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Select Committee into the Resilience of Electricity Infrastructure in a Warming World
Storage technologies and localised distributed generation in Australian electricity networks

ADAMS, Mr Peter, General Manager, Wholesale Markets, Australian Energy Regulator

GROVES, Ms Michelle, Chief Executive Officer, Australian Energy Regulator

PIERCE, Mr John, Chairman, Australian Energy Market Commission

WEBSTER, Ms Catriona, General Counsel, Australian Energy Market Commission


CHAIR: We will resume with representatives of the Australian Energy Regulator and the Australian Energy Market Commission. Before I do that, there are going to be a number of requests for media to film for the rest of the afternoon, so I want to make sure everybody is comfortable with that.

I need to remind witnesses that the Senate has resolved that an officer of a department of the Commonwealth or of a state shall not be asked to give opinions on matters of policy and shall be given reasonable opportunity to refer questions asked of them to superior officers or to the minister. This resolution prohibits only questions asking for opinions on matters of policy and does not preclude questions asking for explanations of policies or factual questions about when and how policies were adopted.

Thank you for coming in this afternoon. Would any of you like to give an opening statement before we go to questions?

Mr Pierce : I might go first, if that is all right. Thank you for the opportunity to present to the committee today. As everyone is aware, and as I am sure everyone else has told you, our energy system is undergoing quite a revolution that is driven by changes in technologies, consumer preferences, and, indeed, the policy priorities of government. On one hand, that creates lots of new opportunities for new services, options for consumers and new business models around storage, electric vehicles, and microgeneration systems, to have smarter ways of consuming this stuff. But, on the other hand, greater and different types of risks need to be managed.

In that environment, I wanted to explain two things: what the role of the commission is in this world; and then point to four areas of reform that the commission has been recommending be adopted by Australian governments, which includes areas that are covered by this committee's terms of reference.

The AEMC is one part of the broader energy governance framework that was put in place by the Council of Australian Governments. That framework has been formalised into an intergovernmental agreement that was signed by the leaders of the state, territory and Commonwealth governments: the Australian Energy Market Agreement. In that, the commission is one of three market institutions—the other two being represented here today—and in that role we really do two things. We are the rule maker for the Australian energy markets, which includes the rules that govern what is referred to as the NEM, the transmission and distribution networks, wholesale gas markets, natural gas pipelines and the retail sale of energy to consumers. Anyone except the Australian Energy Market Commission itself can propose to us a change in those rules, so those rules evolve over time in response to proposals for changes that are put to the commission. In that sense, the future development and evolution of the market framework is in the hands of the market participants, the other market institutions, governments, consumer groups, environment groups and various stakeholders within the sector.

That is our statutory role, but in addition to that we also undertake reviews that are normally under terms of reference issued by the COAG Energy Council where they are seeking advice on how improvements to the regulatory and energy market arrangements may be made. A short way to understand how this process works is that, if somebody thinks that there is a problem and they think they also know what the solution is, they will put a rule change to us. If governments think that there is an issue and want potential solutions explored, that is when they tend to ask us to do a review. Recently, in addition to our statutory functions, the commission has been provided with terms of reference from the COAG Energy Council, requesting what is referred to as 'targeted strategic advice to inform the council's energy market strategy and priority setting process', so that will form part of our work program for this year.

In making those rules, performing our statutory function and providing the advice that we do, the commission is really governed by the three national energy policy objectives: the national electricity objective, the national gas objective and the national energy retailer objective. They are three different objectives, but they all sort of have a common theme, which is referred to as 'promoting the long-term interests of consumers' but with respect to a very specific set of variables: price, quality, reliability and security of those energy services as well as the system as a whole.

The outcomes that consumers experience, of course, are also determined by the other policy objectives and policy mechanisms and instruments that are put in place by the Commonwealth and the state governments that operate outside and independent of national electricity law and the objectives that bind us.

