The regulatory arrangements required for a distributed energy market

In Australia, as electricity prices have increased, driven mainly by increases in peak demand, electricity use has decreased every year since 2008/09. The factors most responsible for these decreases include increased electricity costs, energy efficiency, solar water heaters and photovoltaics. Further increases in electricity prices and uptake of these technologies could result in further reductions in demand. This combined with the projected increases in peak demand and associated expenditure could put further pressure on utilities’ traditional revenue and business models, especially those of networks. Government responses to date to minimise electricity costs will most likely be ineffectual and are inconsistent with absolute reductions in electricity use. This is due to the limited attention given to alternatives to the Network Determination process used to establish future network expenditure, the lack of practical suggestions for decoupling network operators’ revenue from electricity use, and the treatment of distributed energy (energy efficiency, demand management and distributed generation) as an ‘add-on’ to the existing market. We propose the use of Integrated Resource Planning to ensure that distributed energy competes equally with network augmentation, and regulation of distribution network operators under a revenue cap and Overs and Unders process to decouple their revenue from electricity use, both in the context of a broader distributed energy market. We describe how all these arrangements can be integrated in such a way that results in competition between supply-side and demand-side options at all levels: generation, networks and retail. We also provide examples of the types of policies needed for this to occur, as well as the most important issues that would need to be addressed. The issues and approaches discussed here should be relevant to any country facing ongoing reductions in electricity use or high penetrations of distributed generation.