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A shock to the system: How renewables are changing the energy regulation landscape
Substantive Law| What area(s) of law does this episode consider? | Energy market in Australia. |
| Why is this topic relevant? | Everyone uses and relies on electricity in just about every aspect of their lives, so isn’t it nice to know how it gets to us? This episode includes information about the consumer law aspects of energy regulation, but also substantive law content suitable for lawyers who are new to working in the energy law space, whether for electricity generators, distributors, retailers, or clients investing in, lending to or regulating those energy market participants. |
| What legislation is considered in this episode?
| Australian Energy Market Commission Establishment Act 2004 (SA) National Electricity (South Australia) Act 1996 (SA). The National Electricity Law (NEL) is the schedule to this Act and contains provisions on the governance, enforcement and key obligations within the national electricity market (being incorporated into the laws of other states through enabling legislation). The National Electricity (South Australia) Regulations can also be found under this Act. |
| What are the main points? |
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| What are the practical takeaways? |
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| Show notes | AEMC ‘How the spot market works Fact Sheet’ Department of the Environment and Energy ‘Retailer Reliability Obligation Fact Sheet’ Energy Security Board ‘Post 2025 Market Design Consultation Paper’ September 2020 Australian Energy Regulator ‘Wholesale electricity market performance report’ December 2020 |
| David Turner:
1:00 | Hello and welcome to Hearsay, a podcast about Australian laws and lawyers for the Australian legal profession, my name is David Turner. As always, this podcast is proudly supported by Assured Legal Solutions, a boutique commercial law firm making complex simple. Our journey through the Australian energy market begins at one of the power stations where electricity is generated, whether that’s through the burning of coal or gas, or to wind or to solar farms. We then travel long distances through the electricity transmission network before the electricity is transformed to lower voltages and distributed to homes and businesses across the country through distribution networks. But the way the energy market itself is operated is not nearly as straightforward. With multiple Commonwealth regulatory bodies, the Australian Energy Market Commission, the Australian Energy Regulator, and the Australian Energy Market Operator, as well as state bodies, the energy sector is highly regulated and that regulation is constantly evolving. Joining me today on Hearsay is Catriona Webster, an energy policy legal and regulatory consultant to make sense of it all. Catriona thanks so much for joining me today on Hearsay. |
| Catriona Webster: | Thanks, pleasure to be here David. |
| DT: | Now before we leap into the energy market, I want to start with a bit of your background. You were a corporate lawyer at King & Wood Mallesons or one of its earlier iterations. Tell us a bit about your move away from private practise into energy market regulation? |
| CW:
2:00
3:00 | Well David, I think like many law students I wasn’t absolutely clear what I wanted to do when I left law school, but I was lucky enough to get a summer clerkship and then a graduate role at King and Wood Mallesons, or then Mallesons, and stayed with them through to being a senior associate. And I worked on a range of corporate advisory matters including mergers, takeovers, major acquisitions and so forth. And what I discovered as part of that was: I just loved working on transactions where things were real to me; it felt concrete. I loved an acquisition of a national foods company, I loved working for some mining companies on transactions, I liked working for Brewers in the UK who were merging when I worked for Linklaters there for a period as well. And that steered me away from a sort of financial markets type practise and looking out for an inhouse role where I could be part of something real. And an opportunity came up to work for a New Zealand company who was setting up in Australia who ran the NZ electricity market and were moving into actually operating gas markets in New South Wales and later in other jurisdictions. So that’s where I sort of made my move. I was an in-house corporate counsel for a number of years with a marketplace company before getting a fantastic opportunity to move to the Australian Energy Market Commission in 2009, right at the beginning of a very exciting period in the energy market. And from there I went over as a senior lawyer and became general counsel and was general counsel there for several years. |
| DT: | Wow! That first transition from private practise to an inhouse role with an energy company must have really been a baptism by fire in terms of the regulatory environment. |
| CW:
4:00 | It absolutely was and to be honest David, I think the fact that I got to start in a really small part of the supply chain we were implementing for retail competition in gas, so a choice of retailers in gas which was quite late and coming really when you think about it was only sort of the early 2000s that we could make that choice. To start in just one part of the supply chain made it easier. I needed to understand that, I needed to understand distribution networks and retailers and the roles they would play. I didn’t need to understand absolutely everything. And I’ve always found that bite sized chunks is the only way to go in the regulatory space for energy because there’s just so much that is covered in the national framework and outside that in the jurisdictional framework and you just can’t grasp it all at once. So I have really had that opportunity now to work in all parts of the supply chain but I was very lucky when I first plunged in I was just working in a more discreet part of the supply chain. |
| DT: | Now for some of our listeners who might be where you were at your first transition from private practise to their first interactions with the Australian energy market, give us a little bit of an overview of the regulatory landscape? I appreciate that bite size chunks are best, and we won’t be able to cover it all, but we mentioned a few of the Commonwealth regulatory bodies perhaps we can start with them and what each of them does? |
| CW:
5:00
6:00
| Yeah so actually there is quite a lot of confusion that operates in relation to who these bodies are. As a constitutional matter, energy is a matter for the states and territories. So the Commonwealth has only ever played a coordinating role in getting the states and territories together through the Council of Australian Governments originally, which is now the national cabinet type process so that the states can actually agree how they’re going to legislate in respect of energy and allow for a consistent approach across the states and territories. So what they needed to do in order to get that nationally consistent approach given the constitutional issues, was actually agree to how they were going to adopt, effectively, a model law through what’s called an applied law scheme. So they chose a lead legislature which is South Australia and they made a schedule to their national electricity act called the National Electricity Law, and every state and territory who’s part of that market applies that as the law of their jurisdiction. So they’re actually state laws, which is quite interesting, a lot of people don’t understand that. In terms of choosing the agencies, they all had to agree on what agencies or market bodies to confer powers and functions on. There are three main agencies that operate in the national electricity market. The first is the Australian Energy Regulator now they are a Commonwealth body. They’re effectively part of the ACCC but they have their own board and their own sets of powers and functions that they exercise across electricity, gas and retail market matters. So their main rules are the economic regulation of the monopoly parts of the business, so you’ve got the monopoly providers of transmission and distribution networks and they are economically regulated because there’s not a work-ably competitive market. |
| DT: | Yeah, natural monopolies. |
| CW:
7:00
8:00
| Absolutely so that’s a really key function of the regulator. And the other function is obviously the compliance and enforcement, which is incredibly an important part of the market is that it’s running in accordance with its rules fairly and transparently and that’s a key role for them. So that’s a Commonwealth body. But then we have the Australian Energy Market Commission, they are actually a South Australian statutory authority conferred functions under these applied laws. So all of the jurisdictions agree the Australian Energy Market Commission can make rules which are similar to regulations. They have the force of law and they’re delegated legislation under the national electricity law. So it’s a very important function that the Australian Energy Market Commission plays in making rules in this very fast moving market. They also provide policy advice to the ministers responsible for energy on a whole range of energy market issues. So that’s them. The third is the Australian Energy Market Operator and they are like their name suggests the market operator. So they operate the wholesale market for electricity. They also are a system operator, so they’ve got a really big responsibility for maintaining power systems security. And there’s a range of other functions that they play in facilitating the electricity market from an operational perspective; from reporting on amounts of capacity to planning of transmission frameworks. They’ve got a broad range of functions. And they’re actually a public company limited by a guarantee who has a joint industry government membership. So they’re yet another type of institution that exists in the market. TIP: Now that was a lot of information, so let’s just quickly recap for clarity’s sake.
