Forum on Sustainable Energy, Good Governance and Electricity Regulation

Regulation’s role in demand management and renewables: reflections from the

experience in Australia

Eric GroomPrincipal Advisor, IPART

Singapore, 17 March 2008

Drivers for DM and RE

Societal/externalities Environmental Access Local development Affordability

Wholesale/retailNetwork

Role for regulator

Context/country specificDepends on – for example

Institutional/political framework Market structure

Varies over time… and between different activities of

regulator?

IPART’s role

Established 1992 – multi-sector utility regulator ‘Long’ involvement in DM issues

1996 reviewDelineation of role of regulatorHybrid revenue cap

1999 review Full revenue capPricing principles

2002 DM and RE review for government 2004 review

Price Cap + D factorEmissions Trading Scheme

Network regulation

Two key aspects

1. Form of regulation and the incentives created

2. Pricing ‘positive pricing’ i.e prices that reflect costs

by locations ‘negative’ pricing or payments to reduce load

on networks to reduce congestion and avoid capex

Network regulation and DM and RE

Many challenges to DM and RE – not least are cultural and planning biases

But regulation can also create bias in short term

Price cap is a strong disincentive due to the lost revenue

In long termUncertainty over treatment of capex and perceived

bias towards traditional options And regulators have a role in ensuring bets

practice planning process and opportunities for participation of DM and RE projects

IPART’s experience with network regulation

IPART started with hybrid revenue cap and full revenue cap

‘Best solutions’ to short term bias but ineffective. Why? Long term uncertainties remained Strong bias to selling more electricity in

utilities Difficult concept for advocates within utility to

sell

D factor

In 2004 Tribunal adopted price cap with D-Factor.

D Factor is an add-on designed to correct for problems of price cap. Adjusts for impact of lost revenue from

foregone sales allows for recovery of direct expenditures on

DM up to cost of network alternatives allows for the retention of cost savings by the

utility for the regulatory period

Network DM projects under D-factor

Impact on network investment

Program is still small But relative to the size the capex savings are

significant

Over 2 years EA avoided $11m and IE avoided $12m

Trend: small (eg sub $1m) deferred indefinitely, larger projects for 1-2 years

Emissions Trading

Outline of the scheme

Obligation to reduce greenhouse gas emissions attributable to retailers Target: reduce from 8.65 to 7.27 tCO2e per capita by 2007

Emission reduction certificates can be created through low emission generation energy efficiency carbon sequestration large user changes to production process

Interstate activities included Certificates are tradeable Obligations met by acquitting certificates Penalty: $10.50 per tCO2-e(not tax deductable) if target

not met

Role of the Regulator

The regulator (IPART) Monitors compliance with the target reductions in

emissions and imposes penalties Performs the scheme administration role

Scheme administration is not a regulatory function and need not have been given to IPART IPART established it as a separate stand-alone activity

to facilitate a future change in responsibilities

Structure of the Scheme

Issues in Implementation

Responsibility for making good ‘bad certificates’ is with creator Certificates, once registered, are ‘good

currency’.Benchmarks for existing generators and

concern at ‘windfall gains’Inclusion of inter-state activitiesMeasurement and verification of energy

efficiency programs

Assessment

Targets achieved 200 accredited providers – over 100 in DSA 60 million certificates issued – 1/3 for DSA

Implemented with few resources, relatively quickly Reliance on third party auditors has developed capacity,

aided learning Main criticisms: generous rules on allowed generating

activities – but policy issue; administrative ‘learnings’ stand Facing critical transition – oversupply, declining price and

uncertainty about future. Key Transition to national cap and trade scheme on emitters Separate EE certificate scheme