The ability of the market to accommodate and adapt to the sort of changes that are going on is a core part of what the commission needs to focus on when we are doing our particular functions. Since the commission was established in 2005, we have made about 214 different changes in the rules and undertaken about 100 reviews. In more recent times—really over the last couple of years and certainly currently—the four areas that the commission has been focused on in suggesting priority areas for market development—

CHAIR: We are going to get to quite a few questions, so I was wondering how much longer—

Mr Bradley : I was just going to state what they are rather than explain them, because I am sure the questions will come. One is systems security. Two is the integration of the mechanisms used to achieve emission-reduction policy objectives and energy policy objectives so that they are aligned and work together. Three is the redesigning of the way in which gas is bought and sold in gas markets. Four is the promotion of a competitive retail energy services sector.

Thank you.

CHAIR: Ms Groves?

Ms Groves : The Australian Energy Regulator is Australia's national energy market regulator and an independent decision-making body. We regulate energy markets and networks under the national energy market laws and rules. While we have wide-ranging responsibilities under the energy market legislation, probably of most relevance to the committee's terms of reference is our role in electricity network regulation.

In my short opening statement, I would like to inform the committee about the work the AER has been doing to ensure the regulatory framework is meeting the opportunities and challenges of the technology and consumer changes that are facing the market. Over the past few years we have seen exciting developments in technology. In response to these developments, we have been working on new or refining existing regulatory schemes and frameworks to support the efficient uptake of these technologies. We have been guided in our work by the energy market objectives, which Mr Pierce has already referred to—essentially the safe and reliable energy services in the long-term interest of consumers. We consider that competitive markets are best placed to deliver new products and services to consumers and to ensure that customers can capture the value of their choices. Competitive markets empower consumers and lead to lower prices and better quality products and services in the long run.

In our development work we have sought to clearly separate regulated from potentially competitive services. This is to allow new energy markets and products to emerge and to prevent monopoly businesses from exploiting their market power and harming consumers. Clearly where we cannot rely on competition, we need to effectively regulate the monopoly elements to keep costs at an efficient level. We also need regulation to ensure consumer rights are protected. Through changes to the rules and guidelines, we now have a range of mechanisms to support consumer driven rollout of new technologies based on these core principles. Some of the most significant recent developments include our work on new ringfencing guidelines. Under these guidelines, networks are prevented from favouring their own affiliates over other businesses offering competitive energy services, such as rooftop solar, smart appliances and storage. Such separation helps to promote a more level playing field for competitive energy service providers. The guidelines also prevent cost-shifting of the networks from their affiliates into the regulated parts of their business, making sure that network customers are not paying more than they need to.

We have been working to implement reform in network tariffs. More cost reflective tariffs help consumers make informed decisions on how and when they should use electricity as new technologies evolve. Tariff reforms support customers to get the full value of the investments that they are making in new technologies. We are developing a new demand management incentive scheme and innovation allowance. It will provide electricity distribution businesses with an incentive to undertake efficient expenditure on non-network options relating to demand management. The innovation allowance will provide distribution businesses with funding for research and development in demand management projects that have potential to reduce long-term network costs.

The existing scheme to date has supported some $40 million of demand management initiatives, mostly in storage projects. Our program of work to improve network businesses' annual planning and regulatory investment test will provide greater opportunities for third parties to bring in non-network solutions when enhancement or support of the grid is required. In the retail market context, innovation is providing opportunities for existing retailers and new entrants to rethink how energy services can be provided to consumers. There is a growing demand for alternative energy products, and in response a market for new and innovative business models is developing. We are evolving our approach to regulating entry to the retail market so as not to stifle the benefits that may be on offer to consumers. We are also working to provide consumers with access to the best information to allow them to make informed choices.

It is important that our regulatory framework supports and enables customers to make good choices about new technologies and services. It also needs to ensure that customers are able to get the value of efficient inclusion of new technology into the grid. We have been doing a lot of work at the AER to make this happen, and will continue to do so until the framework adapts to meet the challenges of our evolving market. Thank you.

CHAIR: Mr Pierce, why was the decision made on Wednesday to turn the power off in South Australia when there was the potential for more capacity? Your organisation is one of five bodies and regulators across the system. Why do you think that occurred?