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| DT: | There you go! So describing them all as Commonwealth regulatory bodies is really pretty misleading, isn’t it? |
| CW: 9:00 | That’s right. I mean, look, I think the thing is that they operate within the federation, but yes there is that confusion that operates. But I think it’s a really good point to draw out because it’s something that people don’t always understand. And I think that’s why people are a little bit confused sometimes about the complexity of energy regulation more generally is because there’s a lot of people who can be active in that space in terms of legislating. So I haven’t touched on it but the states and territories aside from the national frameworks for electricity which govern a whole range of matters, they have their own very complex regulations that apply, things like licencing of networks and generators, in some cases safety and technical regulation, making sure the appliances you buy are safe. All of those things sit in the jurisdiction so that the national framework just sits within a broader web, if you like, of energy regulation in Australia. |
| DT: | I did a very small amount of this work when I was a baby lawyer and this is something that always confused me and I’m hoping that you can give me an answer: why South Australia? |
| CW: 10:00
11:00 | That’s a really good question. I have asked lots of people this question ’cause it dates back obviously sometime, before my time at the Commission, and I was lucky enough to work with some people who established the national electricity market, who were there when it was set up including two of the commissioners I’ve worked with for a long time, John Pierce and Brian Spalding. But my recollection is that it was partly to do with just in the COAG, or the Council of Australian Governments, council process where other sorts of these applied law schemes were being led from, that there was a little bit of sharing happening but actually it was more about at the particular moment in time the South Australian parliament was held by one party. Both the lower house and the upper house were within the control of one party who was supportive of the national reforms. And so it was the easiest path to bring in this national applied law scheme at the time. And I guess since then the way in which the South Australian parliament exercises that responsibility is very much quite different probably to their own legislation. They hold it almost as a guardian for that group of energy ministers and you can’t actually change the national electricity law without agreement from all the energy ministers from the jurisdictions. So they approach it differently. It would be much less likely to get caught up in battles, it has occasionally happened, but much less likely than it would if it was a piece of their own legislation even with both houses not being controlled by the same party. So does that answer your question? |
| DT:
| I think so, yes. More a matter of curiosity for me. Now you mentioned that the energy market is a very fast-moving market and one symbol of that is perhaps the speed at which the price of energy changes in the wholesale market? Can you give an indication of how that bidding process works? |
| CW:
12:00
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| I can do, it’s probably not going to be as articulate, I’m sure there will be some people shuddering while listening to this, especially if I’ve got any of my previous colleagues from the economics team listening to me. But in effect, I mean the whole sale market is a spot market for energy and it is about supply meeting demand at particular moments during the day and at the moment the price is set on a 30-minute basis every day, but it’s going to move to even less than that, a 5-minute basis. And so it’s a combination of bids and offers coming in. So really what you’ve got is the supplier side is actually generators, large generators are bidding in to say how much they prepared to supply at what price. And then you’ve got some of the demand side that actually bids in a fixed amount that they want to take. But there’s a lot of other people who take what they need in order to supply their customers. So your retailers for example won’t know absolutely exactly what they need, what their customers are going to consume in a day, but they’ll have a pretty good guide. But they’re not required to put in a fixed bid for the amount that they want to take in the market. And effectively with actual demand, which can actually be judged at points in time, the two match. And the point at which they match becomes the clearing price. So effectively for every marginal unit that is bid in, you’ve got an increase in price potentially ’cause some people will be saying they’re bidding at the market price cap, they don’t want to generate unless they’re going to get that amount. And if demand is high enough, it could actually reach what’s called the market price cap which is very significant and I’m not going to have the number accurately, but it’s around $14,000 per megawatt. But when the price clears, everyone who has bid in below that price, gets the clearing price. So they all get that high price. So, if your last marginal unit of electricity that you need is at the market price cap, that’s what you have to pay to get it in the market. Everybody gets that. So it can create real volatility ’cause you could have, depending on what your demand is looking like at a point in time, or whether you’ve got all your generators online, or some are constrained because of various factors, you could get people wanting to get a lot for their supply which can push it up to this market price cap. Or demand can push it there simply because to get that last unit of generation you actually need to pay that amount of money. So it can vary wildly through the course of the day. Particularly in things like the summer peak. And we can maybe talk about how solar impacts on some of that as well. |
| DT: 14:00
15:00
16:00 | Yeah absolutely. TIP: So basically what happens in the energy wholesale market is that generators submit their offers of supply to the AEMO – that is, how much they can produce and at what cost. And then AEMO determines how much generation is required to meet forecasted demand and instructs generators to dispatch energy based on bids from least to most expensive in order to meet that forecasted demand. The average price within the 30-minute trading period then becomes what’s known as the ‘spot’ or ‘clearing’ price – which is the price that all generators receive for production during this period, and it’s the price all customers (including retailers and large customers) have to pay for the electricity they consume. Now this means that at the start of the 30-minute period the market might have cleared at a lower price than the final spot price at the end of the 30-minute period, but regardless retailers and large customers alike have to pay the higher price. This is why the market is going to soon move towards a 5-minute time frame instead of a 30-minute time frame– to more accurately match supply and demand, and provide better value to customers with lower costs. The market price cap is an amount set by the National Electricity Rules and that’s the maximum ‘clearing’ amount. From 1 July 2020, that price is $15,000 per megawatt and it’s adjusted annually. To avoid the volatility of the wholesale market, generators and retailers can enter into contracts that lock in a price for electricity, however, the risks and benefits of being in the spot market need to be weighed up. For those of you listeners who might not be familiar with financial terminology, a spot market by the way, is a market where financial instruments or commodities are traded for immediate delivery – so it’s not just used as a term in electricity. In terms of the electricity market though, the spot market is a way for generators to meet real-time demand from retailers and large customers to supply electricity. So that’s why electricity prices increase during peak periods like in summer when everyone’s running their air conditioners. Now if you’re still lost after all that, the AEMC has published a very informative and visual guide on how the wholesale energy bidding process operates, and we’ll leave a link to that visual guide in our show notes. |
