A Framework to Assess the Ability of Network Regulatory Arrangements to Facilitate Appropriate Investment in Distributed Energy

The planning and operation of electricity industries has traditionally been highly supply-side focused, with electricity demand often treated as entirely exogenously driven. As such, efforts to manage the demand side have generally been limited to relatively minor amounts of network and market-driven demand response and energy efficiency programs. Interest in, and the ability to manage, what is happening on the customer side of the utility meter has increased in recent years, facilitated by a range of new technologies including real-time metering and control, distributed photovoltaic systems and battery storage systems. Beyond energy, a number of potential benefits associated with distributed energy (DE) have been identified, including increased system flexibility to match demand and supply (which is likely to have more value in the future with higher penetration of variable renewable energy), peak load reduction and other network services such as reactive power control, as well as more amorphous societal benefits including increased consumer engagement, improved energy security, increased safety and resilience and reduced emissions. However, the direct economic benefits to consumers of their distributed energy resources is determined by the regulatory environment and retail market arrangements within which they reside. While there are still some challenges associated with appropriately managing high DE, energy consumers have demonstrated their interest in such options, and these wider potential benefits would present a major opportunity for the electricity industry. Given that many of the benefits of DE relate to the present investment in and operation of distribution networks, substantial investment in DE poses particular opportunities yet also potential challenges for distribution network service providers. It is therefore worth investigating to what extent the current network regulatory and commercial arrangements are suited to facilitate appropriate investment in DE by consumers, and potentially other stakeholders. This paper presents an assessment framework to consider the benefits provided by DE, and evaluate the alignment of present regulatory arrangements for DE and financial incentives for different stakeholders with these benefits. Using this framework, potential challenges and areas for improvement are identified. 1. Network services and distributed energy The Australian National Electricity Market (NEM) has a formal National Electricity Objective (NEO) to ‘promote efficient investment in... electricity services for the long-term interests of consumers of electricity’. The NEO provides a basis for reviewing the success or otherwise of NEM governance. Recent years have seen a particular focus on network arrangements, given their role in the doubling of retail electricity prices over the past seven years. A number of inquiries (Productivity Commission, 2013, AEMC, 2012a, AEMC, 2014) have focused on the significant expansion in network investment driving this price increase (ESAA, 2012) to meet reliability standards (Simshauser, 2014) and peak demand increases that have yet to eventuate (AEMO, 2013)(Sandiford, Forcey, Pears, & McConnell, 2015). The Productivity Commission (PC) in particular has questioned the efficiency of these investments by distributed network service providers (DNSPs) (Productivity Commission, 2013). This period of growth in network investment has been paralleled, in surprising ways, by the growing capabilities of, and consumer interest in, a range of distributed energy (DE) options including PV systems, smart metering and controllable loads and, now, battery energy storage systems. There was, however, a significant disconnect between these two developments, despite the potential of many DE options to contribute towards network service provision without additional traditional ‘poles and wires’ network investment. This seems highly unlikely to represent efficient investment in the long-term interests of consumers, and raises further questions regarding network governance in a rapidly changing electricity industry context. An obvious starting point for serving the long-term interests of consumers, is to give those consumers a central role in industry planning arrangements. As noted by the Productivity Commission, consumers have not had a meaningful role in key industry investment processes, which is particularly significant with regards to network investment, recovery of which makes up to half of a typical household electricity bill. There have been recent efforts to improve engagement with end-users including the establishment of Energy Consumers Australia, set up by COAG to advocate in the interests of consumers. However, the primary means by which consumers voice their preferences is through their own investment choices. In the 2015-2016 financial year, there was close to $2.8bn of private investment in PV and storage in Australia1. This does not include any of the energy efficiency measures that were also implemented by energy consumers, or other distributed energy opportunities that consumers will have invested in, which would add considerably to the total. Energy efficiency measures pay for themselves quickly, and more affordable efficient appliances and fixtures are rapidly coming onto market (US-DoE, 2016). ‘Self-consumed’ PV reached socket parity in Australia some years ago (Australian PV Association, 2013), and the cost of energy from PV continues to decline, while electricity storage options are also rapidly declining in cost, with substantial price reductions expected in the near to mid future (Reedman, 2015). And what of the parallel investment of some $8.742bn2 by the distribution networks over the same year, despite opportunities for DE investment to potentially offset at least some of this? 1 Calculated from total PV capacity installed at $2.37/kW installed (Johnson & Egan, 2015) and known Tesla and Enphase orders and pricing as at August 2016 2 According to the AER, current electricity distribution network determinations (not including transmission) total $43.712bn over the five year period Current network investment plans suggest that consumers can expect their electricity prices to continue to rise in the next regulatory period. Electricity price increases serve to make distributed energy (DE) an even more appealing investment for consumers. How should these DE and network investments be seen in the context of the NEM objective of efficient investment in electricity services for the long-term interests of consumers? Networks invest in augmentation on the basis of predicted locational constraints at times of peak demand. These predictions rely on assumptions about user consumption. However, where consumers are investing at the same time to reduce their own costs. This could create unnecessary duplication or, worse, decision making that works against shared interests, which would be an inefficient outcome. The Australian Energy Market Operator (AEMO) Statement of Opportunities for generation is now considering distributed generation (DG) investment by consumers (AEMO, 2016b) but a similar concept for network investment does not yet seem to exist, despite opportunities for efficiency improvements, particularly through the management and reduction of peak demand. The focus of this paper, then, is the issue of more coherent decision making across network businesses and energy consumers, and across traditional network investment and our growing DE options, to deliver the long-term interests of consumers. The paper is structured as follows. Section 2 introduces the key participants and potential decision makers, and their objectives. Section 3 examines the investment options available to achieve the desired outcomes. Section 4 discusses the potential investors in the electricity industry. Finally, Section 5 makes a start on discussing what would be required to make future investment as efficient as possible. 2. Objectives of participants