Clean energy policy actions
7 Energy markets: overview
7.2 Energy market policy framework
• further optimising network regulation
• reviewing derogations and differences between jurisdictional arrangements and the national regime
• applying reforms in non–National Electricity Market (NEM) jurisdictions, most notably in Western Australia’s electricity and gas markets, for which the current Western Australian Strategic Energy Initiative is the key.
Some of these matters are beyond the jurisdiction of any single government and require a sustained, cooperative commitment over time. Despite differences in views between jurisdictions on some matters, the Australian Government considers that the COAG structure remains the most appropriate mechanism to advance these reforms, as demonstrated by its success in energy reform to date.
A number of market overview activities by the energy market bodies in the NEM and the non-NEM jurisdictions are underway, along with a range of market- and jurisdiction-specific reviews and development actions (outlined in chapters 8, 9, 10 and 11).
7.2 Energy market policy framework
The Australian Government uses the following framework to guide its consideration of energy market design and operation. These principles complement the overall energy policy framework set out in Chapter 1: A framework for national energy policy.
Policy objectives
To maintain well-functioning energy markets and services that deliver reliable, safe, secure and competitively priced energy for all Australians, including by:
• encouraging timely and efficient investment in all facets of the energy delivery system
• promoting competitive and accessible energy services
• providing appropriate transparency and protection for consumers.
Policy principles
• Energy markets and services should deliver outcomes that are in the long-term interests of consumers.
• Energy market regulation should be nationally consistent to the greatest extent practicable.
• Energy market design should not give preference to particular technologies or fuel types.
• Market regulation should be stable, predictable, efficient, effective, transparent and accountable.
• Energy markets should interface efficiently and effectively with other relevant markets and policy and regulatory frameworks to provide for integrated least-cost decision-making.
• Government participation in energy markets should be minimised; where it does occur, it should preserve market integrity and comply with competitive neutrality policy.
7
Energy markets: overview
Ensuring that energy markets should operate in the long-term interests of consumers is
fundamental to the government’s approach. This means efficiently balancing supply and demand while promoting accessibility and reliability in meeting Australia’s long-term energy needs at a competitive price. It also follows that market participants must be able to earn adequate returns to ensure that sufficient and efficient levels of service and investment are maintained over the longer term to ensure reliability and security of supply.
7.2.1 Characteristics of well-functioning markets
In assessing whether energy delivery goals are being achieved (and therefore whether there is a case for government intervention in the markets), the definition of ‘well-functioning markets’
is critical.
While the needs of the liquid fuels, electricity and gas markets differ, all well-functioning energy markets seek to maximise competition, including through:
• transparent and effective market objectives
• transparent and supportive rules and regulations that do not introduce material barriers to entry or exit
• clear and effective governance arrangements, including independent and accountable institutions to regulate and operate markets
• appropriate information systems to inform market participants, policymakers and regulators
• efficient regulation of monopoly network infrastructure
• price signals that reflect the full costs and benefits of production, supply and consumption
• well-functioning financial markets to provide certainty, strengthen competition and lower entry costs for new participants
• active consumer participation
• non-integrated and competitive ownership structures throughout the supply chain.
7.3 Policy challenges and priorities
While each energy market has a specific set of issues, there are three overarching challenges and priorities:
• aligning energy market and other policy objectives
• maintaining the momentum for reform
• promoting consumer engagement in market processes.
7.3.1 Aligning energy market and other policy objectives
It is important that energy markets also contribute effectively to a broader range of social, environmental and economic goals. This is reflected in the objective and goals of the Australian Energy Market Agreement (see Box 7.1)
Energy markets: overview
7
Box 7.1: The Australian Energy Market Agreement
On 30 June 2004, the Australian Government and the state and territory governments entered into the Australian Energy Market Agreement to establish the Ministerial Council on Energy (now the Standing Council on Energy and Resources), the working arrangements for the energy market institutions and a national framework for distribution, retail and other market arrangements.
The agreement is supported by the Australian Energy Market Act 2004, which sets out the national laws and rules that apply to electricity, gas and energy retailing.
The National Electricity Law, National Gas Law, National Energy Retail Law, National Electricity Rules, National Gas Rules and National Energy Retail Rules are agreed and applied by each Australian state and territory and the Commonwealth, with some variations between jurisdictions.