| CW:
| Some people just are exposed to those fluctuations, they will expose themselves to that. Most players in the market do not expose themselves to that risk. They actually hedge in the financial market the risks associated with that volatile wholesale market price, and that’s an essential component of the market that sits outside the regulatory framework. |
| DT: | Thank you for that explanation, I’m a huge economics geek so I love to hear about this stuff. |
| CW: | Oh no! Now I feel really embarrassed! |
| DT: | But hopefully some of our listeners are as geeky about economics as I am and will forgive me for that tangent. Now you mentioned that you moved into the Australian Energy Market Commission in 2009 just before a particularly interesting time in energy market regulation. Can you tell me a little bit about what has happened over the last decade in terms of those changes? |
| CW: 17:00
18:00 | Yes absolutely. So looking back I mean I think it took a lot of people by surprise but really what we’ve seen is this massive transition in terms of the sources of large scale generation. So traditionally, and most people I think will probably know this, our generation has been based on coal and coal fired generation backed up by some gas fired generation and some hydro, but generally those non-renewable sources. And you know massive load generators located for example in New South Wales up in the Hunter Valley with big transmission links bringing that generation into the Sydney demand centre. What began to happen really ramping up over the last 10 years has been the push for lower emissions technologies and the entry in the market of large scale renewables, wind, solar, combined with this incredibly rapid uptake of solar PV on rooftops, which also is a source of generation particularly during the day for a lot of residential customers. So these are generators obviously they’ve got a cost of building, you’ve got a cost of building a wind generator or a solar farm, but their marginal cost of energy is very low because their fuel is cheap ’cause it’s from the sun or wind. And it had an impact on price, it actually began to depress prices in the wholesale market. And there were subsidies that were underlying the investments in these renewable generations as well, that was actually driving a lot of investment in the sector. And you just began to see coal fired generators really beginning to sort of have concerns about their future. Then it resulted in some early exits from the market. Now the one I’m really thinking about is the exit of the Hazelwood power station in Victoria because that happened a lot sooner than expected. And the price impact was very significant. Prices increased markedly after that time actually because they were at particular points in the market a low price generator relatively. But they exited much sooner than expected, massive investment in renewables across Australia but in certain jurisdictions like huge levels, for example somewhere like South Australia. And there was just this change in the way the market needed to respond because of the issues caused by this different type of generation. |
| DT: 19:00 | We’ll come back to the impact of renewables on energy market regulation in a moment, but before I do, I want to ask you a bit more about the AMC’s role, where you worked for a number of years. Now there’s a huge amount of delegated legislation in energy isn’t there? The AMC as you said is the rule maker, what do those instruments actually do? |
| CW:
20:00 | So in the national electricity space, yes, as you say very broad rulemaking powers are given to the Australian Energy Market Commission and those rules have the force of law, but they don’t cover everything. As I mentioned before they don’t cover everything that regulates electricity in Australia. They regulate aspects of the supply chain, but I’ll just go through a few of the things that they do. So they cover areas from the registration of market participants, so who can participate in the market, what the registration conditions are. They sort of sub delegate further to the Australian Energy Market Operator the terms on which people can sort of become registered in the market and participate as generators, for example, network service providers, providers of other services in the market. They importantly cover off the wholesale market operation, so how does the wholesale market work. That’s all covered in those rules including things like credit support, how generators can be assured that they’re going to be paid for the electricity they generate, how the market is settled, and a range of matters relating to wholesale market operation which are very detailed. And then they also cover things like power system security, so the obligations of AEMO to maintain a secure power system and how network businesses have to support AEMO in that role. And that’s been a really really big area or focus in the last few years because of some of the impacts of variable renewable generation on the market. |
| DT:
| This might be a completely inaccurate characterization, but it almost sounds like there’s a relationship between the AEMC in the AEMO almost like that of legislature and executive; that one is a rulemaking body that kind of informs how the other is to operate on a day to day basis? |
| CW: 21:00 | Absolutely. And so interestingly, that is definitely the case with the Australian Energy Market Operator. They are subject to the rules and they need to comply with the rules there are under the regulator’s oversight for that compliance. So they have an operational role that is actually subject to regulator oversight, they can’t just do what they want, and of course they don’t. But there are very prescriptive rules that operate. They do have their own ability to impose further procedures, guidelines, standards on market participants though as well. So sitting below the rules is a whole framework of other more detailed instruments that the Australian Energy Market Operator makes. They do play a market oversight role in some ways, but they are doing that within the framework created by the Australian Energy Market Commission. |
| DT: | Now a lot of your experience in the energy market was obviously gained as general counsel at the AEMC but you are now an energy policy law and regulation consultant. Those private clients that you advise as a consultant, what kind of issues are they looking for your assistance on? |
| CW: 22:00 | Given my experience, the types of things I’m advising or at the moment are really about advising governments on policy reform and implementation paths for that reform. So I actually am kind of working in the policy space if you like, although in my own capacity. So I’ve stayed in that. But I did spend a year as head of public policy at TransGrid and in that role I was advising the business on the impacts of reforms on the businesses. So the businesses in the electricity sector, some of them have got very significant regulatory teams, others are not so lucky, but they have a huge amount of regulatory reform to actually keep up with and understand the impacts of. Some are able to, as I say, in house that role, some need to outsource it. So the types of consulting work that they require are often to get across what are the implications of these reforms on me? What do I need to be worried about? What is my advocacy strategy in relation to interacting with the consultation processes? What do I do to sort of mitigate some of the issues that these reforms might be causing me? Deal with the uncertainty in those types of matters. |
