Ausgrid SubmissionResponse to P2025 Market Design Options PaperJune 2021

9 June 2021

Dr Kerry Schott AOIndependent ChairEnergy Security Board

Submitted by email: info@esb.org.au

Dear Dr Schott,

Ausgrid is pleased to respond to the Energy Security Board (ESB) Post 2025 Market Design Options Paper (the Options Paper) on reform roadmaps for the 4 workstreams, published in April 2021.

Ausgrid owns and operates a shared distribution grid that stretches from southern Sydney to the Upper Hunter Valley, including the Sydney CBD. Our network supports over 20 per cent of the national gross domestic product and over 4 million people who live or work within our network area. We see our grid as a shared, open platform, upon which a new ecosystem of products and services will evolve.

We support the efficient evolution of the energy system in a way that reduces costs across the supply chain, while at the same time providing customers more choice and control. As Australia’s electricity becomes increasingly sourced from variable renewable generation it is paramount that we unlock flexibility on the demand side to better match the supply of energy and reduce overall system costs. To realise this transition, now more than ever a collaborative and customer centric approach is required to co-design a sustainable, affordable, and reliable energy system.

As a Distribution System Operator (DSO) we will increasingly use a combination of market-based approaches and smart assets (such as community batteries and dynamic voltage control) to address network constraints, provide Distributed Energy Resources (DER) with access to markets and dynamically allocate capacity in the network.

We are trialling these new capabilities now, supported by a focus on cost-reflective network pricing reform. Through our Network Innovation Advisory Committee (NIAC), we are collaborating with customers on innovative projects that will enable the transformation of networks. It is important that we are allowed and encouraged to evolve to ensure efficient use of shared network assets across Australia in the future. Appropriate investment signals must be maintained to support networks developing these capabilities if we are to deliver better customer outcomes in the long term.

Please find attached further detail on specific points we would like to raise in response to the Demand Side Participation section of the Options Paper and the wider ESB engagement. We are actively contributing to the AEMC’s various rule changes around Essential System Services, so have not provided any detailed comments here. If you have any queries in respect to this submission, please contact Alida Jansen van Vuuren on 0411 436 108 or alida.jansenvanvuuren@ausgrid.com.au.

Regards,

Jessica HiggsHead of Strategy

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Ausgrid Response to P2025 Market Design Consultation Paper

1 A shared DSO Vision

The physical networks across Australia and the businesses that operate them are similar but different. Even within a single network provider’s service area it is a mixture of regional networks originally built and owned by local councils with different construction philosophies and geographical challenges. Networks all fundamentally manage network capacity but have different strengths and weaknesses – the most efficient solution varies with the historical decisions made by networks and governments over many years. For example, in Victoria the state government mandated roll-out of smart meters provides much greater visibility of the low voltage (LV) network whereas in other states a mix of LV monitoring and access to metering data is required to make estimates of the LV network.

However, as networks we recognise the need to work towards a common, well-articulated set of principles and acknowledge that we must make it easier for cross-state players to interact with us. It is for this reason that over the last few months distribution network businesses from across Australia have been collaborating on a shared vision for our role as distribution system operators (DSO).

We will continue to work with the industry, our customers and market bodies to refine and evolve the vision and have already received useful feedback from consumer groups we have engaged. The pilots and trials underway in distribution networks all over Australia will further inform this.

2 Network tariffs vs. centralised network services market

We encourage the ESB to consider solutions that can grow and mature with customer preferences so customers do not pay for large bets made on scenarios that may not eventuate. The growth in renewables, the decentralisation of resources and the speed of innovation all introduce significant uncertainty. Cost-reflective network pricing can pre-emptively “expose” the network benefits of flexibility by building in rewards and providing a smoother transition than through an upfront investment in a UK-style network services market. Rather than waiting for a capacity constraint to develop and then publishing it in a network services market and seeing if there is enough flexibility to address the need, efficient pricing can incentivise distributed energy resources (such as electric vehicles) to respond to network and market conditions from the moment they connect.

Dynamic network pricing has a key role to play in the efficient allocation of network capacity by providing feedback on the network costs of various levels and location of network use. We encourage the ESB to recommend the adoption of the AEMC’s Draft Rule Change on Access, Pricing, and Incentive arrangements for distributed energy resources (DER).

