Victorian Government releases major energy sector statement

In brief

The Victorian Government has issued a statement setting out its view of the state's strategic objectives for the energy sector and the Government's energy priorities. Energy, Resources & Infrastructure Partner and Government Sector Leader Paul Kenny, and Associate Monique Donato, provide an overview.

Overview

The Energy Statement, released by the Minister for Energy and Resources, Russell Northe, highlights the significant changes that are already occurring in the Victorian energy market and identifies others that are likely to emerge in the future. The statement suggests that the following challenges, trends and opportunities are a catalyst for change and will have long-term implications for Victorian energy consumers:

• increased consumer engagement and participation in the energy market;
• falling average electricity demand and rising peak demand;
• greater penetration of distributed generation, especially rooftop solar photovoltaic (PV); and
• increasing wholesale gas prices due to increased exposure to regional markets for natural gas.

The Government's objective for the Energy Statement is to ensure that Victoria has a plan to help drive a modern, resilient energy system that can flexibly respond to any changes arising from these trends.

The Victorian Government's energy priorities

After summarising the Government's achievements in the sector to date, the statement identifies seven areas as the Government's energy priorities. These are:

• retail competition;
• empowering consumers;
• achieving network tariff reform;
• dynamic and interactive electricity distribution networks;
• long-term investment in electricity generation and transmission networks;
• driving a more integrated gas market; and
• developing Victoria's energy resources.

Unlike the process for development of the Federal Government's Energy White Paper, the Victorian Government's Energy Statement has not been the product of a public consultation process. The development of the statement was informed, however, by an Expert Reference Group comprising independent consultants and representatives of key stakeholder groups. In addition, the Government has indicated a commitment to working closely with stakeholders in driving the broad direction of reform outlined in the statement.

The following provides a high-level overview of the seven energy priorities identified in the statement.

Retail competition

While the Victorian retail energy market is ostensibly highly competitive, the Energy Statement draws attention to the presence of high retail margins being paid by Victorian electricity consumers by comparison with other NEM jurisdictions. In order to properly identify and understand the causes, the Government intends to undertake a public review of the retail electricity market. The aim of the review will be to identify possible steps to improve competition, including the removal of regulatory or market barriers that directly or indirectly restrict retail energy businesses' ability to compete. One of the specific issues flagged for review is the role that standing offers play in the market and whether they may contribute to higher retail margins.

At present, Victoria and Queensland are the only NEM jurisdictions that have not adopted the National Energy Customer Framework (NECF). The Energy Statement confirms Victoria's intention to transition to the NECF by 31 December 2015. The statement indicates, however, that the Australian Energy Regulator (AER) will be funded by industry to monitor and enforce a set of Victorian specific consumer protections. A review of the NECF in Victoria will be undertaken in 2018 to ensure that it is benefiting Victorian consumers.

The Government has also stated that it will prioritise the development of new pricing structures and support an approach to achieve a single smart meter data standard, with the aim of allowing consumers access to, and control over, their energy data to help consumers manage electricity costs.

Empowering consumers

The State Government's plan to empower consumers includes:

• improving the functionality and awareness of its Switch On energy information website and My Power Planner price comparison tool to assist consumers making decisions about their energy use. The My Power Planner will be extended from retail electricity-only offers to also include gas offers and solar calculations to improve the ability to compare rooftop solar PV offers;
• establishment of the Energy Information Fund which provides funding of up to $1 million for projects to educate and empower customers that may not be reached by mainstream information campaigns; and
• promotion of energy efficiency, primarily through a range of existing measures.

The statement confirms the phasing out of the current energy efficiency program called the Victorian Energy Efficiency Target (VEET), after a review of the scheme found that continuing the program would come at a significant cost to many Victorians. While no specific new energy efficiency programs are proposed to replace the VEET, the Government has indicated that identifying untapped opportunities for further energy efficiencies is one of its priorities.

In the commercial sector, the statement discusses the Government's trial of Energy Upgrade Agreements (EUAs) with the City of Melbourne. EUAs provide council-based financing mechanisms for energy, water or waste reduction upgrades to existing commercial buildings. The Government plans to amend the Local Government Act 1989 (Vic) to enable all local councils to offer EUAs.

Achieving network tariff reform

The Energy Statement signals a clear policy direction in favour of more cost-reflective network tariffs as a means of achieving better outcomes in terms of both efficiency and equity.

The statement notes that annual demand for electricity in Victoria has dropped by 6.5 per cent from 52,088 GWh in 2008 to 48,724 GWh in 2013. The decrease has mainly been a result of rising electricity prices, increased energy efficiency, lower industrial demand and increased rooftop solar PV. However, the levels of peak demand remain high.

The current structure of flat network tariffs mean the costs of having sufficient network capacity in place to meet peak demand are distributed across all consumers, irrespective of whether their electricity use places an additional burden on the network. More cost reflective tariffs have the potential both to reduce peak demand, by sending appropriate price signals, and achieve a more equitable sharing of network costs.

Two initiatives identified in the Energy Statement to help drive network tariff reform are:

• a Victorian Government review of network tariffs, with the recommendations from the review being used to inform Victoria's approach to network tariff reform over the medium term; and
• the Government continuing to implement the recommendations of the Victorian Competition and Efficiency Commission inquiry into distributed generation, including examination of mechanisms that identify and enable consumers to capture the network value of distributed generation.