| DT: 23:00 | Now how much of that policy work is driven by the shift to renewables? Because, I suppose, we touched on the impact of the shift renewables in terms of price, both down and up a little bit. Earlier South Australia for example has had some much-publicised periods in which it’s been entirely powered by renewable energy. TIP: That’s right, South Australia is truly leading the nation in solar energy. In October 2020, SA reported that solar energy met 100% of its demand for an hour, with rooftop solar (that’s solar panels on houses) providing 76.3% of state demand, with the remaining 23.7% generated by utility scale solar. Now that was a first not only in SA, not only in Australia, but in any major jurisdiction globally! How about that! In the same month, AEMO anticipated that 36,000 rooftop solar systems would be installed over the next 14 months, so we can expect that trend to continue. What kind of policy issues contemporarily are coming out of the shift to renewables? |
| CW: 24:00
25:00 | You’re absolutely right that that shift to renewables is driving a lot of what’s happening in the policy space. So you’ve got everything from the fact that the characteristics of renewable generators are different from the physical characteristics of sort of traditional fossil fuel, spinning metal type generators. So from a physical perspective they don’t interact with the system in the same way as those traditional generators do. And you actually had to do a lot of work in the policy space to understand, market operators had to understand, what’s happening? What is actually physically, technically happening in this market and how do we deal with it? What are the issues? What services were being provided just as a by-product of the nature of those other generators that we no longer have? And you will hear people refer to things like ‘inertia’ and ‘system strength’, some of these systems security services which actually help maintain voltage and frequency at levels that the system can operate securely within. And so, there’s been a policy response to that in terms of how you actually get those services provided and continue to be provided as coal fired generators and gas fired generators retire. And so that’s been a big focus of work. The other big impact has been reliability. So just the fact of: is supply going to meet demand? How can we guarantee that at a point in time when we have weather dependent generators? What incentives do we need to provide for maybe some of the generators that can reliably dispatch to stay in the market? Or new types of reliable generation to enter? How can storage play a part in that? How do we incentivize large amounts of battery storage to come in and be that complement to variable renewables through storing the energy for use at a later time of day? So those are the types of issues governments are grappling with. |
| DT: 26:00
27:00 | Now one story that I’m sure for many of our listeners will have come to their minds on the topic of reliability, storage, the reliability of renewables in particular, is an event a number of years ago with SA, was the entirety of the state was effectively blacked out. There was a much-publicised offer from Tesla to produce batteries in a record period of time, I don’t know whether that ever eventuated. TIP: The state-wide system blackout in South Australia occurred in August 2016 and yes you heard that right, Tesla’s large-scale battery storage in SA, built in 2017, has actually potentially saved the state from experiencing another blackout. The battery station infamously included a promise, made on Twitter, from Tesla’s CEO Elon Musk to ‘build it in 100 days or build it for free’, with the then newly-appointed Scott Morrison mocking the deal for the ‘big battery’, among other ministers, for being as useful to the electricity system as the ‘Big Banana in Coffs Harbour or the Big Prawn in Ballina.’ However, in 2018 the AEMO reported that Tesla’s ‘big battery’ outperformed some of its coal and gas competitors and has ‘unprecedented speed, precision and agility’ in responding to system disturbances. Let’s see the Big Banana do that! And there were a number of alleged or supposed causes for that failure of supply, whether that was the reliability of renewables, or the connection of South Australia to the rest of the Australian energy network. Can you tell us a bit more about that event? |
| CW:
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| Yes so that was really quite an extraordinary event in Australian electricity market history and it did actually change the course of energy policy and has continued to influence it to this day. And I can talk a little bit about that but I won’t pretend to know all of the details of the event, although my understanding is it was an extraordinary storm situation that involved wind so high they blew over transmission towers. Which if you’ve seen transmission towers, are very substantial bits of infrastructure and are built to withstand extreme conditions. That’s how they’re built. It actually was a sort of mini tornado that took out some of those. And that had an impact on the interconnection as you said. So SA became islanded. Though there were a few issues about what caused the system black. It appears that some of the connections that generators had to the system, they weren’t able to respond or ride through various disturbances in the system to the extent perhaps the market operator thought they could. Now that’s a very contentious space, I don’t really want to go into that because it’s the subject of proceedings because the Australian energy regulator conducted a very significant review on that system black following those events. But there definitely were some concerns raised about whether or not the performance standards that generators were asked to meet were adequate in this new world. And that’s been another focus of reform is looking at what performance standard should generators need to meet to enable the market operator to maintain a secure system. I guess one of the things that I see as one of the biggest changes that arose out of that time though, was a shift in focus from governments, or a renewed focus from governments, on just how critical electricity is to the productivity of the Australian community. And how events of this type just cannot be allowed to happen; they just have such significant implications for people to lose electricity in that way. So the governments appointed a panel which you might have heard of, the Finkel review into the security of the national electricity market led by Alan Finkel who’s the chief scientist. And they conducted a very significant review and made a whole series of recommendations. One of which was that we should have a nationally consistent emissions policy, that hasn’t yet been achieved. But they did also make a whole lot of recommendations about system security, and reforms have been rolling as a result of that review since then. It also resulted in the creation of the Energy Security Board which was a market body, I didn’t mention earlier but which is a board made up of the heads of the three agencies, the Australian Energy Regulator, Energy Market Commission and the Market Operator and two independents the Dr Kerry Schott and David Swift who is a very experienced electricity planner/operator who was previously at the Market Operator. They’ve got responsibility