Mr Pierce : Given how recently these events occurred, I am not in a position to express a view on that on behalf of the commission until we have far better information. To give you a sense of how that operates, perhaps the system black event in South Australia back in September might be a good example. Under the rules, when an event of that nature happens the operator has an obligation to produce reports that explain 'natinically' what happened. The AER also has the power in those circumstances—well, generally—to do a compliance review on whether all the parties that are subject to the rules followed the rules.

The COAG Energy Council has given the commission terms of reference to review those events in September, but it acknowledges that for us to do our bit as to what lessons can be learned to improve the rules and the regulatory arrangements, we are reliant firstly on the operator fulfilling their role and, secondly, the AER fulfilling their role in terms of the compliance review. They are really two key inputs that we need to start to answer that question in relation to what happened back in September, and the same—although we have not necessarily been asked to do a review of Wednesday—

CHAIR: Has no-one asked you to do a review as yet?

Mr Pierce : Not the Wednesday, no. But I would suggest that—

CHAIR: Do you expect that that will occur?

Mr Pierce : I would expect that our work in looking at what occurred in September would also want to look at what happened on Wednesday.

CHAIR: Part of your role is to look at the rules. Are the rules working for what is the current make-up of the diversity of our energy generation and getting that energy that has been generated to the consumer? Do the rules work, or do we need to change them?

Mr Pierce : The rules certainly need to change, and they change all the time. I would highlight that there are capital 'r' rules—that is, the rules that we administer; but there are also the small 'r' sets of rules—that is, other pieces of regulation that affect the sector. It is the combination of the two that generates the outcome, as I said, that consumers experience—if you will excuse that particular pun.

We would not contest in any way, as it is quite clear to us that the outcomes that consumers are experiencing at the moment are not what anyone would desire, either in terms of prices and—

CHAIR: Who is currently—

Mr Pierce : If I may—

CHAIR: Who is currently benefiting from the rules? If the consumer is being screwed over, who is currently benefiting from the way the rules currently are?

Mr Pierce : I would not say that the consumer is being screwed over. I would say that there is an issue around the performance of the sector that people—

CHAIR: Some of my constituents back there in South Australia would probably beg to differ.

Mr Pierce : In order to understand why those prices are as they are, I would suggest it is necessary to be very analytical about analysing what the underlying drivers of that are, so that any diagnosis of what the problem is will result in a prescription that is going to do good rather than risk doing more harm than good.

Senator BACK: Chair, can I ask something in the same area that you are asking about?

CHAIR: Yes, Senator Back. I am happy for you to jump in.

Senator BACK: I just want to know, specifically, if you can tell me, whether the commission or the regulator had the power to direct AEMO to take action on 8 February in relation to securing supply of power. Do you have that power?

Mr Pierce : No.

Senator BACK: Or the regulator?

Mr Pierce : We have the power to make rules, as I say, when people propose rules to us—we cannot just make them up—and there are parts of the rules that deal with things like the powers of direction and the circumstances under which they are used.

Senator BACK: So, in February, there was no capacity to have done that. Thank you, Chair.

CHAIR: You talk about the need for a competitive market and that that would deliver the best outcome for consumers. It seems to me, from the evidence we have been given this morning, the rules work against the ability to have a competitive market, when you have settlement units set at 30 minutes rather than at five minutes for example. What are you doing to advocate that those changes need to happen so that energy that has been created, whether it is rooftop solar or in other ways, is actually allowing for the marketplace to be as competitive and as responsive as the consumer needs?

Mr Pierce : One of the market participants, in fact a large industrial customer, has proposed a change in the rules in relation to the specific one that you mentioned—turning the settlement time within the spot market from 30 minutes to five minutes. That rule change process is currently underway, and we are assessing it against the legislative objective, the National Electricity Objective. That rule change is within that statutory process. We consult very widely on all our rule changes, particularly on things of this sort of nature, because it is such a fundamental issue for the structure of the market.

