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Energy market evolution working papers - FY17 Performance

Kurt Winter
22 September 2017

For several years, AGL economists have authored economic research that provides critical analysis of energy market trends and policy settings to industry stakeholders and policy makers. These articles are submitted to academic journals and are subject to a formal (blind) peer-review process prior to publication.

During FY17 the following new pieces of research were published:

  • Reducing the horizons of uncertainty: Setting Australia’s post-2030 emission goal: This policy brief, co-authored with The Climate Institute, outlines the role that long-term targets play in setting government policy and guiding business strategies. It also considers the 2050 emissions goals already announced by other countries and the commitments the Australian Government has made to contribute to limiting warming to 1.5-2°C under the Paris Agreement. Together, these mechanisms have been used to guide recommendations of possible next steps for Australia. These include a lead recommendation to define a 2050 emissions target (or target range) for Australia that will provide guidance for business, government and regulatory decisions.
  • The Changing Nature of the Australian Electricity Industry: This article considers the implications of the emergence of new distributed energy technologies and a global focus on reducing anthropogenic on the founding assumptions underpinning the design of the National Electricity Market and the restructure of the industry following the Hilmer Reforms of the 1990s. Distributed energy technologies represent a ‘partial grid-substitute’ requiring, in the authors’ view, that policymakers consider whether write-downs of the regulated asset base of monopoly network providers are necessary, and the appropriate role of monopolists and competitive markets in delivering these technologies and the products and services they enable. In relation to climate change, the authors found that there is a need to better integrate electricity market and climate change policy to ensure emissions reductions occur in an orderly and cost-effective manner.
  • Access rights and consumer protections in a distributed energy system (published in the book Innovation and Disruption at the Grid’s Edge): This chapter explores how consumer protections and grid access rights may need to be redefined in energy markets featuring widespread distributed energy technologies, using Australia’s National Electricity Market as a case study. It found that customers with solar PV and battery installations will interact with and depend on the grid in different ways and for potentially different services compared with a customer without these technologies. It concludes that reformed consumer protection frameworks will need to balance innovation and customer choice with universal access to electricity supply.
  • Price discrimination in Australia’s retail electricity markets: An analysis of Victoria and southeast Queensland: This article examines price dispersion in deregulated markets and associated impacts on consumer welfare. The authors analyse differential retail electricity offer prices in the Australian states of Victoria and Queensland and contrast these with industry average total cost and the marginal cost of retail supply. Consistent with the literature on price dispersion, the analysis demonstrated that Victoria, the National Electricity Market’s most mature deregulated market, shows a greater dispersion than the NEMs least mature contestable market, southeast Queensland. It found further that in Victoria the marginal unit produced is priced at marginal cost meeting the key criterion for efficient pricing. However, the authors also identified an episode of inter-consumer misallocation due to high ‘standing offers’ and concluded that policy initiatives designed to help firms shift vulnerable households from ‘standing offer’ tariffs are desirable.
  • Electricity market design in a decarbonised energy system (under review): This paper critically examines an ‘energy-only’ market in a high penetration renewables system, with a particular focus on the vertically and horizontally restructured Australian National Energy Market. The authors propose that the ‘energy-only’ market can indeed work within a decarbonised energy system but extreme pricing volatility within spot markets is likely to be required to ensure system reliability. ‘Unintended consequences’ of adjacent climate change policies will need to be corrected to ensure: successful retail competition; appropriate new investment is forthcoming; and pricing outcomes are acceptable given political economy constraints. Potential mechanisms identified to address these consequences include requiring ageing thermal plant to provide sufficient notice of closure, requiring intermittent generation to partner with complementary plant (such as OCGT, advanced batteries or pumped hydro) to create a synthetic ‘firm’ generator, and expanding the role of reliability and security markets.
  • Price dispersion in Australian retail electricity markets (under review): Simshauser and Whish-Wilson (2017) articulated that price dispersion within the restructured Victorian retail electricity market is welfare enhancing as efficient pricing ensured the marginal unit produced was sold at marginal cost. This article expands on this analysis by considering the heterogeneous nature of electricity consumption when measured by volume sold (kWh). The authors find that customers on ‘standing offer’ tariffs use 18% less electricity than customers on ‘high discount’ products, indicating the presence of market segmentation and implicit second-degree price discrimination. Climate change policy and the emergence of new technologies such as household solar PV, battery storage and in-home energy displays will create further price dispersion in Australian electricity markets due to even greater product heterogeneity. The key finding is that policy makers will need to facilitate, rather than prevent, both price and tariff structure dispersion with the objective of improving consumer outcomes.
  • Redesigning a 20th century regulatory framework to deliver 21st century energy technology: This article explores how electricity systems are shifting from a once highly centralised regulated model to become more renewable, distributed and consumer-centric. Australia has some of the highest installation rates of embedded renewable electricity generation in the developed world, and the emergence of cost-effective distributed battery storage and energy management systems may fundamentally alter the electricity industry—which has been largely unchanged for decades. Evolutionary economics indicates that firms must adapt to new technologies and market conditions or they will become extinct. The author found that energy markets will only evolve if regulatory frameworks continuously adapt to ensure that consumer preferences for reliability, control and environmental outcomes are able to be achieved at lowest cost – concluding that regulators will need to ensure that facilitating efficient consumer decision making is prioritised.

Importantly, the views are those of the authors and not necessarily those of AGL.

For further information about our contribution to the energy market transformation, see AGL's FY17 Sustainability Report.