What is it going to take and what needs to be done!?

MARCH 23 2021 — OUR ENERGY, CORTEXO & CTQ ADVISORS

In this, the fifth and final article of our series, we aim to highlight some of the principles that could guide the who, what, when and how of Aotearoa New Zealand’s electricity sector meeting the challenges and opportunities of accelerated electrification.

The story so far goes like this:

• Meeting the carbon budgets proposed by the Climate Change Commission requires a fit-for-purpose electricity system and market able to cope with the heavy lifting resulting from rapid electrification and uptake of renewable, distributed energy resources (DER).

• The electricity sector will not make a least-cost transition to a low emission future without a plan of action. But, the broad discussion on how the electricity sector plans to evolve to support least-cost electrification and decarbonisation of the economy has not really started

• People, the economy and the environment will be worse off unless this year we come up with a plan and start to upgrade the regulatory settings. 

• Several critical decisions are needed by 2023 to put the electricity sector on the path to least regrets and least-cost electrification

So, what needs to happen next?

Success requires being clear about who, what, when and how

The goal is to make sure the right things happen, in the right sequence, in sufficient time, to put the electricity sector on the path to least regrets and least cost electrification. 

Specifying the who, what, when and how, plus clearly describing the why, will not be an easy task. Nor will it be easy to complete the tasks set down in the resulting plan.   

Upgrading our regulatory and market settings to reflect the commitment to zero carbon will, almost certainly, require similar levels of political and economic capital as have been deployed over the past 20 to 30 years to create the wholesale and retail electricity markets that we know and love.

And there are more voices in the room, and more voices not in the room which also need to be heard to achieve an electricity market and system which deliver what people want and need. 

So this time around, to avoid the lack of public (and political) confidence that persists with the ‘Bradford reforms’, there must be a clear commitment to designing people power (the demand-side) into the electricity market and system. 

There are four things which will make the difference between success and disappointment.   

• Clear policy leadership to coordinate the transition and hold everyone accountable

• A long term view which focuses on the things which set the critical path 

• Being inclusive and making sure all voices are heard, particularly the people the whole thing is designed for  

• Learn by doing, using pilots and trials to find what works.

Clear policy leadership to coordinate the transition and hold everyone accountable

Clear policy leadership is needed to coordinate the transition and to hold everyone accountable.

A useful current-day reference point is the Energy Security Board (ESB) established by all Australian governments in 2017 to coordinate the implementation of an electricity market reform blueprint and to provide whole of system oversight for energy security and reliability to drive better outcomes for consumers. The reform blueprint was commissioned by all Australian governments following a series of ‘stumbles’ by its electricity system and market. The most recent output of the ESB was a Post-2025 Market Design Directions Paper mapping out what is next.  

There are a number of differences between Australia and Aotearoa New Zealand. But that does not mean there are no useful insights from the Australian experience:

• impetus and urgency for change exists due to the policy leadership of the Australian governments. The direction of travel was set by the government commissioned blueprint for upgrading the regulatory settings;

• responsibility for delivering the blueprint is delegated to an independent, expert body with a specific forward-looking focus and not distracted by the dramas of the day (government officials keep a close eye on things though); 

• collaboration by the three electricity sector regulators is baked in, but they are not asked to identify the specific changes (they are responsible and accountable for implementing the changes identified by the ESB – the regulators play a support role, not a lead role);  

• there is a broad ecosystem of parties able to contribute to the redesign of the regulatory and market settings, including sector participants, Energy Consumers Australia and the Australian Renewable Energy Agency.

For another perspective, the UK Government released its plan in December 2020.

The experience of the redesign processes in the late 1990’s and in 2008-10 is worth reflecting on, but there are differences, particularly the existence of the Commerce Commission and Electricity Authority. However, the Commerce Commission and Electricity Authority are not intended to provide overarching policy leadership. In any event, one cannot direct the other, leading to inertia when priorities or perspectives differ. 

It’s essential, then, that we have some form of separate body with a mandate and budget to lead, plan and direct. While that may not be a specific role for the Climate Change Commission, we certainly expect to see that entity’s influence over our institutional settings grow. There are parallels here with how economic and social reforms of the 80s and 90s have shaped our public and private lives.