That one is being processed at the moment. We published, last year, a notification that the rule change was underway and started the consultation process. We will publish a directions paper, which will really just outline what some of the options might be for implementation of that rule change and unpack some of the issues around it. We are currently expecting to make a final determination in the beginning—sorry, we will publish draft rules, which are akin to exposure drafts of legislation, on 6 July, so it is under consideration. I cannot tell you what the outcome is going to be. I am subject to judicial review processes through the statutory processes.

CHAIR: There are the Australian Energy Regulator, the Australian Energy Market Commission, the Australian Energy Market Operator and a handful of other bodies in this space. It seems to me that there is a whole lot of bureaucracy regulating the system, and that keeping the power on and having a reliable response to the needs of households, businesses and consumers is getting lost in the middle of all of that. How do you propose that we make sure that what happened on Wednesday in South Australia does not happen again? What is the proposal that you are putting forward to government or, indeed, to your other agency counterparts to make sure that does not continue to occur?

Mr Pierce : You are operating on different time horizons here. In terms of our role, those four areas that I referred to before are the priority areas, or the agenda, if you like, that the commission would be suggesting that governments focus on. In relation to the performance of the system, I would suggest to you that, whilst we have particular issues at this point in time in relation to people experiencing issues with security and reliability—the two being quite different—in general terms, the system has performed well over a long period of time and that, also over a long period of time, there were appropriate investments being made that maintained the reliability of supply: a new plant went in, an old plant went out. That process of renewal occurred quite successfully for a long period of time and, in recent times—

CHAIR: Yes, but it is not working now, so what is the—

Mr Pierce : We have been saying for some that, in order to deal with the sorts of changes that have been occurring both in technology policy objectives of government and consumer preferences, those four things needed to be progressed in order for it to continue to operate successfully.

CHAIR: I do not think you answered the question at all. There was a lot of boffin talk, a lot of bureaucratic jumble—with all respect—

Mr Pierce : One, the mechanisms that are used to achieve energy policy objectives and emission reduction objectives are aligned and integrated so that they work together rather than working in opposite directions as they do currently.

Two, that we develop—as we are doing at the moment—new markets for the technical characteristics or the technical services that are needed to maintain a secure power system given the changes in technology—

CHAIR: Mr Pierce, we are going to have to go to questions from other senators. I just want to be very clear: is it that you have not been given clear enough direction from the federal government as to a plan for how the energy system and the market need to work given the new environment? Do you feel like you have not been given enough direction?

Mr Pierce : The policy direction that we operate under comes from the COAG Energy Council, not from any one jurisdiction. We have provided them with advice about what we think the priorities should be and have formally asked for that—as I said in my opening statement—from the set of terms of reference. Much of our work program, which we have had on over the last couple of years and currently, fits under those headings.

Senator McALLISTER: Mr Pierce, the evidence this morning has been around the nature of the transition that faces the electricity sector. It has gone to at least two dimensions: firstly, the ageing nature of the existing fleet and the need for substantial investment in whatever technology and, secondly, the increasing diversity of technology choices that we might contemplate as we make this transition. Is it fair to say that those four priorities you refer to contemplate a scenario of that kind? You do not disagree with the facts on the ground?

Mr Pierce : Not at all. Those four priorities were crafted with a view to those sorts of trends. One of the things that the rules attempt to do is provide a framework to achieve the policy objectives we have been given, irrespective of whatever the future may bring in terms of demand, technologies and costs. This allows the market participants—businesses—to adapt and find for themselves the best types of technologies and business models to use in order to win customers. That does not get dictated in the rules. It is a framework for how that operates and how we can keep the system together. We are not in the business of making forecasts, but those sorts of clear trends you can see happening. We have reported on them and discussed them in many of our reports, providing examples and models of how those changes are occurring, keeping an eye on whether there is an implication in the rules, some barrier in the rules to those sorts of developments taking root. If there are, we would bring it to people's attention and invite them to put in rule changes. I could list quite a few that we have done in recent times that fall under that heading as evidence that it happens.

Senator McALLISTER: One of the positions that has been put to this committee is that the lack of policy certainty around emissions reduction is significantly hampering market participants' ability to plan for the future, particularly around new investment. You mentioned the need to integrate emissions reduction objectives with electricity system objectives. Is that what you are referring to?

