The Australian Energy Market

Kevin Cox

We are fortunate that the ACT government and regulated organisations seek feedback from ACT citizens. One of the main ways is with YourSay https://www.yoursay.act.gov.au/. Other ways are submissions to government enquiries.

The Gungahlin Community Council has representatives on other bodies. One of these is the Evoenergy Consumer Representative Council (ECRC), of which I am the current representative. The ECRC members were asked to put submissions to an enquiry into the Rate of Return for the distribution and transmission monopoly services. Because the supply of energy is a capital intensive industry, the Rate of Return is the major determining factor in the price of electricity and gas. For those interested, this link https://www.aer.gov.au/publications/guidelines-schemes-models/rate-of-return-instrument-2022/initiation gives the method used by the Energy Regulator.

Regulating the Electricity Grid

The electricity grid consists of transmission and distribution wires. Transmission wires are the large ones between large producers and places where electricity is consumed. For example, the wires from the Snowy Mountains to Canberra or the Wind Farms in Victoria to Canberra are transmission assets. Distribution assets are the local wires in Canberra.

The grid is a natural monopoly. There is no point in having two sets of wires running down a street. However, it means consumers have no choice, and there is no market to set the price of electricity distribution. To address this problem, the government created the Australian Energy Market Commission to set the rules, including pricing, for the grid.

The mission of the AEMC is:

To work for Australia’s future productivity and living standards by contributing to a decarbonising, affordable and reliable energy system for all consumers.

The members of the AEMC are appointed by the Federal and State governments, who also appoint the board of the Australian Energy Regulator (AER) to administer the rules set by the AEMC.

Setting the Price of Electricity

Australia has an existing electricity grid. Governments, private and public companies own different parts of it. Investment money is needed for capital works to expand, develop and maintain the grid. The returns on investment capital are a major part of the electricity price.

The organisations that own the grid are shareholder companies, and shareholders determine where and how investment money is spent. The task of the AEMC and AER is to set and administer the rules to meet the above mission — which is to protect the consumer — while the company duties are to meet the needs of the shareholders and increase the shareholder returns.

Shareholders contribute capital to companies. At the moment, there is no way for consumers to contribute capital. Yet, historically consumer money has built the network and continues to supply ongoing capital through the charges for transmission and distribution of energy.

Consumers' lack of a voice on the investment decision-making boards of shareholder companies makes it difficult for the AEMC to meet its objectives of affordable and reliable energy for consumers.

Recognising Consumer Capital

My submission to the AER outlines how to recognise consumer capital while leaving share ownership structures intact. Consumers could contribute capital directly by prepurchasing electricity at a discount. For example, a citizen could purchase 20 years of electricity and receive a return on their capital as a discount when the prepayment is used. If companies fund some investments this way, the regulators can require consumer representation at the company board meetings. The regulator can require that consumer capital be obtained before loans or investor capital. Consumer Capital puts consumer money at risk in a similar way that share ownership puts shareholders money at risk.

When shareholders receive dividends, the regulator can specify that some of the dividends must be a return of capital. The capital returned can pass to consumers as prepayments. To make the system scalable and economically efficient, consumers can organise themselves as local non-distributing cooperatives. They can elect representatives to sit on the boards of regulated companies.

The local non-distributing cooperatives acquire capital when paying for their electricity. The cooperatives can have their own internal mechanisms for distributing the capital to members. The cooperatives can use the capital as collateral for batteries or solar installations loans. Local consumers can distribute the returns on capital as lower prices or more investments.

Summary

Consumer capital could give consumers a voice at the decision-making table of distribution and transmission companies. It does not change the existing physical or organisational structure of the Australian Energy Market. However, the consumer’s voice in the energy market replaces the choice they would have in an unregulated non-monopoly market and strengthens the role of the AEMC. It makes the Australian Energy Market closer to an unregulated competitive market and makes electricity more affordable. It directs investments to more economically efficient forms of renewable energy.

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Kevin Cox

Kevin works on giving individuals control over their online information - particularly their financial information with local communities.