Three innovation opportunities presented by the AEMC 2018 Retail Energy Competition Review

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In today’s article, our focus is not on any regulatory proposals, but three innovation opportunities for energy businesses that are suggested by AEMC’s observations in the Review.

The Australian Energy Market Commission (AEMC) has just released its mammoth (351 page) review (the Review) of competition in retail energy markets for 2018.[1] In one sense, it is a depressing read. The overriding theme is increased consumer dissatisfaction and hardship as a result of retail price increases over the period. In response, AEMC has recommended various regulatory reforms to improve the efficient operation of the energy retail markets. Of course, there are already a plethora of initiatives underway at both the Commonwealth and State/Territory level with that stated goal. In our May Energy Update, we identified 17 (!) consultations initiated by government agencies in May relating to electricity, the majority focused on a more efficient retail market.[2]

innovation opportunities AEMC review - view of Sydney opera house

Photo by Liam Pozz on Unsplash

By Dr Drew Donnelly, Regulatory Speciliast, Compliance Quarter

The Price Increases

The major cause of price increases in 2017 was a substantial increase in wholesale costs, caused primarily by the retirement of the Northern and Hazelwood generators, as well as high gas commodity prices.[3] While retailers cannot directly control wholesale energy prices, AEMC observes a range of behaviour that retailers engage in that could be having a detrimental effect on prices, including:

  • Not engaging in network pricing regulatory processes;
  • Transferring complex tariff structures from network businesses into their own retail offerings;
  • Opaque discounting and tariff structures that make it difficult for customers to compare offers.[4]

Innovation Opportunity 1: Alternative Solar PV and Battery Solutions

As a response to increasing prices, AEMC notes the consumer-driven shift to solar photovoltaic (solar PV) and battery storage over the past year. Consider:

  • 154,877 residential solar PV installations in 2017, an increase of 25 per cent from 2016, which added 938MW of solar capacity to the National Electricity Market;
  • battery installations increased by around 275 per cent in 2017 from a low base, and consumer interest in household batteries increased considerably.[5]

AEMC observes that there are considerable barriers to solar PV adoption for some consumers such as renters, apartment dwellers and those of limited finance.[6] This suggests an opportunity for businesses that can offer innovative solar PV ownership arrangements and financing initiatives.

Innovation Opportunity 2: Data-driven innovation

AEMC notes the improved access to customer consumption data that has arisen from Smart Meter adoption.[7] This should be further amplified by the introduction of the new Consumer Data Right across the energy sector. This means more innovation opportunities for businesses that can leverage the consumer’s consumption profile to offer them a better energy deal.

Innovation Opportunity 3: Leveraging Innovation in Embedded Networks

AEMC notes the introduction of ‘power of choice’ to embedded network customers and the associated Embedded Network Manager role.[8] Much of the emphasis so far has been on the opportunities that this presents for market retailers who wish to serve embedded network customers. However, this also presents an opportunity for embedded network businesses themselves (such as embedded network owners, utility management companies and service providers); the opportunity to consider how they might leverage their physical and regulatory advantages to retain customers. Embedded network businesses should consider:

  • How smart meters at the ‘gate meter’ might be used to negotiate a better deal from their gate meter retailer;
  • How flexibility in metering requirements, compared to market retailers, can be used to cut costs in metering provision to customers;
  • How ownership and design of physical infrastructure (i.e. wiring, connection points and transformers) might be used to reduce costs to the embedded network. For market retailers, the physical infrastructure is controlled by network businesses and is subject to more stringent regulatory requirements.

For further support, please contact the Compliance Quarter team by clicking here. Or if you’d like to talk through the three innovation opportunities from the AEMC review, please feel free to book a call with us directly by clicking here.

[1] See https://www.aemc.gov.au/sites/default/files/2018-06/Final%20Report.pdf.

[2] See https://www.compliancequarter.com.au/may-2018-energy-roundup-budget-2018-and-new-renewable-energy-projects/.

[3] AEMC 2018 Retail Energy Competition Review, p6.

[4] Ibid., pii.

[5] Ibid., p137.

[6] Ibid., p150.

[7] Ibid., p111.

[8] Ibid., p38.

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