Mr Pierce : It is the role of government to determine what the objectives should be, not people like us. But the instruments that are used to achieve them—that is where we start to take an interest and get involved, as to whether they are being designed to achieve those objectives and, importantly, to work together. We have said this publicly and in reports: when you have a set of objectives under emission reduction or promotion of renewables—industry policy objectives—that are implemented through one set of mechanisms, and a set of energy market objectives that are done through a different set of mechanisms, then, unless they are working together, from the viewpoint of the companies and the viewpoints of consumers there is the risk that they do not work together. In fact, they tend to pull in opposite directions. And then we do not get the outcomes that either energy policy objectives require or emission policy objectives require.

Senator McALLISTER: I know that the AEMC has previously recommended that some version of an emissions intensity scheme would be an appropriate evolution for the emissions reduction fund. Is that still the view of the AEMC?

Mr Pierce : At the end of last year, we published a report on the integration of these mechanisms. Really, it was a report that looked at the characteristics of different mechanisms that could be used to achieve a given emission reduction objective. The specification of the emission reduction target is up to governments to determine.

Senator McALLISTER: Of course.

Mr Pierce : The advice that was being sought from us by the energy council was around the characteristics in terms of the effect on markets, the effect on investment and the ability to respond when the future turns out differently from what we expected it to do today—of different types of emission reduction mechanisms, one of which was the emissions intensity scheme. On the criteria that were put forward, it was pretty clear to us that it had the most attractive characteristics—the chief one being it was the one least dependent on your forecast today of what the future was going to be. It would self-correct.

Senator McALLISTER: I will turn to something slightly different. One aspect of our discussions this morning has gone to whether or not there ought to be any government involvement in regulating the energy sector. Since you are, of all the institutions, perhaps the one most focused on policy, could you explain the underlying policy rationale for government involvement in the sector and then how your organisation and the AER fit into that frame? If you could do it briefly; I know it is a big subject area. But I think getting some basics on the record would be helpful.

Mr Pierce : Even if we had a blank sheet of paper and there was not the history behind governments' involvement in this sector, given the essential nature of energy and its underpinnings to rest of the economy governments would, of course, have an interest in how that was being done. I refer to it as self-evident that government will have a set of policy objectives—i.e. a set of outcomes from this sector—that it would want to see being achieved. One manifestation of that is the objectives written into the National Electricity Law.

Of course, how those objectives are met is a point on which people can have different views as to the degree to which government is directly involved in the supply or not. We always thought the government's chief role was to specify the policy objectives. It is from those legislated objectives, just like in any other area, that the regulations that affect the sector then hang off. Government obviously has a role there. The regulations in this area are somewhat different. There seems to be the need to regulate monopoly activities such as the networks. The AER regulates consumer protection arrangements. So, in the same way that there is consumer protection law generally, there is a set of very specific consumer protections in relation to energy. The rest of them are referred to as regulations, because, perhaps somewhat uniquely, they are driven by physics. There is a need to coordinate the production of this stuff with consumption and to be able to do that continuously. So a lot of the rules are around how that is done. You do not necessarily need that degree of prescription in other sectors of the economy, because, as I say, the physics are different.

Senator BACK: Mr Pierce, in your System Security Market Frameworks Review you flag the challenges of increasing non-synchronous generation such as wind and solar. Can you explain to the committee what you mean by 'non-synchronous generation' and then can you elaborate on what these challenges are and what we need to know about them.

Mr Pierce : Sure. There is a technical answer to that that an engineer will provide you with, but I will provide a more general understanding. In order to keep the lights on, you need more than just having the right number of megawatts on the ground producing energy at the right time. In order to keep the system together, there are a number of other technical characteristics that need to be maintained and operated within fairly tight bands. The chief one, or the one that people have been focused on quite recently, is the frequency of the system. Think of the power system as a machine with lots of different parts in it: if the machine is not going to break then all those parts need to rotate at the same speed, and you need to be able to control that.