for the whole of system oversight of bringing all those market bodies together to try and solve some of these problems. And so they are now three years into their tenure. But that was a significant change and they oversaw also big reform for the retailer reliability obligation as well, which was formerly the national energy guarantee but morphed into the retailer reliability obligation. TIP: The Retailer Reliability Obligation (RRO) commenced 1 July 2019 and was brought in the COAG Energy Council as a response to the rapid technological changes as the industry moves towards a lower emissions system. According to the Australian Energy Regulator’s website, the RRO aims to provide stronger incentives to market participants to invest directly in generation and to support reliability in the National Electricity Market. The AEMO will play a role in identifying potential reliability gaps in the market, and if a material gap is forecasted three years and three months out, the AEMO will apply to the AER to trigger the RRO by making it a reliability instrument. The South Australian Minister can also trigger the RRO 15 months before the start of the identified gap. A reliability instrument is where liable entities are put on notice to enter contracts to cover peak demand. If the response is insufficient and the AER still forecasts a gap, then liable companies have to report their contract positions, for the gap period, to the AER. Now that’s all pretty complicated but the Department of the Environment and Energy has published a factsheet on the RRO and we’ll leave a link to that our show notes that explains it a bit further. |
| DT: | So a lot of those policy and regulatory changes coming out of that extraordinary event have really been in that area of reliability. |
| CW:
32:00
33:00 | Reliability and security. So really focused on what does it mean to have technically a secure operation of that system physically. That’s been a very big focus but also as you say reliability. So this notion of a retailer reliability obligation was that it may not be enough just to have renewables, particularly in the absence of large scale storage or the deployment of that storage in the system. You need to be able to access dispatchable electricity when it’s needed. So how do you create incentives on retailers to be procuring enough dispatchable electricity to meet their demand? And that’s what that obligation is designed to do. But it’s currently being reviewed in the context of a big reform process called ‘post-2025 market reform’ led by the Energy Security Board and they’re looking at: is that a sufficient mechanism or should there be additional mechanisms including exploring things like capacity markets and other things to create incentives for that dispatchable electricity? TIP: The post 2025 market reform is being undertaken by the Energy Security Board within the COAG Energy Council for the purposes of “recommend[ing] any changes to the existing market design or recommend an alternative market design to enable the provision of the full range of services to customers necessary to deliver a secure, reliable and lower emissions electricity system at the least cost.” The Consultation Paper was released in September 2020 discusses the exit of coal-fired power as the energy market moves towards more intense integration of, and reliance on, renewable energy sources. We’ll leave a link to the full paper in the show notes. |
| DT:
| And before the energy security board was formed, how did the three regulators communicate with one another on security, reliability, other issues? Was there a kind of concerted approach? |
| CW:
34:00
| There was definitely a lot of communication, and always has been, between the market bodies. And there was a very important role played by COAG energy council, so that’s the energy council which are the ministers responsible for energy across all the jurisdictions. They have a council process which is now captured in a committee of the national cabinet to meet regularly at least twice a year and agree on the very high-level strategy and energy policy matters. And they brought the entities or market bodies together in those formal settings and in the informal settings that prepared for those meetings. They also have a senior committee of officials who are very senior Department officials from all of the energy departments. And again they play a really key role in sort of bringing the market bodies together, directing them to do particular reviews and activities, to work together on things. So informally there was a lot of communication, but I think the Finkel review really pointed out that it could be operating more seamlessly, in a more formalised way, and that there was a role for an independent chair and deputy chair to actually undertake that. And I should have mentioned actually Clare Savage, who used to be the deputy chair, is now the chair of the Australian Energy Regulator. So since her time on the energy security board has been appointed to that role. |
| DT: | And how does storage fit into these questions of reliability and security? |
| CW:
35:00
36:00 | Looking at something like the NSW electricity infrastructure strategy which has been recently announced, they are looking at large scale renewable energy zones; renewable energy generators connected into transmission links that they would bring the generation into the Sydney load centre, for example. They are looking at storage as a key element of that. Because if you can combine the renewable generators with enough storage, you can actually create that dispatchable electricity we were just talking about before. Now it’s all really about that cost curve and the advances in that technology, but it’s coming on absolutely in leaps and bounds. You’ve got lots of players in the market, a lot of competition, a lot of the industry trying to participate in different ways and understand from their perspective how to use that storage technology for their own benefit. So generators are looking at it, transmission businesses are looking at how they can use storage to better deliver their services ’cause it can be used to sort of as a replacement in some cases for more transmission build. Distributors are really looking at it, they’ve got some very significant issues on their networks in terms of managing all this solar PV and huge peaks and troughs on demand. So they’re looking at it and what they can do within there. They’ve got some ring-fencing issues which means they can’t sort of just go out and buy lots of storage. But they are looking at how also storage is going to be purchased by some of these households, how it’s going to become part of a package. So even at that smaller scale it could have a very significant impact. |
| DT: | I want to turn now to compliance issues which some of our listeners advising private clients may be more focused on. Whether in your role as a regulator or in your role advising a private client, can you think of a time where non-compliance has affected an energy market participant? |
| CW:
