New financial year, familiar themes for the energy sector

The 2024-25 financial year has commenced. The energy sector is adjusting to a new Integrated System Plan (ISP), new network prices, new electricity default market offer (DMO) prices, new enforcement and compliance priorities for the Australian Energy Regulator (AER) and ongoing scrutiny by the Australian Competition and Consumer Commission (ACCC) and State-based energy regulators.

Whilst the instruments and policy statements are new, the themes are familiar.

The energy transition is underway, but significant further investment in infrastructure and renewable generation, including by energy customers themselves, is urgently required if the power market is to transition to net-zero by 2050 without overly jeopardising electricity reliability, security and prices. Meanwhile, cost of living pressures mount, with energy affordability and customer protections remaining critical in the eyes of the law makers and regulators.

In this article, we explore how these themes set the regulatory and development landscape for the energy sector, particularly power and renewables.

• AEMO's Integrated System Plan
• Default retail prices
• The AER's enforcement and compliance priorities
• Network charge reset
• ACCC
• Conclusion

AEMO's Integrated System Plan

The Australian Energy Market Operator (AEMO) has released its biennial update of the roadmap for the energy transition in the form of its 2024 ISP.

It confirms that a mix of renewable energy generation (including solar and wind), connected by distribution and transmission, firmed by storage and backed up by gas-powered generation, remains the lowest-cost pathway to a net zero economy by 2050. Of course, the costs of pursuing this pathway will be considerable, estimated as an annualised capital cost of $122 billion to 2050.

However, with a predicted 100% withdrawal of coal generation by 2038 (five years earlier than previously predicted), AEMO has warned that urgent investment in, and delivery of, renewable energy generation, transmission and storage is needed.

For Australia to remain on track for a secure energy transition, AEMO has identified that by 2030:

• grid-scale wind and solar generation needs to more than double;
• storage capacity needs to increase seven-fold; and
• 2,500 km of new and upgraded transmission needs to be delivered, and be operating at full capacity (from five committed or anticipated projects currently underway across the NEM).

Barriers to securing these outcomes persist, including that planned projects are not progressing as expected for reasons including lengthening approval processes, social licence issues and investment uncertainty, supply chain issues and workforce shortages.

Energy customers themselves are also set to play an important role. AEMO has noted that both households and businesses are continuing to invest in rooftop solar, batteries and electric vehicles, often referred to as "distributed energy resources". For example, with the right NEM policy, market and system settings, AEMO observes that consumer batteries could be effectively coordinated to offset the need for an additional $4.1 billion of grid-scale investment (guarding against higher costs on consumer bills).

The distributed energy resources landscape has been an area of focus and progress for the transition in the last 12 months. However, it is also one of the most intricate, given the interaction required between various participants such as networks, retailers, metering service providers, orchestrators, installers and often landlords and bodies corporate. Layered on top of that are detailed regulation, customer protection imperatives, diverse technologies, complex metering and system requirements and customer equity considerations.

In the meantime, volatile wholesale prices (attributable to various causes, including energy scarcity and an uncertain transition trajectory) and the costs of the system augmentation and extension required to support grid-scale renewables and storage, are impacting bills.

Default retail prices

The AER's final determination on DMO prices for 2024-25 came into effect on 1 July 2024, as did the Victorian "VDO" equivalent. The default prices signal the energy regulators' views of a cost-reflective price and generally become an informal ceiling for new small business and residential offers.

Residential and small business default customers in New South Wales, Victoria and South Australia will see decreases in their electricity prices, while those in South-East Queensland will see increases. The extent of the price movements will depend upon the region, customer type, usage and tariff type.

The AER cites the following as key contributing factors:

• Wholesale versus network costs: While wholesale markets have stabilised significantly (though at higher wholesale prices than seen in 2021 and early 2022), this has been offset by pressures in network prices. Annual network tariffs for both residential and small business customers have increased across all distributors. These increases are attributable to a mix of factors (e.g., increases in inflation and interest rates, transmission costs, incentive payments / jurisdictional schemes etc.), which, in New South Wales at least, includes contribution allocations to develop renewable energy zones.
• Electricity affordability: Households continue to experience difficult economic conditions, including cost of living and electricity affordability issues. Given this, the AER was strict on the margins that it allowed energy retailers to achieve.