When you have big bits of spinning metal, as you do with more traditional coal and gas generation, they tend to provide those sorts of services effectively as a by-product of just being there. Nobody has to invest, or nobody had to invest in the past, specifically to provide these additional services that you need to run a secure power system. It just came as a by-product of the physics. When you invested in a coal-fired power station or a gas station it came with the ability to provide those services.

With the changes in technology and that is what is referred to as synchronous. It synchronises with the frequency of the rest of the system. The new technologies do not come naturally with the ability to provide those services. It is not because of whether they are renewable or not, it is just the technicality of the type of equipment. It is not to say that they cannot; it just does not come as a free by-product.

So our contention is that to provide these sorts of services that you need to maintain a secure power system we are now going to need people to specifically invest to provide those services, and if that is going happen then you ask what is the mechanism that is going to trigger that? Part of the system security review is looking at some rule changes that were also given to us after we started the review, but it is looking at what sort of market and regulatory mechanisms need to be put in place to allow people to finance the investment that is need to provide these additional services, which in the past, given the technology, tended to come anyway.

Senator BACK: I want to continue on that theme, if I may. I understand from AEMO that a semi-scheduled generator is one of intermittent output. Can you tell me when the classification of semi-scheduled generator came into national electricity rules? I presume these are industrial wind turbines.

Mr Pierce : We are vaguely thinking around 2010, but if you do not mind we will take that on notice and get you a very specific date.

Senator BACK: I am not going to ask your opinion on whether or not it is a good idea to have them, but I do want to ask: what would be the process by which you would go about removing the concept of the classification of semi-scheduled generators from national electricity rules?

Mr Pierce : If it is a classification that is included within the rules then someone would have to propose a rule change to us, and the threshold for a valid rule change is reasonably low. It would have to include a rationale as to why that conforms with the national electricity objective.

Senator BACK: Thanks. My final question goes to you, Ms Groves, if I may. In your opening comment you were saying that one of the roles of the regulator is to prevent cost-shifting. Could you expand briefly on what you meant by that?

Ms Groves : Certainly. Network businesses are natural monopoly businesses and they are entitled to recover their costs through their regulated revenues, which are paid for by customers under regulated prices. If those businesses are also involved in other businesses not related to the provision of those regulated services and have costs and are capable of moving those costs back into the regulated one, two things can happen. The customers of the regulated service can end up paying more than they need to, and the competitive market processes might be challenged, because the costs that should be sitting for them in those businesses have been shifted elsewhere. So they may be able to compete on an unfair playing field.

Senator BACK: For my clarification, if a parent company established generation facilities and set up a $2 shell company to operate those, with the idea, of course, of imposing huge costs on the $2 shell company, which ultimately—not in day-to-day prices—might be to the significant cost of consumers and others, would that be regarded as cost-shifting under your guidelines?

Ms Groves : Our guidelines are specifically related to the economically regulated part of the sector, which is the network businesses. Generators are not economically regulated. We have a role in there around enforcement and compliance, monitoring the rules and their compliance with the rules, but there is no economic regulation, in the same way as there is with, say, the poles and wires or the pipes.

Senator BACK: Thank you.

Senator XENOPHON: Mr Pierce, I have a number of questions that I want to try to get through as quickly as possible. Do you have views as to what lessons can be learnt from the South Australian state-wide blackout on 28 September last year?

Mr Pierce : I suspect we will, and that is why the Energy Council has asked us to do a review—

Senator XENOPHON: No, I do not ask in the plural—I asked whether you have views about that.

Mr Pierce : My views will be reflected in the report that we publish and provide in response to the council's request.

Senator XENOPHON: Which will be when?

Mr Pierce : The terms of reference ask us to complete that within six months of the completion of the reports from the Australian Energy Market Operator and the Australian Energy Regulator.

Senator XENOPHON: Some have said that AEMO providing reports into the blackout when AEMO was a key player in that may be seen as Caesar judging Caesar. Do you think that is a matter that could be better addressed by a more robust analysis? I think I wrote to you the day after the blackout asking whether you would look into it, and you demurred at that time. What do you say about the inherent difficulty of AEMO looking into itself?

