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Challenging times ahead for the AER

James Reynolds — September 2011

Emerging Issue: Debate at the CEDA Trustee lunch on 4 August 2011, identified a broad base of challenges ahead for the Australian Energy Regulator (AER).

The first challenge relates to the emerging risks in Australia’s energy markets; notably, the choice of the next generation of reliable low emissions base load generation investment from options of:

  • Combined cycle gas turbines (gas price risks)
  • Carbon capture storage (commercialisation of technology risk); or
  • Geothermal (combination of technology commercialisation risk and affordable connection to the grid risk).

These risks are prevalent and, now with a price on carbon, are essential to reducing the emissions intensity of our gross domestic product – the consequence of how these risks are managed will be ultimately reflected in the delivered price of electricity to consumers.

Addressing peak electricity demand through innovative solutions within the current economic regulatory framework is a key challenge. New demand-side management technologies are likely to be enabled by network style or alternatives to network investments, yet the current industry structure, and regulatory incentives ensures that network owners are unable to fully capture the value from these prospective technologies.

The underlying drivers’ increasing network costs and final prices to consumers are ubiquitous, and propelled by: strong growth in peak energy demand and physical connections (essentially catering to growth); replacing ageing assets; and meeting increased planning and reliability standards. The choice of looking for lower network costs may also translate to less reliable electricity supply, which is not where the current debate is focused.

The role for the AER and its institutional counterparties – the AEMC, the MCE, and AEMO (to a lesser extent) – is to provide a stable, consistent, and robust regulatory framework to facilitate necessary capital investments in long-lived assets minimising long-term costs to consumers. Whether the AER’s foreshadowed changes – to increase its decision-making discretion, alter the application of current merits review arrangements, and substitute alternate computations of regulated businesses WACC – provides the basis for achieving these objectives over the long term, remains to be seen.

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