As many retailers revisit their pricing for the financial year ahead, the above factors will influence their approach. So too will the ACCC's requirements for electricity retailers under the 'big stick' regime in the Competition and Consumer Act 2010 (Cth) to make reasonable adjustments to their customer pricing to reflect sustained and substantial reductions in electricity procurement costs.

The AER's enforcement and compliance priorities

The AER is also set to carry over many of its enforcement and compliance priorities from last financial year. We reported on these last year in our article, accessible here.

These priorities demonstrate that, as the energy transition momentum builds and cost of living pressures grow, electricity generators' bidding behaviour and retailers' approaches to customer hardship, charging and energy plan transparency remain top of its agenda.

• Vulnerable customers: With cost-of-living pressures persisting for energy customers, the AER will continue to focus on energy retailers' observance of customer hardship obligations, including providing ready access to hardship programs and payment plans that reflect a customer's capacity to pay.
• Pricing and billing: To help ensure energy customers are engaging with the retail market and are on the best deal for them, again in the context of increasing cost of living pressures, the AER will continue focusing on energy retailer compliance with billing and pricing information obligations. These include the mandatory Better Bills Guideline (which has been in place for over 9 months now), which requires "better offer" statements be included on customer bills, as well as price and tariff change notice requirements.
• Power System Stability and Security: Important to power system security and efficient outcomes in the wholesale electricity market, the AER will continue to ensure generators are complying with offer and bidding obligations and AEMO dispatch instructions, as well as providing accurate and timely information about their capability and availability to AEMO. In the context of the energy transition, the AER sees it as critical that generators understand and comply with their regulatory obligations.
• Performance Standards: Given the increase in, and complexity of, new connections to critical infrastructure as the energy transition progresses, the AER is continuing to focus on improving generators' and load facilities' compliance with performance standards. On the other side of the connection point, the AER is also focusing on ensuring network services providers comply with their obligations in the National Electricity Rules and connection agreements, to allow AEMO to properly manage the power system.
• Gas Market Transparency Measures: With the new Gas Bulletin Board reporting obligations having now been in effect for over a year, the AER is shifting its focus from clarifying these obligations for gas market participants and monitoring the completeness of reporting, to ensuring the accurate and timely provision of required information. The AER sees this as important for price transparency, efficiency, investment decisions and informing government policy.

Network charge reset

Of course, the entire energy supply chain must do its part in supporting the energy transition in times of cost pressure and uncertainty.

From 1 July, networks apply their revised 2024/2025 annual pricing proposals which are underpinned by new revenue allowances for the NSW, ACT and TAS distributors.

In those 2024-2029 AER revenue determinations, the interaction of opposing forces is a common theme. Network customers will bear additional costs to allow the build out of the grid and the penetration of greater numbers of distributed energy resources, in support of the transition, and to ensure that networks, and therefore electricity supply, are resilient to increasing threats, including cyber risks, bushfires and floods.

ACCC

In power, there is an increasing intersection between ACCC and AER focus and enforcement action. For energy retailers, the AER is concentrating on billing transparency and hardship. The ACCC is also focusing upon customer and market outcomes in the energy sector under the consumer law, energy retail code and the 'big stick' regime.

For generation, the AER and ACCC's agendas underscore the need for generators to have (and comply with) rigorous processes and policies for compliance with market-facing obligations under the National Electricity Rules and the Competition and Consumer Act 2010 (Cth).

Conclusion

It is not necessarily disappointing or surprising that the themes for this financial year largely echo previous years. The actors mentioned in this article are advancing. However, a decisive approach is necessary to the hasten the resolution of the energy trilemma (balancing the competing priorities of energy security, sustainability and affordability). This must be underpinned by the alignment of relevant stakeholders and regulators, and State and Federal Governments, with clarity and coordination on who is doing what and how they go about it.

Claire Forster and her team are leading competition, consumer and energy regulatory lawyers. They act in all aspects of the regulatory interface and support local and global energy majors with compliance and their energy transition projects. Please contact us should you require any assistance.