Mr Pierce : I think you will find that one manifestation of a response to your request is in fact the terms of reference and the request the council has made of the commission to undertake the review that they have.

Senator XENOPHON: I am sure it was not my request that led to it.

Mr Pierce : Perhaps a happy coincidence. I am sure David can articulate the type of reporting that AEMO is obliged to do under the rules around the technical—what happened. You will perhaps do me the honour of allowing me to reserve any judgement about what how things can be improved in the future until we go through the proper processes.

Senator XENOPHON: Sure. You referred to the emissions intensity scheme, something I have a lot of familiarity with going back to when I commissioned Frontier Economics back in 2009, along with then opposition leader Malcolm Turnbull. Surely the main attraction of the EIS is that it lowers prices and does not involve the tax churn, and that it is also technologically neutral. Do you see that, in the context of your role, as providing more security of supply and also dampening prices, in terms of providing competitive tension in the market place?

Mr Pierce : It could be a characteristic. I would suggest that the main thing the sector needs to provide that sense of certainty and security that will then enable the market participants to do what they do—make investments and operate their businesses—is certainty around the policy framework and the policy instruments that are going to be operating and affecting the sector.

Senator XENOPHON: But also certainty in respect of investment, is that right?

Mr Pierce : In order to have certainty in the sense of investment, yes. They need to know what investments are going to fly or not, which means they need to know what is the policy framework that is going to apply, not just today but in five years time, 10 years time and 15 years time. It is the confidence people have in the stability, not necessarily in the specifics but of the framework, that underpins the confidence that people have for an investment.

Senator XENOPHON: I have been reading this morning a report prepared by Nous consulting, then headed by Dr Tony Marxsen, who of course is the current chair of AEMO. The report is headed 'January supply interruptions: executive summary.' It relates to the 16 January 2007 electricity supply interruptions in Victoria and in includes the section 'What happened and why and Opportunities and recommendations.' It is an older document. Are you familiar with it?

Mr Pierce : I am familiar with the fact that Dr—

Senator XENOPHON: If the witnesses may be approached with a copy of it. I think I provided it.


Mr Pierce : I personally am familiar with the fact that Dr Marxsen prepared that report, and I am sure that within the organisation I will have people who are very familiar with its content.

Senator XENOPHON: In fairness to you and also to Ms Groves, it makes a number of recommendations about changes to the national electricity rules; the role of the regulators—of course, back then it was NEMMCO, which evolved into AEMO. This related to bushfires, but many would say that it could relate to a severe weather event as well in relation to much faster supply restoration. It recommended changes to the rules to establish a clear obligation for NEMMCO, now AEMO, to promptly restore supply to loads, development of procedures for faster restoration of supply et cetera. Could I ask that both AER and AEMC take on notice some of the recommendations about changes to the rules—changes to the powers of the regulator—and whether those changes that were strongly recommended back in 2007 have been implemented and whether the implementation of those changes would have made a material difference to the blackouts we saw in September 2016 and the most recent load shedding just two days ago. I am happy to put them specifically on notice. That would help. But at least that is the base document.

My final question to put on notice both to the AER and to the AEMC is: are there any rules that you think need to be changed to help Australia meet its emissions reduction targets? That follows on from Senator McAllister's questions. Second, are there any governance changes that you think are required to help Australia meet its emissions reduction targets. Third, are there any areas of the market you are concerned about as to the level of competition and, in turn, the impact on prices and reliability. Thank you very much.

Senator ROBERTS: My salary is paid by taxpayers, and I am a servant to the people of Queensland. Before I go on to ask you some questions—mine will be more general—I am reminded that when I requested a presentation by the CSIRO chief executive on the empirical evidence on which the CSIRO's claim that we are affecting climate is based, his experts in that presentation refused to say there is any danger to our climate from carbon dioxide from human activity. They refused to say there is any danger.

With that in mind, I can think of all the carbon dioxide emissions, trading schemes and all the other things that we are now doing. Could you please define a market? What is a market, in your view? There is no trick question here.

