Navigating the Regulatory Journey to Net Zero
We are amidst the greatest transformation in the history of our energy markets, as technological cost curves, customer demands for new technologies, and impending net-zero policy interventions (both ahead of and after COP26 in Glasgow this year) begin to collide. For those deeply involved in the plethora of National Electricity Rule (NER) changes – as I experienced first-hand during my time with the Australian Energy Markets Operator (AEMO) – these are complex times.
The National Electricity Market (NEM) rule change process appropriately allows rule change requests to be made by any market participant or stakeholder. While historically these tended to be more incremental in nature, as the transition gains pace, rule changes are becoming more frequent, increasingly complex and inter-related.
The NEM currently has four market bodies – AEMO, the AEMC, the AER and the Energy Security Board (ESB), the latter responsible for the difficult task of charting a course for a ship that has arguably already left the harbour. The current dynamic can be difficult for those outside the market bodies to take stock of. On the one hand, the ESB is progressing a pathway to post 2025 NEM reform with its final report and recommendations due around August this year. On the other hand, the AEMC is utilising current rule change processes to explore and progress many of the reforms that the ESB is deliberating on, while State-based changes are also underway.
While advocacy has long been part of the regulatory landscape, two things have changed as a consequence of the energy transition. Firstly, the growing complexity and overlapping nature of rule changes now requires detailed technical arguments to be made to the AEMC. Secondly, influencing the AEMC is more difficult than ever as it faces the challenging task of delivering rule changes in a timely manner, ensuring all stakeholders are heard and appropriately considered, and co-designing least cost solutions with the ESB and AEMO that address both current and future needs of the NEM.
For industry, one thing is clear…the regulatory burden has never been higher and influencing the regime has never been more difficult. Choices need to be made about how and where to devote time and effort effectively engaging in regulatory processes over the next 10 years.
Defining the destination
The journey begins with three fundamental questions – What does the future look like? Where does my company or organisation fit in that future? And what do I need to impact or influence right now? Technology changes, cost curves, policy announcements and net zero targets, for example, provide a range of long-term scenarios that will define the future operating environment for companies.[1] Choosing a most likely scenario provides a proprietary view of the future that enables long-term strategies to be developed, key decisions to be taken, and portfolio optimisation to occur. It also provides a platform for prioritising which policies, reforms and regulatory processes are critical to that desired destination and worthy of the investment, advocacy and engagement required to influence their direction and outcomes. This is central to establishing an effective regulatory engagement strategy.
Setting the course
There has never been a more important time for companies to align their regulatory strategy to their corporate strategy. This can be achieved through identification of the fundamental principles, enablers and regulatory reforms required to achieve the desired destination within the most likely future scenario. Where companies identify that competitive advantage lies in exploiting certain markets – for example, the evolution of contestability arrangements for transmission, or new two-sided markets for distributed energy resources (DER) – a clear decision to prioritise those aspects of the reform program, and a laser focus on the enablers and design elements needed to optimise business and consumer outcomes, is essential.
Steering and defending the ship
Rule changes can have serious implications for energy market participants. The costs associated with Five-Minute Settlement reforms, for example, will be substantial. The Integrating Energy Storage Systems in the NEM rule change will better enable new bi-directional resource providers to participate in the NEM competing with traditional wholesale market participants. This requires adoption of a rigorous framework for assessing the impacts of rule changes and reforms on existing operations, and the alignment of advocacy and intervention to the outcomes of those assessments. The assessment should be undertaken through the following lenses:
Strategic–What does the rule change mean for my most likely scenario and desired destination? How does it benefit, impact or otherwise alter my corporate and/or portfolio strategy?
Commercial – What are the commercial or business opportunities? Will the changes open or close markets, impact pricing arrangements, allow new services or alter existing ones? What are the risks to my business? And what does it mean for my competition?
Operational – What are the technical and operational implications for my business (systems, people, processes, procurement etc.)? What are the cost impacts, and do they outweigh the benefits for my business, and for my customers?
Environmental – Are the changes consistent with, impacted by, or interdependent with other reforms, rule changes or initiatives underway or proposed?
Given the increasing complexity and pace of reform, the nature and quality of your interactions matters deeply – a regulatory navigation strategy that is aligned to corporate strategy; has a laser focus on what is important to the future direction and success of your company; and a robust framework for assessing regulatory changes in order to meaningfully influence outcomes is now a core business imperative.
Keen to continue the discussion? Email me at srennie@renniepartners.com.au
Rennie Partners is an integrated regulatory, strategic, and commercial firm based in Brisbane and operating nationally. We pride ourselves on framework-based solutions to understanding and solving difficult questions for our clients, consequent to the global transition towards a net-zero future.