Its findings span the energy supply chain, and its recommendations cover all aspects of electricity generation, transport, and sale.
The ACCC's key findings
We have divided our summary of some of the key findings from the ACCC's 400-page Final Report into the three main areas of the electricity supply chain: generation, networks and retail.
Generation
The ACCC's report found that wholesale prices have been a key contributor to increases in residential and business customers' bills over the past two years. The report identified the following factors as key drivers of higher wholesale electricity prices:
- high levels of concentration in wholesale electricity generation: the ACCC's report argues that current wholesale market ownership is so concentrated that the structure is "not conducive to vigorous competition";
- tightening of the supply-demand balance brought about by the exit of large coal-fired generators (with relatively little notice) and lack of investment in replacement generation; and
- fuel source cost factors (in particular, significant shortages in competitively priced gas).
The ACCC recognised that wholesale prices have started to ease as new capacity enters the market (with a shift towards renewable generation, which the ACCC expected to continue even without direct policy intervention), but considered that market and policy settings needed to be adjusted to promote competition to maintain downward pressure on prices.
Networks
The ACCC identified that network costs are, "on average, the largest part of the average NEM customer bill and have also been the largest factor in the increase in bills over the last 10 years". The ACCC found that elevated network costs were likely caused by:
- what it characterised as "over-investment" driven by "excessive reliability standards" and a regulatory regime "tilted in favour of network owners" in certain transmission and distribution networks in the NEM (pointing, with cautious approval, to work done by the Grattan Institute on identifying the scale of that over-investment);
- significant take up of rooftop solar PV, increased by "very generous solar feed-in tariff schemes" that have inequitably increased costs, borne primarily by non-solar households;
- tariff structures that do not reflect actual costs (although the ACCC also recognised the potential for "bill shock outcomes" as networks transition to cost-reflective pricing); and
- complex regulatory frameworks that are too slow to address issues that, if solved, could decrease retail prices, together with "gaming of the regulatory system" by networks.
Retail
The ACCC also identified issues in retail markets (for both consumers and business), including:
- growing retail costs since markets were opened for competition (although this is to be expected as competing involves incurring costs to compete for and win customers, such as advertising and marketing);
- incumbency advantages for the three largest retailers that continue to flow from their acquisition of customer bases at the time of deregulation—which the ACCC reasoned made it challenging for smaller retailers to compete effectively as income from the large customer base could be used to subsidise new offers; and
- lack of transparent offers to retail customers. In particular, the ACCC focussed on confusing headline discounts that are deliberately employed by retailers to give the impression that their offer is significantly cheaper that other offers in the market when this if often not the case.
Recommendations overview
The ACCC has made a range of recommendations that call for significant market reform and intervention, which will require considerable commitment from State and Federal Governments to implement. It is apparent that although the ACCC has identified that there are clear factors that have put upwards pressure on pricing (including the relatively sudden exit of a large amount of coal-fired generation and a reduction in the availability of domestic natural gas pushed up wholesale prices, and uncertain policy framework that may potentially discourage investment), it is not confident that energy markets will correct themselves without Government intervention.
Below we summarise the more significant recommendations.
Increasing competition in energy generation
The ACCC's recommendations to increase competition in energy generation include:
- support for developing the National Energy Guarantee as a means for encouraging investment in capacity from a diverse range of sources, diluting market concentration and promoting competition to supply retailers while achieving carbon emission reductions at low-cost;
- prohibiting market participants with 20% of generation capacity in any NEM region (or overall) from acquiring control over competing generation (even if it does not substantially lessen competition);
- a proposal that the Queensland Government divide its generation assets into three similarly sized generation portfolios that will compete with each other;
- a proposal that the Commonwealth establish a program, initially for four years, to underwrite new generation projects by offering low fixed-price energy offtake agreements for the later years (6-15) of the project;
- reporting of all over-the-counter energy trades, and market-making obligations in South Australia requiring large, vertically-integrated retailers to offer minimum hedge contracts each day; and
- introducing new market manipulation rules based on the National Gas Law, larger penalties for failing to comply with bidding rules, and stronger enforcement powers for the AER (which coincides with the COAG Energy Council's current public consultation about AER powers and penalties).
Networks
The ACCC's recommendations to reduce network costs include:
- voluntary write-downs of State-owned network businesses in Queensland, Tasmania and NSW to compensate for previous "over-investment", and corresponding State and Federally funded rebates for past "over-investment" in privatised NSW networks;
- faster shift to cost-reflective network pricing and roll-out of smart meters; and
- enabling third parties to offer demand-response directly to the wholesale market, with networks charged with providing incentives to increase use of demand-response.
The ACCC has also reiterated its support for permanently abolishing limited merits review, claiming that it enabled networks to "game" the system and increase costs.
Retail
The ACCC's focus in retail markets is to make it easier for consumers (including individuals and businesses) to compare prices and switch providers, and provide a range of consumer protections. The recommendations include:
- new retailer rules to introduce a price-capped "default offer", discounts to be guaranteed and measured against a "reference bill", changes to make it harder for retailers to "save" a customer that is being churned and faster customer transfer processes; and
- new consumer data right for electricity and protections for concession / hardship customers, together with State and Federally funded energy literacy schemes (including to small businesses).
The report suggests that affordability concerns are most acute for customers who have not (or possibly cannot) install solar photovoltaic systems, as solar customers pay, on average, $538 a year less than other customers.
Further, the ACCC has found that, despite the best of intentions, national and state-based environmental schemes have typically imposed costs that have added to electricity bills for users.
In order to reduce the impact of environmental schemes on retail prices paid by customers, the ACCC recommends that:
- the Small-scale Renewable Energy Scheme (which applies nationally) be wound down and abolished by 2021 (rather than 2030, as scheduled); and
- costs associated with state-based premium solar feed-in schemes be borne by State Governments through their budgets (as is the case in Queensland) rather than recovering these charges directly from electricity users.
More power, and arguably less accountability, for the AER
The ACCC has also recommended changes to the AER that will make it more powerful, and arguably less accountable. These include:
- maintaining the permanent abolition of limited merits review and greater flexibility for the AER;
- transferring network reliability standards decision-making to the AER (or potentially another body);
- expanding the AER's enforcement powers, including infringement notices and compulsory examinations, and significantly increasing civil penalties for failing to comply with the NER and National Energy Retail Rules (to be equivalent to breaches of competition law: the greater of $10 million, three times the benefit gained or 10% of turnover); and
- greater use of AER guidelines instead of codification of regulatory assessment methodologies, and a mandatory hardship guideline.
Implementation roadmap: a potentially long road to reform
The Federal Government has indicated that it will consult with stakeholders as part of developing the Federal Government's response to be expected before the end of 2018.
The COAG Energy Council will be the primary forum negotiating agreement between the Commonwealth and the States about which reforms to progress and their design, with the next meeting scheduled for August 2018. While there are some recommendations that could be progressed as rule changes through the Australian Energy Market Commission (AEMC), the majority of changes will require changes to legislation.
As a consequence, the implementation of the recommendations (other than the recommendation to abolish the limited merits review process) will take time, and may not be implemented until next year.
Obtaining a copy of the Final Report
You can download a copy of the Final Report from the ACCC's website:
For further information, please contact:
Bill Reid, Partner, Ashurst
bill.reid@ashurst.com
