As we continue to see the transition of the NEM in Australia, regulation plays a crucial role in balancing innovation and consumer protection. Clare Savage, Chair of the Australian Energy Regulator (AER), recently shared her thoughts in a Q&A following the Energy Networks Australia “Beyond the Wires” Regulation Seminar in Brisbane. Her discussion provides valuable insights into how the AER is adapting its approach to meet the demands of the energy transition.
Network Utilisation and the “Wall of Capex”
Savage began by highlighting an important issue: while network reliability has improved over time, asset utilisation has decreased significantly, currently hovering in the low 40% range across the National Electricity Market (NEM). This underutilisation comes at a time when many distribution networks are proposing significant increases in capital expenditure (capex). These proposed increases are in addition to the billions already planned for critical projects aimed at integrating new renewable energy sources to replace ageing coal plants.
Savage described this situation as a “wall of capex” that could overshadow the benefits of lower wholesale energy costs from renewables unless efficiency is improved. These network costs are not just a short-term issue; they will be embedded in the system for years to come. Thus, it is essential to fully utilise existing network capacity before investing in new infrastructure.
Rethinking Regulation’s Role in Innovation
One of Savage’s key messages was the need to challenge the notion that regulation is a barrier to innovation. While regulations are necessary, she argued that they should not be the first consideration when developing new solutions for customers. Instead, she encouraged network businesses to explore creative approaches within the existing framework.
Savage raised several questions to prompt network providers to think differently: Are there investments or partnerships that could reduce the need for large-scale capex? What barriers exist that prevent more efficient use of network infrastructure? She suggested that potential solutions could include new incentive schemes, ring-fencing waivers, or the use of regulatory sandboxes to trial innovative approaches.
Regulatory Sandboxing: An Underutilised Opportunity
The concept of regulatory sandboxing, which allows businesses to trial new ideas within a flexible regulatory environment, was a key focus of Savage’s discussion. Despite its potential, there has been limited use of this tool in Australia. Savage pointed out that only one application has been made by a network business, with no rejections by the AER. Similarly, out of 16 ring-fencing applications, none have been rejected.
This suggests that the regulatory framework may be more accommodating than some perceive. The AER’s Trial Projects Guidelines, updated in January 2023, provide a clear pathway for businesses to test innovative solutions that might not fit neatly within existing regulations. For businesses looking to innovate, understanding and engaging with these guidelines could be key to unlocking new opportunities.
Demonstrating Value to Consumers
Savage also emphasised the importance of demonstrating the value of new proposals to consumers. The AER is looking for solutions that not only address current challenges but also ensure lower electricity costs in the medium and long term. Savage made it clear that the AER is open to considering new approaches, provided that businesses can clearly show how their proposals align with the National Electricity Objective (NEO) and deliver benefits to consumers.
Conclusion: A Collaborative Approach to the Future
As Australia’s energy sector transitions to a more sustainable future, the role of regulation will be critical in ensuring that this transition benefits all stakeholders. The AER, under Clare Savage’s leadership, is showing a willingness to engage with innovative ideas and adapt the regulatory framework where necessary. For businesses in the energy sector, this represents an opportunity to collaborate with the AER in developing solutions that meet the needs of today while preparing for the challenges of tomorrow.
The AER’s message is clear: they are open to innovation and are ready to work with the industry to find solutions that benefit consumers in the long run. The future of Australia’s energy market will be shaped by those who can think creatively within the regulatory framework and demonstrate real value to consumers.