A long term view which focuses on the things which set the critical path

Upgrading the regulatory settings to create a more flexible electricity system and the market will be a long term project with multiple work streams and stages. 

A transition plan with a combination of teeth, carrots and sticks is needed to identify and sequence the tasks. A pretty complete list of things to do can probably be prepared using the Productivity Commission Low-emissions economy report, ENA Network Transformation Roadmap, the series of reports commissioned by the System Operator, and the Innovation and Participation Advisory Group, established to advise the Electricity Authority, advice on creating equal access to electricity networks.

But, the immediate priority is clear from the Climate Change Commission’s draft advice. We need to prepare our transmission and distribution networks to manage accelerating electrification at the least cost. At the most basic level, this involves:

• infrastructure investment settings which allow network investment ahead of time, while avoiding unnecessary over-building

• market settings that create flexibility markets to maximise the value for people of their DER and particularly to encourage networks to consider and procure viable alternatives to traditional poles and wires expenditure.

Delivering these outcomes means changes to how the Commerce Commission regulates electricity networks. It requires implementing much of the current voluntary ENA Network Transformation Roadmap, particularly enabling networks’ visibility of how their low voltage assets are being used. Development of the contractual frameworks to integrate DER and provide a clear pathway for households and businesses to be part of the distributed energy future is also needed. 

Being inclusive and making sure all voices are heard

A small group of experts cooking up a tasty new batch of regulatory settings in a backroom will not be to everyone’s flavour. The most likely outcome of even the most impartial process would be to see the results go in the bin due to a lack of confidence in the kitchen. 

A robust, durable outcome means the path to least-cost electrification must be walked by as many interest groups as possible: government, regulators, sector participants – present and future, large and small – industry groups, and consumers.

There will be a key role for the Consumer Advocacy Council currently being established to be the trusted, credible, authoritative and independent advocate for residential and small business electricity consumers. This body should make it easier for people and communities to get involved, particularly to express their preferences and expectations. 

The greatest challenge for decision-makers will be to reconcile the interests and positions of the integrated generation and retail businesses (particularly those with state ownership), distribution networks, Transpower, retail-only businesses, DER owners, aggregators and the rest. Identifying a future state which realises the best possible outcomes for consumers, the economy and the environment won’t be easy. 

That’s not a reason to exclude or ignore sector participants. Industry-led efforts to develop rule changes should be encouraged, particularly because doing so should help speed progress. But, the focus must be on protecting people (and the environment) first, not suppliers.  

The key thing to avoid is rules designed and dictated by parties anchored to the past, rather than looking forward. The goal of least-cost electrification will not be achieved if we let the past and present hold back the future.

A further challenge for decision-makers will be having the right appetite for risk and the potential for policy failure. Being conservative may be appropriate for a steady-state environment; but very risky for one likely to see rapid, transformative change.  

Learn by doing, using pilots and trials to find what works

Decision-makers, particularly the Electricity Authority and Commerce Commission, will need to leverage industry expertise and commit to using pilots and trials to find the way without getting bogged down in never-ending regulatory consultation processes

Regulatory change isn’t a simple exercise. The potential for wide-ranging impacts from getting it wrong encourages conservative and time-consuming decision-making processes.

A fail-fast approach might work for software development or a startup business. A regulator adopting the same approach would be exposing consumers and participants to the costs of poorly designed rules and the opportunity cost of time spent working on the wrong thing. 

Regulatory innovation is possible though. Open, multi-party regulatory pilots, trials, sandbox experiments are obviously a helpful tool for testing assumptions and consequences in a controlled environment. 

The development of the UK flexibility market (for network support) is a useful example. The market has emerged due to a range of factors, including industry leadership (committing to flexibility first) and changes to network regulation to promote use of flexibility. Development started in 2017 and services have been delivered since 2018. There has been ongoing refinement to the market rules over the time. Market volumes have increased from 116MW in 2018 to 1166MW in 2020. 

Pilots will also help to iron out the policy wrinkles. A key policy lesson from the UK (or mistake to be avoided) is the interaction between centralised versus decentralised flexibility resources – centralised, grid-scale resources are ‘faster to market’, but more expensive in the long term. Testing the market settings for real helped identify how policy choices could  inadvertently create a preference for centralised and relatively high emissions flexibility resources. In turn, this would raise costs for consumers and the environment by crowding out cheaper decentralised and low emissions flexibility resources.