The overarching objective of the Australian Energy Market Agreement is the ‘promotion of the long-term interests of energy consumers, with regard to price, quality and reliability of electricity and gas services’. This objective is supported by the subordinate objectives of the National Electricity, Gas and Energy Retail Laws. The agreement also sets out a framework for further energy market reform, which includes:
• promoting the long-term interests of consumers
• strengthening the various aspects of the energy market to improve the climate for investment
• streamlining and improving economic regulation, including reducing the costs and complexity of existing regulation and lowering barriers to competition
• improving the planning and development of electricity transmission networks
• enhancing the participation of energy users in the markets, including through demand-side management
• increasing the penetration of natural gas as a way to lower energy costs, improve services and reduce greenhouse gas emissions
• further addressing greenhouse gas emissions from the energy sector.
There are differing perspectives on whether the objectives for the Australian Energy Market Agreement, the national energy market laws or both should be amended to refer explicitly to other specific policy goals, such as environmental or social policy objectives.
The Australian Government believes that the objectives and principles, as currently defined, remain appropriate to current and future energy policy needs and that they provide a robust basis for market regulation and development. The core objective and operating principle—ensuring that markets operate in the long-term interests of consumers—allows a broad range of interests to be taken into account and provides enough scope for effective interfaces between energy markets and other policy frameworks.
Given that no regulatory or market failure associated with the overall objectives in the Australian Energy Market Agreement has been identified, making such changes would risk introducing unnecessary complexity and potential confusion for market operators, regulators and participants.
It is also unclear how non-energy policy goals, which differ across jurisdictions, could be coherently reflected in a single set of national market rules. These issues are best dealt with outside the market settings through direct and targeted policy, as this allows for properly targeted, efficient and effective outcomes.
7
Energy markets: overview
For example, concerns about energy cost impacts on low-income households are most efficiently addressed through mechanisms such as transparent community service obligation payments or through various social ‘safety nets’, rather than through market or price regulation. Similarly, environmental outcomes are generally best achieved through appropriate pricing of externalities or the direct management of impacts, rather than through market rules that impose inflexible preferences for particular technologies or fuels or restrictions on access to resources.
However, decisions on energy market design and regulation must take into account and efficiently interface with other important policy frameworks. To ensure that energy and other policy goals are achieved harmoniously, and to build the necessary community acceptance of reforms, these decisions should be tackled holistically and transparently.
This approach underlies the design of the government’s carbon pricing mechanism, which
includes a range of measures to ensure the efficient integration of the carbon and energy markets, particularly the electricity market.
7.3.2 Maintaining the momentum for reform
It is widely accepted that the economic policy reforms of the 1980s and 1990s transformed the dynamics of the Australian economy, helping to drive a surge in productivity growth. In the past decade, Australia’s productivity growth—measured in terms of both labour productivity and multifactor productivity—has slowed (Parkinson 2011). Productivity has declined markedly in the electricity and gas sectors, driven by factors such as rising peak demand (which reduces capital utilisation rates), greater investment in higher-cost, lower-capacity generation plant and additional network building standards (PC 2012).
The Australian Government considers that there is a need to continue with reforms that increase the flexibility of the economy and its productive capacity if people and businesses are to embrace change, adapt and innovate.
It is perhaps more important than ever that attention and momentum are given to the promotion of greater efficiency and resilience in market structures to minimise cost-of-living and business cost pressures.
Australians have generally been served well by the cooperative effort across jurisdictions to promote ongoing reform and the development of Australia’s principal energy markets. Those efforts have provided real and lasting benefits to consumers and the economy (see Box 7.2).
Box 7.2: The benefits of energy market reform
Reforms of Australia’s main energy markets were a key part of Australia’s competition policy reforms of the 1990s and have brought lasting and tangible benefits to the economy and energy consumers. In 2005, the Productivity Commission estimated that the reforms had increased Australia’s GDP by 2.5%.
In particular, the creation of new national electricity and gas markets restructured previously separate state-owned and operated energy entities into a competitive and interconnected wholesale market involving business-on-business competition supported by more
transparent and nationally regulated networks. This delivered:
• a highly competitive and efficient wholesale electricity market with substantially
improved efficiencies and generation capacity utilisation rates (which helped to maintain wholesale energy prices at lower levels in real terms than in 1996–97)
• the world’s longest interconnected electricity grid, which has consistently provided power at a high standard of reliability
Energy markets: overview
7
• energy market structures (independent, national and consistent energy laws and institutions) that are well placed to respond efficiently to broader policy objectives
• more competition in the retail sector, where most customers can now choose suppliers and find better deals.
