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Gabrielle Kuiper

Year of Award: 2017 Award State: New South Wales Environment > Energy And Resources
To investigate the regulation of clean, smart, customer-centric energy networks - USA, UK, Belgium, France, Germany

An inescapable conclusion from my Churchill Fellowship is where there is the clearest vision, articulated at the political, policy and regulatory levels, there is the most progress in developing clean, smart, customer-centric electricity networks.  Innovation and the decarbonisation of the energy system cannot succeed in the time required without a long-term strategic vision.

Australian government leadership and vision are therefore necessary to judiciously decarbonise energy systems and deliver better outcomes for consumers. Governments must facilitate mission-oriented innovation in electricity networks.

Both the policy-making and regulatory bodies need to be ‘strategic mission-oriented public institutions’ where the mission is decarbonisation with improved outcomes for consumers. Simplified governance by creating a lead policy maker can support clearer accountability.

In the UK, the IGov project at the University of Essex have suggested an ‘Energy System Transformation Commission’ be created and set a vision for new institutional arrangements at distribution and local levels. It is worth considering if a comparable body is needed in Australia.

New York State’s Public Service Commission led by Audrey Zibelman under Reforming the Energy Vision (REV) has provided the clearest articulation of the three future roles of what’s generally being termed a Distribution System Operator (DSO). These are to:

  1. Manage the network using Distributed Energy Resources (DER)
  2. Manage a ‘local’ market platform trading capacity, ancillary services and grid support (such as fault response) using DER, and
  3. Plan using DER as ‘non wires’ alternatives, which could include a ‘flexibility’ platform as a place where DER can bid in alternatives to network replacement or upgrades.

Some experts, including those at the Regulatory Assistance Project (RAP), IGov and Professor Dieter Helm in the UK have concluded that independent DSOs are needed to pursue the public interest in decarbonisation. This view suggest that various functions and enhancements to distribution networks would be opened up to competitive auctions and, at the local level, with bids for network enhancements from DERs. There are tentative pilots and initial attempts to create ‘flexibility markets’ and use DER as substitutes for network augmentation across the jurisdictions visited. However, it’s very early days everywhere with opening up competition at the distribution level.

Planning is becoming more sophisticated as ‘energy tech’ develops, but it’s complex and at formative stages in terms of competitive models. There is some support for planning being undertaken by an independent body, as already the case for transmission in many jurisdictions. Jon Wellinghoff, former head of the US Federal Energy Regulatory Commission (FERC), for example, supports this view.

The clear need to realign the objectives of distribution network owners with decarbonisation and consumer objectives suggests that performance-based regulation is a better model for the energy transformation than traditional rate-based economic regulation. Performance-based regulation needs to enable innovation and risk and reward sharing between distribution businesses and consumers (or tax payers). In Australia we are a long way from the static networks in which the current form of CPI-X revenue regulation was developed. To create revenue regulation suited to the challenges of decarbonisation would mean moving not only to totex, but to whole system analysis; a major reconsideration of what kind of incentives are needed for decarbonisation across electricity, transport and gas (in particular) at reasonable cost.

In addition, qualitative assessments may be a valuable tool for cultural change in utilities, as can benchmarking and ex-post reviews. And, regulators must be given sufficiently flexibility to change their regulation with changing technological and commercial circumstances.

With renewable generation and DER time and location matter in ways that they didn’t previously and regulation needs to reflect this. Value of DER (VDER) (aka time and location-based tariffs) and emiciency (proportionate emissions reduction) are two important concepts that need to be built into electricity policy and regulation.

Policy and regulation can set a direction, but distribution businesses are not passive recipients and havethe potential to shape their own business model, speed of decarbonisation and modernisation. This report makes some very tentative observations about cultural change in utilities, but much deeperresearch is required.

Australia now has two million households with rooftop solar and around 70,000 households with battery storage. With a higher penetration of DER than almost anywhere in the world, but with relatively ‘dumb’ grids, there a need for systems thinking and for the Australian government to articulate a vision for this massive and ongoing energy transition.

My Fellowship suggests considerable deliberation on the type of institutions, governance, visions for electricity distribution networks and the corresponding revenue regulation in Australia would bear fruit given the energy transition and the need to rapidly reduce greenhouse gas emissions. There are significant known unknowns, including the pace of technological change which make the situation difficult for governments, policy-makers and regulators alike. But we must act fast given it is easier and cheaper to reduce emissions from electricity production than those in any other sector.

Keywords: Electricity, distribution networks, regulation, distributed energy resources, distribution system operator, institutions, decarbonisation, electrification, public interest, utilities, poles and wires, climate change, energy, renewable energy.

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