ACCC report on electricity offers no easy solutions to the problem of Australia's future energy policy

If you want an insight into a competition regulator's perspective on the next iteration of an energy policy, you need look no further than the ACCC's report released on 11 July 2018, "Restoring Electricity Affordability & Australia's Competitive Advantage".

But the Report's true importance goes beyond this. It was seized upon by supporters and opponents of the National Energy Guarantee (NEG), and used by the Federal Government as a report identifying steps to lower prices. Given the current fluidity in energy policy, and the Government's stated priority of lower electricity prices, the Report could be very influential in future policy. Below, we focus on the ACCC recommendations that align with the Government's two priorities, and tease out their impact on the future of investment in electricity generation.

The ACCC identifies four key objectives for Australian electricity policy

On 27 March 2017, the then Treasurer, the Honourable Scott Morrison MP, directed the ACCC to conduct an inquiry into the supply of retail electricity and the competitiveness of retail electricity.

The ACCC's final report examines the electricity market and identified 56 recommendations aimed at reducing prices, restoring consumer confidence and Australia's competitive advantage. These recommendations span the entire electricity supply chain, focusing on four key areas:

1. boosting competition in electricity generation and retail;
2. lowering costs in networks, environmental schemes and retail;
3. enhancing consumer experiences and outcomes; and
4. improving business outcomes.

The Government has highlighted the first two objectives as improving the price outcomes for consumers.Boosting competition in electricity generation and retail

In a bidding market that is the National Electricity Market (NEM), competition between market participants generates efficient prices relevant to the available assets, which in turn benefits consumers.

On the supply side, the NEM relies heavily on competitive pressure between generators to deliver lowest pricing. The ACCC's nine recommendations on market competition seek to address domination and concentration, with the aim of enhancing competition between generators.

Recommendation 1: The National Electricity Law (NEL) should be amended to prevent any acquisition or other arrangement (other than investment in new capacity) that would result in a market participant owning, or controlling dispatch of, more than 20% of generation capacity in any NEM region or across the NEM as a whole. This provision should be designed to prevent market participants circumventing the 20% cap including by way of ownership structure or contractual arrangements.

The ACCC's objective in applying a cap is to prevent the entrenchment of existing concentration and vertical integration of generation currently experienced in the NEM.

It points to other industries such as airport ownership where cross-holdings are capped and sees this form of market limit as a long-term measure for preserving the competitiveness of the generation market.

However, there are some issues with this approach. First, companies may be unwilling to invest in generation assets if they can hold a greater position in the market in other jurisdictions.

Secondly, this recommendation (when combined with Recommendation 2) will target State-owned generation and effectively require divestment or disaggregation of generation in jurisdictions such as Queensland. Historically, privatisation of State-owned assets has been unpopular with Queensland voters (which makes it a sensitive issue for Government) and reduces generation earnings to the State.

Recommendation 3: The NEL should be amended to provide the Australian Energy Regulator (AER) with powers to address behaviour which has the effect of manipulating the proper function of the wholesale market, together with the necessary investigation powers and appropriate remedies. The current market manipulation powers in respect of gas market supply hubs represent a good framework for equivalent powers in respect of the electricity market.

Recommendation 3 seeks is aimed at expanding the AER's investigation and intervention powers. The ACCC's view is that introducing a market power manipulation rule would provide two benefits:

• greater transparency in electricity bidding practices and activities; and
• greater understanding of transactions and the competitive forces behind them.

The key issue with widening the scope of regulatory oversight in this matter is that it adds regulatory uncertainty and burden for trading generators. Further, there may be circumstances where genuine competitive generator bids are placed, which then result in high market prices at a particular time. While the trading strategy of a generator is highly confidential, if a generator is forced to disclose part or all of its trading strategy and could give other traders an unfair advantage.

Recommendation 6: The NEL should be amended so as to require the reporting of all over-the-counter (OTC) trades to a repository administered by the AER. Reported OTC trades should then be disclosed publicly in a de-identified format that facilitates the dissemination of important market information without unintentionally revealing the parties involved.

Recommendation 6 requires OTC trades to be reported then subsequently disclosed to encourage the dissemination of market information. Generators and retailers can use OTC hedge contracts and vertical integration of generation and retail to mitigate against the volatility of the electricity spot price, reducing price and volume risk.

The contract market affects generator and retailer positions in the NEM. Specifically, the OTC market involves bilateral trades between businesses allowing generators to trade a multitude of products that best suits their underlying generator portfolios and retail portfolios. These positions can be a competitive advantage which, if able to be understood from the disclosed information, could result in competitive positions being eroded.

The ACCC's Recommendation 6 is aimed at promoting market transparency, encouraging all market participants and observers to understand the general dynamics of the OTC market. The extent to which information is reported in a de-identified manner would be critical in determining whether this recommendation reveals competitive positions (for example advance price signals) that could be utilised by other market competitors for their advantage.