A major advantage of trials is to provide practical insights to the impacts, thereby avoiding rule changes based on abstract ideas and the inherent bias of this to keeping the status quo.  

There is significant opportunity to expand the use of pilots and trials in Aotearoa NZ to support more informed policy making by moving from the present preference for a closed shop, siloed approach to a more multilateral, multi-party approach which emphasises sharing of experience and insights. Asset focused investigations are useful, but will never provide the insights which come from piloting the sort of multi-party exchanges found in a market environment.

Public and regulatory support for pilots will prove critical to avoiding large mistakes and to prompt changes to inadequate regulatory settings. 

In particular, the full benefit of an experimental approach will probably require dedicated financial support being available to assist less-resourced organisations test their ideas. Otherwise, regulatory experiments will mostly be conducted (and captured) by established, well-capitalised businesses with a big enough R&D budget.   

The current approach of allocating government funds to very specific areas is proving piecemeal and causing innovators to divert scarce resources towards making their innovation fit the funding requirements. An approach based on co-funding and knowledge sharing, similar to the Australian Renewable Energy Agency would definitely supercharge energy sector innovation in Aotearoa NZ.    

Wrapping things up

This series of articles has been about presenting a business case for the electricity sector to commit to starting the hard work required for the electricity system and market to meet the challenges and opportunities of accelerated electrification.

Article one identified the opportunity, article two identified the unmet need in the market, article three identified the size of the market, article four urged speed to market. This final article outlines the minimum viable product:

• Clear policy leadership to coordinate the transition and hold everyone accountable

• A long term view that focuses on the things which set the critical path 

• Being inclusive and making sure all voices are heard, particularly the people the whole thing is designed for  

• Learn by doing, using pilots and trials to find what works

We also need the forward-looking players to be properly recognised. No, that doesn’t mean awards nights or subsidies. It means the sector being honest with itself that priorities have been (and still largely are) skewed to near term matters and narrow self-interest at the expense of current and future consumers, the economy, and the environment. There needs to be at least an equal appetite for investing to upgrade the regulatory infrastructure as there is for building physical assets. 

Ara Ake is supporting regulatory innovation

Ara Ake, the new organisation tasked with accelerating the demonstration and commercialisation of energy innovation in Aotearoa, is aiming to coordinate a pilot to test regulatory settings which would give consumers more flexibility and choice. The idea is to trial if and how people having greater opportunities to realise the value of their energy resources can at the same time help to create a cheaper, more flexible, more resilient, and lower emissions, electricity system via a potential regulatory change known as ‘multiple trading relationships‘.

Ara Ake’s involvement will fill a gap by acting as a neutral go-between to connect the different parts of the energy supply chain. We need more of this type of thing – spotting and supporting practical opportunities for new energy development and using existing infrastructure and expertise differently.

Final thoughts

We think that formally establishing a collective voice of forward-looking players and a regular forum to demonstrate collaboration and share knowledge would help. 

Do you or your organisation want to be part of this? If so, get in touch.

We intend to combine our series of articles into a single ‘white paper’. And, we’ll be sending a copy directly to all key players. Again, please get in touch to make sure you’re on our list. 

The discussion we’ve launched in this series needs to be moved into a workshop (or perhaps even an ‘unconference’ format) with a target of coming up with an initial plan and identifying that essential, single, separate organisation that can lead, plan and direct. Would you like to support that? If so, let us know.

It’s worth doing. We’re not the only ones saying so. And, the Climate Change Commission’s proposed budgets mean there’s no time to waste – it’s worth doing now. Are you with us? If so, email us. 

This is the fifth and final of a series of collaborative articles put together by Aotearoa New Zealand electricity industry innovators, Cortexo and Our Energy, supported by Craig Evans of CTQ Advisors.

Our aim is to ask the questions not being asked. And share our views of the answers to these hard questions.

Get in touch with your hard questions and answers. We want to build a community of people, businesses and organisations wanting greater urgency in how the electricity sector responds to the climate emergency. The status quo simply does not cut it. And given current priorities, it’s very difficult to be confident the electricity sector will deliver the openness, flexibility, equity, and drastically lower emissions at anywhere near the speed that is required to meet our carbon budgets in a cost-effective way.

It’s time to stop talking and start doing…