The SWIS and other non-market systems

whether there are barriers in the existing framework that prevent network businesses using tools such as benchmarking to improve performance.

One of the ways to achieve that cultural shift is for government to adopt more flexible, evidence-based approaches where it is required to make decisions that affect the business, such as setting reliability requirements for distribution network businesses. Whether state

governments also remove themselves from ownership to reinforce this change is a matter for them.

The New South Wales Government has taken a positive step by asking the SCER to task the AEMC with looking into reliability standards in the state as part of its review of distribution reliability outcomes and standards. The review’s final report, which was released on 31 August 2012, will inform the state government’s setting of reliability standards. Another positive move has been the NEM jurisdictions’ agreement to a national transmission reliability standard framework that ensures that the body that sets the standard is separate from the body that applies the standard.

Similarly, the Electricity Supply Industry Expert Panel commented on what was required for effective corporate governance of publicly owned companies:

The Shareholder Ministers’ oversight of State Owned Energy Business performance should provide a sufficient level of accountability to drive continuous improvement in the efficiency and effectiveness of the business. The economic regulatory framework will only partly drive efficiency in the businesses. There is, therefore, a clear responsibility on the Shareholders, through their interaction with the Boards, to provide additional impetus for efficiency.

(ESIEP 2012)

These are critically important steps in giving consumers confidence that expenditures by these businesses (and therefore their costs) are aimed at efficiently meeting service delivery requirements.

10.3.4 The SWIS and other non-market systems

The South West Interconnected System

The design and regulation of the SWIS creates challenges different from those in the NEM.

They include ensuring that wholesale price signals drive efficient investment in new generation, fostering greater market competition, creating a more level playing field by removing government from the market, and the continued cross-subsidy of retail prices.

Decisions on these matters are the responsibility of the Western Australian Government, which published its Strategic Energy Initiative on 28 August 2012. The Australian Government supports further reforms to develop a more efficient and competitive electricity market, noting the very strong links between this market and the western gas market.

The Australian Government also notes that while there are a number of fundamental design differences between the NEM and the SWIS (which are likely to remain), there is also growing convergence in many aspects of market operation and regulation. This suggests that there may be benefit in considering the opting-in of this market to national arrangements as provided for in the Australian Energy market Agreement.

Wholesale market

The development of a separate wholesale energy market and a capacity market (through the reserve capacity mechanism) was intended to provide an efficient mechanism for allocating supply and a guarantee of payment to investors who build and secure capacity. However, having separate markets for capacity and energy means that there are separate price signals for each.

The Independent Market Operator has begun a review of the reserve capacity mechanism to identify potential changes to improve the economic efficiency of investment signals. The Australian Government supports that review. A related review of the price-setting methodology for the reserve capacity mechanism, which is almost complete, is expected to recommend changes with the potential to reduce prices associated with the mechanism by 10%–15%.

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Retail prices

Regulated retail prices in the SWIS are not yet at cost-reflective levels, and there is a shortfall between the income received and the cost of supplying electricity. Since 2009–10, the shortfall has been funded by a community service obligation payment (ERA 2011). While price adjustments will have impacts on consumers, the Australian Government believes that there would be benefit in developing a clear pathway to efficient pricing levels, coupled with protections and support for vulnerable customers.

Networks

The AEMC has identified a number of inefficiencies in the connection process and transmission network planning in the SWIS (AEMC 2009). The commission has recommended the introduction of a formal regime for transmission connection and augmentation, and reviews of the workability and clarity of regulatory approval processes and the network augmentation charging regime.

The Western Australian Government has considered network issues in its Strategic Energy Initiative.

In its final report, it stated its intention to:

• integrate energy infrastructure planning, funding and augmentation with whole-of-government strategies focused on the development of the state

• design, augment and use essential energy infrastructure in an efficient and safe manner to promote competition and investment.

The Australian Government supports those aims and encourages the Western Australian

Government to continue to engage with its stakeholders and, where relevant, the national energy institutions, in developing its reform package.

Competition

The SWIS has a concentrated ownership structure in which Verve Energy, a state-owned utility, accounts for more than half of generation capacity. The entry of new, privately owned generators since the market began is expected to continue. In June 2011, there were 12 active retail licences in the SWIS; however, most generators are contracted to the state-owned retailer, Synergy (Global–ROAM 2011).

The growing Western Australian economy will increase the demands on the SWIS. Attracting investment to meet those demands will be important if the market is to continue to maintain a secure and reliable supply of electricity.

Continued government ownership of energy assets could be a barrier to effective competition.

Regulators should ensure competitive neutrality in all circumstances.

Other non-market systems

Off-grid electricity generation in Australia was estimated to be 12 803 GWh in 2009 (BREE 2012a).

Growth in mining operations, particularly in Western Australia, has led to an increase in off-grid generation, most of it from diesel- or gas-fired generators.

While the lack of comprehensive data for remote power generation makes forecasting overall growth difficult, it is clear from industry forecasts that resources developments are fuelling rapid growth. For example, electricity demand in the Pilbara region is projected to increase by around 12 000 GWh by 2015, mostly from gas-fired self-generation. Growth in the Mid-West region will add an additional 4000 GWh, about half of which is likely to be off-grid (CMEWA 2011).

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This expansion creates both opportunities for regional development and challenges in promoting the development of common-use infrastructure. In particular, rising fuel costs and improvements in hybrid renewable–fossil generation technologies suggest that there could be good opportunities for large-scale commercial systems.

The Western Australian and Northern Territory governments are working with local communities and the minerals industry to balance public and resource sector infrastructure needs while achieving the most efficient outcomes for the community. This includes further work to collect better

information on energy use and needs in non-market regions and to explore options for securing greater productivity and efficiency through the development of common-use energy infrastructure in larger regions. The Australian Government fully supports that work.

10.4 Measuring policy success

Policy success in reforming our electricity markets, which requires a commitment to continued reform by all jurisdictions, would result in:

• more efficient and competitive retail and wholesale markets with transparent and market-based price signals that promote efficient patterns of investment and energy use

– this should also include improved service delivery and a greater range of energy management products and services

• more efficient and transparent delivery of network services with investment aligned with evolving market and consumers’ needs, with reduced barriers to connection and demand-side participation

– this should also include transparent and effective network regulation and customer-appropriate reliability and other performance standards that strike an efficient balance between cost and service delivery

• electricity networks and markets that effectively encourage and accommodate an efficient balance supply- and demand-side opportunities and a more diverse national generation profile, with an accelerating deployment of clean energy, including distributed generation

• a more commercially disciplined market (including networks) with less government participation, greater transparency, and better governance of businesses that remain publicly owned

• an investment pipeline capable of meeting expected future needs in all market segments

• a more national approach to the regulation of energy markets, including the implementation of the National Energy Customer Framework and the full transfer of non-economic retail regulatory functions to national market bodies, along with a robust and effective framework to protect vulnerable customers

• high-performing independent national energy market institutions with adequate capacities, capabilities and accountabilities to perform their assigned functions.

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