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Ausgrid Response to P2025 Market Design Consultation Paper

Notwithstanding this, DSOs will continue to run demand management programs, procure flexibility through virtual power plants and establish bi-lateral contracts to address capacity constraints when that is the most efficient solution. However, these should be thought of as point solutions in specific areas to manage specific capacity constraints rather than the only way that the network value stack is exposed to traders.

3 This is not about picking between markets, regulations, or technical solutions

We need a range of solutions. Operating a highly renewable, highly distributed energy system is a complex task. We need backstops, obligations, standards, regulation, interoperability, and an appropriate ecosystem of markets and incentives to stimulate innovation to support Australia’s energy transition. The biggest challenge might be making it simple for customers, and perhaps even simpler than our existing market design. This may include establishing a ‘base’ network service for those customers that do not wish to actively participate and increased optionality for those that do, including considering the role of technology innovation and intermediaries.

In addition, the line between essential and value add services that customers receive from (and provide to) the network is blurring. We are pleased to see further development of the consumer protection framework in the ESB’s Options Paper that ensures affordable access to an essential service and appropriate protection for vulnerable customers while making room for the innovation needed to unlock the demand side flexibility.

Networks will need to evolve and provide new services (such as export services, shared community storage services and sophisticated system security support) as we transition to a distributed energy system, which means we need fit for purpose ringfencing rules that do not prevent this. The Australian Energy Regulator aims to simulate a competitive environment for networks where actual competition would not be in the best interest of consumers. It is important that we consider where distributors are uniquely placed to support the transition rather than only considering market solutions.

4 Government policy costs

Jurisdictional Governments are increasingly seeking to recover the cost of their policies through network charges. Most recently, the cost of the ACT Government’s large-scale feed-in tariff, recovered through Evoenergy network charges, is causing 2021-22 electricity bills to increase by nearly $300 compared to 2020-21 for an average residential customer.

Network businesses are not well placed to absorb highly volatile costs because the regulatory framework mandates that jurisdictional charges are passed through to customers in the year that they are incurred. It is well understood that customers, and especially vulnerable customers, place a high value on price certainty and stability. Taxpayers are far better placed to bear the volatile costs of Government policies because the Government can recover costs over a longer time horizon, shape the impact (such as considering household income) and can provide greater stability in cost recovery to taxpayers.

Incorporating customer preferences into our decision making has never been more integral than it is today as customers want to have a say in how the network is designed and how it will enable the services that they value. We have worked hard to develop customer relationships and build trust to establish lines of open communication and collaboration with customers.

Customer trust is eroded when charges increase and there is no corresponding increase in the services provided. Lower levels of customer trust make it more challenging for networks and the

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Ausgrid Response to P2025 Market Design Consultation Paper

industry as a whole to engage with customers on the changes needed as we transition to a decentralised energy system.

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Ausgrid Response to P2025 Market Design Consultation Paper

5 Next steps for roles and responsibilities

The challenge of assigning roles and responsibilities ought not be a trade-off between AEMO, DSO or Trader centric models, but rather how to place the responsibility of various elements with those best placed to manage the risks associated with that responsibility. It is nearly impossible for any single organisation or entity to understand all the complexities across the supply chain to a great enough extent to make informed decisions in isolation. It is paramount that we collectively work through these challenges, engage with consumers, and design a flexible energy system that works in the Australian context and accommodates all Australians.

From our perspective we will need to grapple with the following during the 3-year Maturity Plan process:

1. What consumer research and engagement tells us about demand elasticity, customers’ willingness to engage and our (collective) social licence to control DER.

2. How to address minimum demand with an eye on the future, including clear guidelines on what is paid for and what are mandated services (with agreed limits and transparency for mandated control).

3. When or where DSOs should consider investing in community batteries.4. What is needed to enable community energy solutions and local settlement.5. How to make it easier for traders to participate in existing and future markets on behalf of

customers.6. Where we should focus our efforts to standardise market facing elements of network services.7. What pilots and trials will increase confidence in the reliable dispatch of distributed resources.

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Ausgrid Response to P2025 Market Design Consultation Paper

Thank you

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