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41:00 | I think the most obvious examples that I’ve got are really us seeing as rule makers the sort of regulatory response to breaches of particular provisions by businesses. So I can think of a couple of instances of that. One is in relation to generator bidding behaviour and the ability of generators to potentially game the wholesale market price by their bidding behaviour. Lots of focus on that, through some activities of the large generators sort of in 2015, 2016 which were unsuccessfully sort of prosecuted, if you like, by the Australian Energy Regulator. TIP: One such case is the decision of Justice Dowsett in the 2011 Federal Court case Australian Energy Regulator v Stanwell Corporation Limited [2011] FCA 991, 30 August 2011. In the Stanwell case, the AER alleged that energy traders at Stanwell made a number of re-bids that were not made in good faith. The AER claimed that the re-bids were not made in good faith because each case they were made with the intention that if the price didn’t rise sufficiently as a result of the re-bid, Stanwell would make another re-bid for the same trading interval. In the AER’s view, Stanwell didn’t actually intend to honour these initial re-bids, absent to changing material conditions and circumstances. They were a device to influence the dispatch price. Ultimately his Honour found that in order to establish an absence of good faith, the AER had to demonstrate that a trader did not have a genuine intention that a rebid be honoured for the dispatch intervals to which it related, at the time that the bid was made, absent a change in material conditions and circumstances. And the Court found that the AER had not discharged its burden in the case against Stanwell and dismissed the AER’s application. You can really see that the law as it applied at the time of the Stanwell case, really required the AER to establish a subjective intention on the part of the trader, but following the AER’s unsuccessful case against Stanwell for breach of the bidding in good faith provisions, the SA Minister for Energy in South Australia submitted a rule change to the AEMC and the AEMC changed the bidding in good faith provisions with a prohibition against making false or misleading offers and introduced new compliance requirements on generators to preserve a contemporaneous record of the circumstances surrounding late rebids. The intent of these rule changes was to establish a more objective basis to infer a generator’s intent and assist with the interpretation and practical application of the rebidding rules. And as a result there was a lot of reform to those provisions that we oversaw as the Australian Energy Market Commission to make that bidding process clearer, to create more reporting on the way in which bids had been changed, and try to just enhance the fairness and transparency of that bidding behaviour. So I think that’s an example I’ve got. Another one would be the Energy Regulator, quite rightly, has got a very strong focus on energy consumer protections. And there have been a number of high-profile cases where there have been compliance actions against some of the large retailers for their behaviour in the retail markets. So even as late as June 2020, Energy Australia were ordered to pay 1.5 million penalties for the way in which they treated customers in financial distress. So there are very significant protections in the energy retail regulatory framework for customers in financial distress and how they should be dealt with and every step really needs to be taken to make sure they’re not disconnected before they’ve been given opportunities to pay payment plans; there’s a whole range of provisions that protect them. And Energy Australia was found in breach of that. I’m not sure whether there’s an ongoing appeal in relation in that matter, but that was a very significant finding. TIP: Now the citation for that case is AER v EnergyAustralia Pty Ltd [2020] FCA 1647, a 2020 decision of the Federal Court. As Catriona said, EnergyAustralia was ordered to pay a civil penalty fine of $1.5 million and maintain a compliance program for breaching the National Energy Retail Law (Retail Law) and the National Energy Retail Rules (Retail Rules) in relation to eight customers experiencing payment difficulties during the period 2016-2018. The AER Chair’s, Clare Savage, publicly stated that “the penalties imposed by the Federal Court should send a clear signal to every energy retailer about the importance of complying with their obligations under these hardship laws” and emphasised that “there are clear laws in place requiring all energy retailers to give extra protection to customers who are in financial hardship.” And there’s been lots of other actions in the retail space as well on things like failure to comply with life support obligations, so specific obligations on retailers and distributors to protect those people on life support and ensure there aren’t interruptions to their supply of electricity, failure to get proper consent to the transfer of customers. There were some very dodgy marketing practises early on which the regulator has managed to stamp out pretty quickly. Things like door-to-door sales that were sort of unconscionably difficult for people to push back on. You know offers being pushed on people and their consent being obtained illegally. So those are the types of matters I’ve got as examples, but I mean there have been numerous actions taken by the regulator. And the regulator does release its compliance enforcement priorities every year and they shift a little bit depending on what they’re seeing in the market. |
| DT: | Are those enforcement priorities usually consumer focused? That retailer to consumer relationship? |
| CW: 42:00 | Well I mean they will always be a big focus I think of the regulator activity, because it’s the long-term interest of consumers that’s at the heart of the whole energy market space. The national electricity objective is about the long-term interests of consumers. But no, it will go further than that. So, for example, one focus for them is compliance of generators with their performance standards. So that increased focus on those performance standards, the ways in which they technically connect into the network are being complied with in order to maintain system security. There will be a focus on the retailer reliability obligation and the meeting of those obligations, so it is broader, but they’ll always maintain a strong focus on those more vulnerable consumers. |
| DT: | Now I imagine there are complaints processes, dispute resolution processes, hardship processes, that those retailers offer but in terms of those enforcement proceedings commenced by the regulator, how are those regulatory breaches, those non-compliance issues, identified by the regulator? |
| CW: 43:00
| They have a whole range of tools that they use to identify breaches. So they’ve got very significant information gathering powers, so they do gather information regularly on compliance matters. They also have a lot of formalised reporting requirements that are set out in the national electricity rules and the national energy retail rules in relation to how particular businesses need to report their compliance activities. And they need to be signed off at very senior levels within the organisation so there’s a lot of self-disclosure that goes on in relation to that, which is a tool obviously that’s been used in licencing and other things for a long time which really drives that compliance behaviour when the people responsible for compliance have to report back up to the chief executive about how many breaches they’ve had in a in a period. So they use that. The Australian Energy Market Operator in the context of the electricity market as opposed to the energy retail space, plays a really important role in compliance as well because they’re actually seeing on the ground particular behaviour. And they will be able to pick up from some of that, ‘hang on, that doesn’t seem right, that isn’t working, we’ve had to take this action to remediate the impacts of this conduct by a generator,’ say. And so there’s a lot of reporting through and sharing of information between them and the regulator too on those more technical matters. |
| DT: 44:00 | And I suppose too on bidding behaviour, as you described earlier in terms of that remediation. |
| CW:
45:00 | Absolutely. And the regulator also has a wholesale market price monitoring role as well. So there are a number of reports as soon as prices rise above a certain level for a period of time, the regulator actually has to go and do an investigation and say, ‘OK well what caused this?’ And look at was there anything that was in the market operating properly in accordance with its rules that caused those price increases? And then also looking more generally over a longer term about what’s driving wholesale prices. TIP: Most recently, the third quarter 2020 wholesale statistics produced by the AER revealed that South Australia recorded a weekly volume weighted average (VMA) price of $9 per megawatt per hour (MWh); the lowest since 2012 driven by record-low demand and negative prices. Additionally, coal generators continued to offer significant capacity at low prices while gas prices also remained low. VMA prices for electricity generally ranged from $34 MWh in QLD to $54 MWh in Victoria – so that’s quite a difference. The wholesale electricity market performance report in 2020 was also published recently and found that the market is continuing to move towards widely dispersed renewable generators following the entry of large-scale solar and wind generation and grid scale batteries. In case you’re interested in reading the full findings of that report, we’ll leave a link to in our show notes. |
| DT: | Now in terms of the enforcement options that are available to energy regulators, you’ve described a number of different enforcement proceedings commenced in courts. Many of the subjects of this enforcement action are very large organisations, perhaps institutional organisations in terms of their size when we’re talking about natural monopolies. I imagine litigation isn’t the only enforcement option available to the regulator? |
| CW: 46:00
| So depending on, sort of, what parts of the sector you’re talking about, there’s a lot of education that also happens I think from the regulator in the energy retail space. So you know there’s a lot of smaller retailers that enter the market, there’s a lot of materials that are provided by the energy regulator in terms of delivering to the retailers understanding what their expectations are for compliance, what they expect from them in terms of reporting, guides, guidelines on behaviour and codes of conduct, and those sorts of things. So there’s a lot of other tools that are used in that space. I think again, the Energy Market Operator plays an important role again with generators through the registration of the generator process and taking them through the process of registration and providing information, as do the network businesses through the connection process. So I guess that’s an information provision that’s helping people be more compliant. So you think about the fact people want to comply, but it’s hard to comply, it’s a complex environment. But advisors, all sorts of advisors, play very important roles in supporting these businesses to operate in this very complex market as well. |
| DT: | It’s a great point that I imagine much of the non-compliance is inadvertent, simply because of the complexity of the regulatory space. And that education role really plays a preventative role. |
| CW: 47:00 | Yes, exactly. And I think too that part of the reason for trying to maintain a nationally consistent set of regulations is to try and make it easier for people to comply with the framework. So for example, the National Energy Retail Framework doesn’t apply in every jurisdiction on the East Coast even though they’re all interconnected in the national electricity market. Some jurisdictions have chosen to put their own energy specific consumer protections in place instead. That does make it tough for retailers for example to operate across multiple jurisdictions because they’ve got multiple regimes that they have to be compliant with. So even that move to try and make that nationally consistent was driven by the desire to make it easier, and also reduce the cost of compliance because ultimately those costs get passed on to consumers. |
| DT: 48:00 | Now to finish up today, I want to talk about the future, where you see the market going and particularly the impact of renewables on that. And I’ll start with emissions targets, which you touched on earlier, that there is a desire I suppose in policy circles for a single national emissions target or consistent emissions targets amongst the states. But we don’t have that yet. Why are there individual targets? |
| CW:
49:00 | I mean again this is a matter of really about sort of the Constitution and what people have got power over, or don’t have power over. So everyone has the power to legislate in relation to this space. The Commonwealth government hasn’t chosen to sort of regulate in a way, although potentially they could, which overrides the state-based approaches. Now I’m not saying they would necessarily do that, but they do have a bunch of constitutional powers they could bring together to do that. But they haven’t chosen to do that. And it does mean that states are driven by their own governments and the desires of their own governments in terms of emissions reduction to put in place those targets and also to drive investment against those targets. So I think states are looking at the moment to say ‘we know this is the future, we have to move in that direction, we’ve got investors telling us they won’t invest any longer in some of these types of generation,’ you see a whole lot of investor groups for example who now won’t invest in fossil fuel based technologies. We want to create incentives in our state to get the investment here in renewables ’cause it’s going to happen, and if we don’t put in place incentives, it’ll go elsewhere. So I think there’s a combination of the zero emissions reduction policies, and also their desire for investment in their state to grow the economies, to grow regional development those kinds of things are driving that. |
| DT: | And are some of those incentives different in different states? |
| CW:
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| Yes they are, look I don’t have at my fingertips all of the differences but yes, they are very significantly different. So I mean you take place like the ACT that wants to move to net zero emissions, are looking at you know major decarbonization of their gas distribution for example. There’s some more extreme examples of what people have done. And states differ in terms of the mechanisms they’ve used as well in order to drive that emissions reduction and investment as well. So, you’ve got all sorts of state-based schemes that differ, which is again when you think about the investors, a tricky landscape to try and navigate; to try and work out where to locate and where the best incentives are for your investment. TIP: Let’s take a look at Australia’s commitment to climate change more generally. The Australian government has continually supported the coal industry and has shown no intention of adopting a blanket net-zero emissions target, instead following a ‘technology-neutral approach.’ Investments in renewable energy are in decline, in fact in the second quarter of 2020 we saw the lowest investment in large-scale renewables since 2017, a drop of 46% from the previous quarter. Australia’s reduction in emissions have been attributed to decreased industrial activity as a result of the pandemic rather than effective climate policy. In relation to the states and territories renewable energy targets, QLD, Victoria and the NT have pledged to achieve 50% renewable energy by 2030, Tasmania 100% renewable energy by 2022, which is pretty bold, and SA net 100% renewable energy by 2030. NSW and WA don’t have specific renewable energy targets but have both shown support for the former national target of 20% renewable energy by 2020. Meanwhile, the ACT achieved 100% renewable energy in 2020 and has not yet announced a new target. In March 2020 the NSW government released its Net Zero Plan Stage 1: 2020-2030 with the aim to reduce emissions by 35% when compared to 2005 levels. To meet this goal, one of the many programs the NSW government is planning to establish is a $450 million ‘Emissions Intensity Reduction Program’ which will support businesses to transition their equipment and processes to low emission alternatives. |