Lowering costs in networks, environmental schemes and retail

Network costs are the largest component of the total amounts paid by electricity consumers and have contributed to increases in electricity prices. Electricity transmission and distribution networks are strong natural monopolies. As a result, networks are subject to strict regulation and oversight to prevent anti-competitive practices.

In addition to network costs, environmental costs contribute to electricity prices. Various Governments have implemented a range of policies and schemes directed at encouraging investment in renewable energy. The ACCC's 19 recommendations relating to network costs and environmental schemes are stated to strike a balance between economic efficiency and promotion of renewable energy.

Recommendation 11: The governments of Queensland, NSW and Tasmania should take immediate steps to remedy the past over-investment of their network businesses in order to improve affordability of the network. With appropriate assistance from the Australian Government, this can be done:

- in Queensland, Tasmania and for Essential Energy in NSW, through a voluntary government write-down of the regulatory asset base;

- in NSW, where the assets have since been fully or partially privatised, through the use of rebates on network charges (paid to the distribution company to be passed on to consumers) that offset the impact of over-investment in those states.

Such write-downs would have economic efficiency by reducing current distorting price signals. The amount of the write-downs and rebates should be made by reference to the estimates of over-investment by the Grattan Institute, and should result in at least $100 a year in savings for average residential customers in those states.

Recommendation 12: The AER should be given the power to monitor the effect of the write-downs and rebates on network charges effectively faced by retail customers.

Recommendations 11 and 12 seek to address what the ACCC views as network over-investment resulting from increases in network reliability standards, incentives in the regulatory framework, and public ownership of networks. It says higher costs are incurred because companies recover their return on capital based on a higher than efficient regulatory asset base (RAB). The ACCC concluded there were two possible solutions to over-investment:

• in the short term, a one-off voluntary write-down of asset values in those networks where over-investment has occurred, leading to a reduction in the RAB, and in turn revenues and prices; or
• in the longer term, an amendment to the regulatory regime to allow for greater scrutiny of potential stranded assets or the efficiency of investments made by networks.

The value of network asset bases determines the amounts paid by electricity users for network charges, impacting electricity affordability. A reduction in the RAB of electricity networks results in lower network charges, and lower overall retail prices to consumers. While Recommendations 11 and 12 have the potential to result in lower prices for customers, they are made on the basis that State Governments will bear the pain of lower asset value and returns and as such appears to create inequality between State and private owners of networks.

Recommendation 24: The small-scale renewable energy scheme should be wound down and abolished by 2021.

Recommendation 24 advocates for the removal of the small-scale renewable energy scheme (SRES). This scheme creates a financial incentive for individuals and small businesses to install eligible small-scale renewable energy systems such as solar panel systems, small-scale wind systems, small-scale hydro systems, solar water heaters and air source heat pumps. Measures which are aimed at meeting Australia's renewable energy target.

The renewable energy target aims to incentivise investment in renewable energy generation by requiring a certain percentage of electricity generation to be sourced from renewable energy. Many State schemes, including Feed-in-Tariff (FiT) schemes, have been introduced to encourage energy efficiency, investment in gas powered generation, or investment in rooftop solar PV.

The increased interest in solar PV installation has led to a large reduction in installation costs. As a result the ACCC considers the subsidies for small-scale solar installations unnecessary and the SRES should be removed saving, it says, residential customers $15-$30 per year.

If Recommendation 24 was implemented this would have implications for the affordability of solar PV installation, and may discourage ongoing investment in small scale renewables which needs to be balanced against recovery of ongoing and growing scheme costs.

Recommendation 25: To reduce the costs associated with premium solar feed-in tariff schemes:

- any costs remaining from such schemes should be borne by state governments through their budgets, as Queensland has done for the next three years, rather than being recovered through charges to electricity users, and this should be done on a permanent basis;

- where a premium solar FiT scheme has finished, as is the case in NSW, the collection of charges previously used to pay FiTs through network premiums should also end; and

- ongoing scheme eligibility rules should be reviewed and tightened to ensure that costs of these schemes are minimised.

Recommendation 25 seeks to encourage State Governments to alter the approach used to recover costs under their renewable energy schemes. The ACCC considers funding of premium FiTs though distributor charges as being inherently inequitable for two reasons:

• premium FiTs are more generous than the wholesale costs of electricity, benefitting solar PV owners; and
• payments made under the FiTs are funded by all other network users.

Arguably, removing the FiT schemes could discourage new renewable customers and decrease the incentive to adopt renewable energy alternatives. Without some form of financial incentive, customers may choose to continue with traditional energy sources rather than adopt renewable energy at a domestic level.

Moving forward

Australia continues to face an energy trilemma as it aims to tackle energy security, reduce the cost of electricity, and adhere to renewable energy and carbon emission targets. While the ACCC's report, "Restoring Electricity Affordability & Australia's Competitive Advantage", focused on wholesale and retail markets along with network costs, the ACCC's recommendations offer no easy solution to maintaining energy security, increasing the role of renewables in the overall generation supply mix, while keeping prices to a generally acceptable level.

Thanks to Claire Robertson for her help in writing this article.