Independent Review into the Future Security of the National Electricity Market Blueprint for the Future, Jun 2017

6.1 Consumers are at the centre of the NEM

Australians are keen adopters of new energy technologies. The uptake of new technologies and new, often digitally enabled, ways of providing services to consumers is an integral part of the transformation of the NEM.

An increasing proportion of investment in new generation assets comes from individual consumers. In the NEM, consumers have installed more than 1.44 million rooftop solar photovoltaic systems.³⁰⁴ AEMO forecasts that by 2036 the annual electricity generation from rooftop photovoltaic solar will increase by 350 per cent from current levels.³⁰⁵

Battery storage is poised to be the next major consumer-driven deployment of energy technology. Upfront costs for solar photovoltaic systems with storage are currently high, with long payback periods for most consumers. Bloomberg expects the average payback period for residential consumers to fall below 10 years in the early 2020s, with around 100,000 battery storage systems to support rooftop solar photovoltaic generation predicted to be installed by 2020.³⁰⁶

Innovative companies are starting to develop and market home energy management systems that coordinate and automate a consumer’s appliances, generation and storage equipment. Energy efficiency improvements, particularly in homes with modern appliances and building technologies, can reduce peak demand.

For larger consumers, building energy management systems able to respond to outside control signals are becoming more common. Given appropriate incentives and market opportunities, voluntary load reductions by commercial and industrial users could serve as an alternative to involuntary load shedding to address supply shortages.

Consumers currently benefit directly from installing these technologies through avoiding the wholesale cost of energy, transmission and distribution costs, but residential and small business consumers are not currently rewarded for their contribution to reducing peak demand.

A vision for consumers in an active demand-side of the market would be one where:

Consumers across the spectrum share in the benefits associated with new technologies.

Consumers have the information they need, in a manner they can understand, so that they can make informed decisions about their electricity use and investment in equipment.

In the short-term, distributed energy resources (DER) are coordinated to provide real-time services including energy, ancillary services and network support.

In the medium-term, improved price signals show the value of services across the supply chain and new technologies and consumer tools supporting demand-side solutions and consumer choice achieve mass scale.

In the long-term, improvements in energy efficiency reduce electricity demand and generation capacity, reducing costs for consumers.

Missing these opportunities risks over-investment in new large-scale generators and network assets, leading to higher costs. This particularly affects consumers who are not able to invest in their own alternatives to grid-supplied electricity or energy efficiency. Higher costs of electricity from the grid could see more and more consumers having little or no need for grid-supplied energy, concentrating the burden of the cost of the grid on a much smaller group of remaining consumers.

Despite this environment of change, consumers still expect electricity to be safe, reliable and affordable. The current regulatory arrangements for the NEM are unlikely to be able to meet those expectations without reforms.

The impacts of new technologies also mean that the energy market bodies – AEMO, the AER and the AEMC – will face new challenges. It will be critically important that they be more dynamic and responsive.

6.2 An effective retail electricity market

Consumers need to be confident that the retail sector, their first point of contact with the electricity market, is working for them and meeting their needs. Surveys by the AEMC and Energy Consumers Australia have found that while the majority of residential consumers are satisfied with their services and their retailer, they are not convinced they are getting value for money.³⁰⁷

Activating demand-side resources needs consumers who trust the market and expect it to work in their favour, so that they are willing to engage with retailers and the emerging energy services sector.

Effective competition is a key driver of productive, efficient and innovative markets. Competition also allows consumers to take greater control. But there are indicators that the retail market in the NEM may not be as effective as it could be.

The retail market needs to:

Provide real value to consumers from their choice of providers and products.

Support service innovation that unlocks technology and simplifies choice for consumers.

Open up new opportunities for all consumers, including vulnerable and less-engaged consumers.

Deliver prices that reflect costs and risks, including reasonable returns for the provider.

Several studies have found that the retail market is not offering the same value or benefits to consumers as other markets. For example, the Grattan Institute argues that the retail electricity market for small consumers is characterised by profit margins that are higher than in other retail electricity markets overseas, a lack of innovation, and confusing product offerings, with a consequent lack of engagement by consumers.³⁰⁸

It is difficult to make accurate assessments of the effectiveness of the retail electricity market due to the lack of publicly available information about retail prices. Public reports such as the Grattan Institute report and the AEMC’s annual retail competition review rely on information about prices being publicly offered by retailers (without knowing how many consumers are on each offer) or limited information that is voluntarily shared by retailers. The AER has extensive gathering powers but to date it has not used them in relation to retail pricing information.