| DT:
| Now one such incentive in New South Wales is a $32 billion-dollar renewable energy plan. Tell me a bit more about that and how that fits into what’s presently a primarily gas-led COVID-19 recovery scheme? |
| CW: 52:00
53:00 | I mean the Commonwealth have indicated they see a very big role for gas in that COVID recovery. I don’t think the jurisdictions necessarily are aligned on that. Although there will be some investment in gas, particularly sort of flexible gas plant probably, in order to support the transition until you get to a point that you’ve got adequate storage or hydro to actually create that complement to renewable generation. But what you’re seeing in something like the electricity infrastructure strategy announced by the NSW government, is a great desire to see renewable generation in this state and to really grow that at scale and to support the building of transmission links to where that generation can be located. ‘Cause one of the issues in the national market is that transmission was built to connect these large coal fire or gas fired generations and bring that generation to the load centres. We’ve now got the sources of generation like wind and solar located a long way away from the existing transmission links, and it tends to mean that the links that are there, if there are links, are quite low in capacity and can’t be guaranteed to deliver that energy into the load centre reliably. So they’re looking at building these significant transmission links out into renewable energy zones and put together a package of incentives to really drive investment. And they see that as a major transition of the system obviously to a lower emissions economy, but also as critical to just electricity reliability more generally, because they’re seeing the retirement of coal fired generators within the near horizon. So some of the big power stations like Liddell for example, have been a big focus of media attention because it’s due to retire in 2022/23 ish. And so they are very seriously concerned about reliability and the need to replace that ageing coal fired generation. |
| DT:
| And with all of those changes, the retirement of coal fired plants, changes to the transmission network, that move to renewables, and all of the reliability issues that creates, that perhaps I’m asking you to get your crystal ball out here but the energy market and how it’s regulated has changed a lot in the past ten years, how do you think it will change over the next ten? |
| CW: 54:00
55:00 | It’s a really good question I think in the very sort of short to medium term there is going to be a lot of challenges to the national framework for there to be a nationally consistent approach on some of these issues because of the desire for states to do things a bit differently, so the strategy we just talked about. So, to some extent the states will have to put in place the regulatory mechanisms they think are needed to deliver what they want in terms of the replacement of that ageing generation. And so, I think there will be some challenges to keeping a nationally consistent framework potentially. That’s probably more of a matter for people deep in the energy sector to be sort of concerned about in terms of the origins of the national framework in the first place and what it was designed to achieve. But I think one of the key areas is going to be a real focus on distributed energy actually. The distribution level, sort of household generating systems and the continued rapid uptake of those sorts of solar PV technologies and what that’s going to do with the electricity market more generally. So, so much demand being met by customers themselves and whether that can be managed in a way that you can get the benefits to consumers from all that investment but keep a reliable backup source of supply through the existing channels of transmission networks into the distribution network while that’s happening. So, I think that’s a really big challenge that regulators are going to face in the next few years and they’re already grappling with a lot of those issues now. And they’re also still grappling with at a national level the sort of reliability concerns and how to create, I think I mentioned before, create the incentives for that dispatchable capacity to still be in the system. So this post 2025 market review that’s being done by the energy security board is really focused on that as a key focus area. So it’s a bit more of the same it sounds like, but potentially that issue of how states might go it alone because they’ve got their own policies that they want to meet in terms of emissions reduction and reliability. |
| DT: | Potentially the continuing of a trend that has been in place for some time. |
| CW: 56:00 | Yes, but hopefully too, looking very much at the bright side, you know they’re supporting this transition, which I think most people thought as inevitable to renewable generation. The reason being there is now much greater understanding of what was causing system security concerns and a lot of bright minds at work as to how do you address those issues and make sure that sort of system black issue doesn’t happen again. So I think there has been a lot of progress made on the system security and that’s an ongoing work programme, but definitely lots of progress has been made. |
| DT: | Well we’ve discussed this very complex and sometimes highly technical area of law and regulation today, but it’s important to remember that all of us are affected by the way the energy market operates and therefore the way it’s regulated. So Catriona thanks so much for joining me today on Hearsay to explain it! |
| CW: | Oh it’s been a pleasure, thank you. |
| DT:
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58:00 | Thanks very much. You’ve been listening to the Hearsay The Legal Podcast. I’d like to thank my guest today, Catriona Webster for coming on the show. Now if you liked this episode which had a fair bit of economic content why not give ‘Microeconomics for Lawyers’, my interview with Dr George Beaton, a go. Or, for another deep dive into a specific area of law and another substantive law point, try episode 3 of Hearsay ‘This is STRATA!’ with Sam Saw about the law of strata schemes. Now if you’re an Australian legal practitioner, you can claim one continuing professional development point for listening to this episode. Whether an activity entitles you to claim a CPD point is self-assessed, as you know, but we suggest this episode constitutes an activity in substantive law. If you’ve claimed 5 CPD points for audio content already this year, you may need to access our multimedia content to claim further points from listening to Hearsay. Visit our website htlp.com.au for more information on claiming and tracking your points on our platform. The Hearsay team is Tim Edmeades, Kirti Kumar, Araceli Robledo, Zahra Wilson and me, David Turner. Nicola Cosgrove is our executive producer and without her there would be no Hearsay. Hearsay The Legal Podcast is proudly supported by Assured Legal Solutions, making complex simple. You can find all of our episodes as well as summary papers, transcripts, quizzes and more good stuff at htlp.com.au. That’s HTLP for Hearsay The Legal Podcast.com.au. Thanks for listening. |
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