As we discussed in our previous instalments, Australia is at the global forefront of a transition towards distributed energy that is changing the way customers generate and store energy in their homes and businesses.
This transformation also has important implications for the design of Australia’s energy market system to ensure that DER is effectively integrated to enable the greatest benefit to all energy users.
We consider the development of competitive-based arrangements where owners of DER assets are rewarded for providing wider network and wholesale market-based services will deliver the greatest benefit, as DER uptake continues to grow.
In a competitive framework, aggregators would compete in optimising different DER value streams (network, wholesale and ancillary services) through orchestration to provide cost-competitive services to the grid whist enabling DER customers to exercise choice and realise greater value from their investments.
While some progress has been made to improve DER integration since the Australian Energy Market Commission (AEMC) undertook its annual Electricity Network Economic Framework Review in 2019, we believe that further work is required to test competitive based arrangements that:
- Enables DER to bid as scheduled resources for wholesale and ancillary services;
- Opens the network value pool to the competitive tender processes through enhanced transparency and opportunities for non-network solutions for the benefit of all consumers;
- Provides greater accountability for network constraints management to support improved investment certainty for DER customers; and
- Enables DER owners to be rewarded for services provided by default to resolve issues caused by historical circumstances of distribution network operation.
In their Open Energy Networks position paper that was published in May, Energy Networks Australia (ENA) suggests that there is no strong case to adopt any of the frameworks for distribution markets in the near term, given that the benefits and costs to consumers of a distribution market are highly dependent on DER deployment rates being high. However, ENA’s conclusion appears to discount the potential cost to customers in adopting control approaches with respect to customers DER assets that could better managed through competitive incentives.
We have observed a range of recent regulatory proposals that seek to accelerate the implementation of technical standards and communications protocols for DER, including AEMO’s Renewable Integration Study and the SA Government’s Smarter Homes Consultation. In the absence of a competitive-based mechanism that incentivises customers, these proposed reforms risk enabling distribution networks or the market operator to mandate the provision of network support services from DER assets, thereby foreclosing the potential for a more mature customer-centric arrangement to emerge.
We have been an active participant in AEMO’s VPP Demonstrations and see these trials as an important step in the integration of these kinds of business models into Australia’s energy markets. We would encourage a coordinated and carefully sequenced approach towards DER market integration, to ensures market reforms draw appropriate learning from these early trials and provide a fit-for-purpose regulatory framework into the future. In our view, this will provide investment certainty for DER hardware manufacturers, aggregators, software providers, and the market more broadly. We also believe the regulatory framework should better enable innovation and we welcome the AEMC’s proposed regulatory sandbox arrangements as an important opportunity to accelerate progress.
Complementary reforms should also be progressed
We also support the development of the following complementary reforms to better facilitate DER integration. In our view, key enabling reforms include:
- Connection, access and pricing arrangements to better incentivise networks to support DER services and enable greater certainty for DER market participation. DER investors should be afforded a level of investment certainty through their network. Network access arrangements should therefore empower customers to engage in a range of competitive retail offers to realise greater value on their investment, for example by participating in innovative energy services such as orchestration to support the grid in times of need. We note there are a range of network access and pricing regulatory reforms currently on the horizon that would seek to improve DER customers’ level of access and investment certainty.
While Australia leads the world in the number of operational VPPs, there are currently no residential battery VPPs engaged in commercial relationships with networks to provide VPP services at scale. By orienting network businesses to value the services that DER can provide, we consider that the regulatory framework will better support consumer confidence in energy storage, thereby enabling scaled participation in aggregation services.
- The network expenditure assessment framework to ensure that networks effectively facilitate the interaction of DER with the broader energy market system. To ensure consistent customer outcomes, the AER’s assessment of dynamic export operating envelopes will need to be informed by an established customer export value methodology that appropriately values customer impacts and differentiates between historic circumstances of distribution network operation and issues associated with higher DER penetration.
- Establishment of technical standards that promote safety but offer open access and interoperability. Promoting interoperability through technical standards will be a key enabler for the use and optimisation of DER across Australia’s energy markets.
- The regulatory framework that protects the contestable market for non-network solutions and ensures that ring-fencing is not causing customer detriment. We consider that the Australian Energy Council’s rule change proposal to give effect to a reduction in the Regulatory Investment Test for Distribution (RIT-D) cost threshold, below its current $5 million threshold will improve opportunities for non-network solutions. We also consider that the benefits of contestability should be considered in the context of front-of-the-meter distribution connected energy storage assets as a means to support efficient investment in these assets that could deliver a range of value streams.
AGL supports the work being undertaken in recent industry consultations to advance these key reforms, including through the ESB’s P2025 and broader DER Integration Workplan as well as the DEIP Working Groups and ad hoc taskforces.
We look forward to continuing to engage with policymakers and regulatory on the important question of distribution market design to ensure that customers can realise the full potential of their investment.