Some misconceptions about reform
One common misperception is that reforms have led to higher prices. Energy prices in Australia generally remained stable and low through the late 1990s to around 2007. Recent price rises largely reflect a combination of increasing production costs and the high point of an investment cycle in Australia’s energy infrastructure.
A second common misperception is that deregulation means a lack of oversight and the loss of consumer protections. Australia’s energy consumer protections are generally higher than in many other markets, and further reforms will be accompanied by an appropriate safety net. Competitive markets also strengthen the consumer’s position through greater efficiency and by allowing consumer choices between services.
But we can do better ...
• Further improvements are needed to the regulatory frameworks for networks to minimise cost pressures without inhibiting efficient and necessary expenditure. This is a complex task, so any changes must be carefully considered and evidence based.
• Government ownership of energy assets may create the potential for conflict in both policy and operational decisions. However, government ownership of energy businesses is a decision for the respective governments.
• Competitive and efficient retail energy markets will deliver benefits for both consumers and the energy sector. Where competition is sufficient, COAG processes should assist jurisdictions’ transition to deregulated prices. A robust and effective customer protection framework is vital. Where prices continue to be regulated, there is scope for more consistent regulatory methodology.
• Consumers should be empowered to participate in the market, and improve
productivity, through demand-side participation and better information and products.
Pricing, regulatory and technical agendas should support this goal.
• Over the longer term, an active work program is needed to improve the harmonisation of national energy markets and to apply national laws and use national institutions consistently in all markets. A particular focus on gas markets and energy market resilience is needed.
• The mechanisms for tracking reform, measuring it against objectives and communicating it can be improved.
7
Energy markets: overview
However, some important reforms have not yet been completed. There is still work to do in areas such as retail price deregulation, strengthening network regulation, improving demand-side outcomes, improving the productivity of government-owned businesses, and further developing our gas markets as they mature and can support more efficient structures. Hard decisions about pricing and competition will make our markets more truly national and, more importantly, deliver sustained benefits to consumers (these issues are discussed further in Chapter 9: Energy markets:
gas and Chapter 10: Energy markets: electricity).
In the longer term, the policy and regulatory frameworks for the liquid fuel market need to provide for a more consistent, market-based treatment of all fuels and technologies, and a more stable and predictable framework for the development of new products and industries (see Chapter 8: Energy markets: liquid fuels).
Unfortunately, progress in some areas of reform or market development (such as retail market reform) has been slower or more patchy than desired, particularly in the light of previous commitments. This has been to the detriment of consumers and energy businesses.
The Australian Government believes that there is a need for ongoing and transparent monitoring of progress in market reform. The chair of the Standing Council on Energy and Resources currently reports annually to COAG on progress against the standing council’s agreed work plan. The government will examine how this could be improved to provide a more holistic assessment of progress and remaining gaps or needs.
The complexity of the market and its interactions should not be underestimated. It is important that policy development responds to those challenges based on good arguments, research and analysis to develop policies that can stay in place over the long term.
While these and other reforms will not eliminate price increases for consumers, they can help to ensure that energy services are delivered efficiently, investors receive efficient and fair returns, and future price pressures are limited to those that are necessary. While some reforms may be politically challenging, they are important in the long term and necessary if consumers are to get the best results.
7.3.3 Consumer engagement in market processes
Energy reforms must be well targeted and supported by key stakeholders if they are to produce the best outcomes, so we need better communication and consumer engagement in the reform process. While market rule-setting and review processes allow for consumer input, in practice this is often constrained by stakeholders’ time, technical capacity and resource limitations. This is particularly the case for many welfare and small consumer groups.
It is also vitally important that the consumer voice is heard during policy and market development.
The Australian Government currently provides support to the Consumer Advocacy Panel, which provides a vehicle for consumer representation. There is a need, however, to consider how consumer advocacy organisations can participate more effectively in the national reform agenda.
The government will work with consumer advocacy groups to explore opportunities for more effective and nationally focused engagement.
In addition, there may be merit in considering how reform processes could be improved. This could involve more inclusive use of experts, including from business and consumer groups, at the working level on market design and development to ensure that proposed approaches are robust and represent best practice. This can be done in ways that address potential conflicts of interest and preserve appropriate policy and decision-making responsibilities.
Energy markets: overview