This chapter acknowledges how new technologies, such as electric battery storage, may also have a role to play in reducing peak demand, and reducing network costs, by enabling electricity to be stored.

Dynamic and interactive electricity distribution networks

The Energy Statement sets the foundation for Victoria to advocate for a fundamental review of network regulation in national energy market forums.

The statement emphasises the rapid change that electricity networks are facing and the implications this has for network regulation. It notes that, under the current regulatory model, the principal aim of network regulation is to set the total revenue for network businesses equal to the efficient costs of building, operating and maintaining the network. It suggests that this framework results in decisions that lock in substantial capital investment programs that are recovered from consumers over a lengthy payback period.

Regulatory reform may be needed to provide better incentives for innovation, to allocate risk in a manner that encourages commercial and customer focused approaches to long-term planning, and to introduce competition where it is efficient to do so. The statement indicates the Government's strong support for the current network regulation reforms that are being implemented based on the outcomes of the Australian Energy Market Commission's Power of Choice review. However, the statement says that it is unlikely these reforms will be adequate to support efficient transformation of the network for the future.

On this basis the statement commits the Victorian Government to developing (in partnership with NEM jurisdictions through the COAG Energy Council) a fundamental and far-reaching review of network regulation to effect change from 2020. The Government will undertake work to build evidence for a forward-looking review of network regulation that would consider:

• creating incentives for network businesses to invest in innovation that helps realise efficiencies in network service delivery;
• allocating risk between distribution businesses and consumers;
• developing the regulatory framework to encourage efficient decision making across the energy system so that an optimal mix of supply and demand side responses is achieved; and
• increasing the scope for competition across different network services, including identifying those network services that should retain natural monopoly features.

In terms of more specific and immediate actions, the statement indicates that the Government will introduce regulatory reform to improve the ease and speed of new electricity network connections for Victorian businesses, and will continue to advocate for an independent and adequately resourced AER.

Long-term investment in electricity generation and transmission networks

This chapter emphasises the importance of making decisions now that will support long-term investment in new generation projects and transmission infrastructure, notwithstanding the fact that AEMO's forecast future electricity demand has found that Victoria will not require new generation capacity before 2022-23.

The statement suggests that an important basis for supporting investment is long-term certainty around the national climate change policy. The statement indicates the Victorian Government's support for the ongoing operation of the Commonwealth's Renewable Energy Target (RET). In addition to the RET, the Government pledges to actively advocate Victorian interests in other national reform processes, including in relation to the Direct Action Plan and Emissions Reduction Fund, the Commonwealth Energy White Paper and the carbon tax repeal, and through the biannual COAG Energy Council meetings.

The statement indicates that the Government is open to considering different options for reform of the wholesale electricity market to address concerns that the NEM may not be able to deliver long-term signals for investment in generation capacity. It does not favour the introduction of a capacity market, which it suggests is a move to a more centrally planned model that imposes increased costs on consumers. One potential reform the statement suggests is worthy of further investigation relates to the wholesale market price cap. An increase in the price cap, currently set at $13,000, may provide improved incentives for new investment, particularly in peaking capacity.

In relation to transmission networks, the statement indicates on-going support for the improved transmission investment and access frameworks recommendations being considered as part of the AEMC's Transmission Frameworks Review.

Driving a more integrated gas market

A key theme of this chapter is the impact on Victoria of the fundamental shift in the gas market's focus from meeting domestic demand to supplying export markets. This, coupled with high exploration costs for new onshore natural gas sources, is placing pressure on domestic wholesale gas prices. The statement notes the risk that, while demand for natural gas in the long term is likely to be sufficiently met, demand may not be met in the short term, particularly in NSW. A shortage of gas in NSW will have flow-on effects for the Victorian gas sector, which services much of the demand in NSW.

The statement does not favour the introduction of a domestic gas reservation policy or restriction of gas exports as a means of controlling the supply and price of natural gas in Victoria. It suggests that such policies would be inconsistent with Victoria's open and competitive, modern economy. In order to mitigate the likelihood of higher gas prices in the future, the Government has indicated it will take action to deliver a more efficient east coast gas market, including by:

• advocating for a set of more integrated market arrangements throughout the eastern seaboard;
• seeking, through national regulatory and market reform processes, to make gas markets more transparent, liquid and accessible;
• advocating for a single set of principles for access to east coast pipelines;
• reviewing governance and rule making arrangements for the Victorian gas market; and
• funding the AEMC to undertake a thorough review of capacity and risk management mechanisms in the Victorian gas market, in consultation with AEMO.

Developing Victoria's energy resources

The statement confirms the Victorian Government's continuing support for the Coal Development Strategy, which involves market testing and development of Latrobe Valley coal, the Advanced Lignite Demonstration Program, and carbon capture storage projects, such as the CarbonNet project and the Otway Project.

In relation to renewables, the statement indicates the State Government's intent to remove potential barriers to introducing and adapting renewable energy technologies from overseas. No specific new initiatives are proposed other than changes to wind farm planning laws that enable minor amendments to existing wind energy planning permits to enable turbines to be upgraded to best-available technology.

With respect to onshore natural gas, the statement does not foreshadow any change to the existing moratorium on hydraulic fracturing, new exploration licences and approval of exploration drilling activities. A 12-month Onshore Natural Gas Community and Stakeholder Engagement Program was launched in April 2014, and the outcome of the consultation will no doubt be important in influencing future policy.