Comparing offers from different retailers is also complicated by differences in how prices are structured and marketed. For example, prices may include several different components, and may be marketed as a discount of ‘x’ per cent without it being clear to the consumer what base the discount is from. Marketing by retailers should be much clearer and state the standard price from which any discounts apply.

A number of reviews and inquiries are currently considering issues related to the effectiveness of electricity retail competition. Most significantly, the Australian Government has announced an inquiry into the electricity retail market by the Australian Competition and Consumer Commission (ACCC). The Terms of Reference for the inquiry require the ACCC to scrutinise a number of issues, including the cost drivers of electricity prices and any impediments to consumer choice, including a lack of transparent information. The ACCC has extensive information gathering powers. In the course of this inquiry the ACCC should consider whether the AER has sufficient information gathering powers and functions to gather retail price information on an ongoing basis. Three special reviews will report this year (Table 6.1).

Table 6.1: Current special reviews of the electricity retail market

Special Review	Body	Timing
Electricity supply and prices inquiry	ACCC	Preliminary report in September 2017; final report in June 2018
Review of electricity and gas retail markets in Victoria	Victorian Government	Final report to the Minister by May 2017
Market monitoring report (one-off report for FY2017)	Queensland Competition Authority	By 31 October 2017

The following reports are published annually, half yearly or quarterly (Table 6.2).

Table 6.2: Periodical energy market reports

Periodical report	Body	Timing
Retail energy competition review	AEMC	Published annually
Residential electricity price trends report	AEMC	Published annually
Retail energy market performance reporting	AER	Quarterly updates and a report published annually
State of the Energy Market	AER	Quarterly updates and a report published annually
Victorian Energy Market Report	Essential Services Commission of Victoria	Published annually
Monitoring of the NSW retail electricity market	NSW Independent Pricing and Regulatory Tribunal	Published annually
Energy retail offer prices in SA: Ministerial report	Essential Services Commission of South Australia	Published annually
Comparison of Australian Standing Offer Energy Prices	Office of the Tasmanian Energy Regulator	Report updated every 6 months

Recommendation 6.1

As part of its inquiry into the electricity retail market, the Australian Competition and Consumer Commission should make recommendations on improving the transparency and clarity of electricity retail prices to make it easier for consumers to:

Understand and compare prices.

Be aware when the terms of their offer change or their discounts expire.

Make more informed decisions about investing in rooftop solar photovoltaic, batteries or energy efficiency measures.

The Australian Competition and Consumer Commission should also consider whether the Australian Energy Regulator requires further powers to collect and publish and share retail price data.

Large consumers also face particular issues in relation to the availability and price of long-term retail contracts. Many commercial and industrial businesses prefer to enter into retail contracts that offer a specified electricity price for a defined period, for example two to three years, providing greater certainty regarding one of their key input costs and assisting them to make business decisions.

The price and availability of these retail contracts largely depends on the price and availability of equivalent wholesale market forward contracts. As discussed in Chapter 3, there has been a significant increase in the level and volatility of wholesale spot prices in recent years, which has led to significant increases in contract prices in electricity financial markets. At the same time, the current level of uncertainty in the market means that many commercial and industrial consumers are reluctant to enter into longer term contracts. The recommendations in Chapter 3 are designed to ease these concerns, and should lead to less risk and a greater availability of long-term wholesale and retail contracts for large consumers.

Large industrial consumers are particularly sensitive to reliability and affordability issues, due to their high electricity consumption and, in some cases, uninterruptible loads. Unexpected power losses have the potential to cause considerable damage to industrial infrastructure, imposing costs of repairs, and of lost production while repairs are underway.³⁰⁹ Some industrial consumers are turning to contingency options to ensure a reliable electricity supply,³¹⁰ which could include emergency back-up generators or self-generation.

Recommendation 6.2

The Energy Security Board’s annual Health of the NEM report to the COAG Energy Council should include the impact of changes in the market on the price and availability of long-term retail contracts for commercial and industrial consumers.