Mr Pierce : As a colleague of mine expressed it, it is merely some sort of institutional arrangement that allows people who want to sell stuff to trade with people who want to buy it in such a way that they both benefit from it. What is not to like about that?

Senator ROBERTS: I love it. Ms Groves?

Ms Groves : I do not think I could say it any better.

Senator ROBERTS: So in a carbon dioxide trading market, an emissions trading scheme, I wonder what needs are being met and who is benefiting? What is the effect on our energy market of the government footprint through subsidies and regulations? Is that being costed?

Mr Pierce : These things change over time.

Senator ROBERTS: I agree.

Mr Pierce : We have published numbers and explained the mechanics of the effect of the renewable energy target, which of course operates outside of our governance arrangements, on both wholesale prices and retail prices, given that the two are different, and how those effects change over time. We have not summed it all up to a dollar amount. We do, however, publish each year a report, at the request of the COAG Energy Council, on what we expect over the next two or three years to be the main drivers of changes in energy prices. It is not supposed to be a forecast; it is 'these are the things that are going to make a change'. In the past, the main story has been prices have been driven by (1) primarily prices in the network prices and (2) the effect of the sum of all of what we put in as environmental policy instruments—the RET is a Commonwealth one but there are various state level ones as well.

Senator ROBERTS: So it is very hard quantify?

Mr Pierce : No. We have put numbers on it, very specific numbers. As I said, they change over time. What I am highlighting to is, at least in the past, network charges were the main thing that drove electricity prices up, and the cost of various environmental policy objectives was the second effect. Today, though, in the report last year and I expect in the future, the effect will primarily be driven by the tightening demand/supply balance in the wholesale market. That is a bit hard to differentiate. Let us say, if the RET did not exist, what would the wholesale market be doing?

Senator ROBERTS: Yes, I get you.

Mr Pierce : It is impossible to tell, but you know it is having an effect.

Senator ROBERTS: So government regulations, government footprint, is having an effect on those prices indirectly?

Mr Pierce : This is an important point that, I think, people need to understand if they are going to look at this sector. People spend a lot of time talking about technologies. They spent a lot of time looking at spot prices. Spot prices should only be thought of—I will be a bit extreme to make a point—as purely a mechanism that allows the physical dispatch and coordination of plant to happen. The economics and finance and the outcomes that consumers experience are actually more driven by what happens in the contract market. If the generator is highly contracted then the only reason it cares about the spot price is whether it has been able to bid so that its physical production can back its contract position. If they are undercontracted then that is when you see the price spikes. So any intervention—a building of interconnectors, an instrument to achieve an emissions reduction or an increase in renewable energy—you have to ask yourself the question: what is the effect going to be on that contract market? Is it going to make it more durable, have more liquidity, have a longer duration or detract from it? If it detracts from it, that is when we get problems.

Whilst people talk about the effect of different technologies, I would suggest that the answer to a lot of what we are observing in South Australia and what we have been observing in recent times in Queensland—and I would not be surprised if we started to see it emerge in Victoria towards the end of the year—lies in how the contract market has been affected and how well it is performing.

Senator ROBERTS: Our Constitution is based on the concept of competitive federalism, meaning that as states develop efficiencies those efficiencies will be copied by other states. Otherwise, they will lose their citizens and lose their business. It is a wonderful concept to me. We have a market of ideas, if you like, within our Commonwealth. There is nothing sexier than that in human history—the market for ideas. Now I am going to read a tweet from Tim Nicholls, who is the Liberal Party Leader of the Opposition in the Queensland state parliament. He tweeted:

Qld's coal-fired power saves NSW's bacon today, but under @AnnastaciaMP's 50% renewables target, who's saving ours in the future? #qldpol

So what we now have is a centralisation of energy going on—

CHAIR: Senator Roberts, we are out of time, so do you want to get to a question?

Senator ROBERTS: Yes, and it will decrease responsibility for efficiency within each of the states. If South Australia wants to keep being sloppy and stupid, good luck to it. If it drags Victoria down, good luck to it. When Victorians and South Australians run out of power after Hazelwood shuts down, they will turn to New South Wales and Queensland and drive our prices up, no matter what we do. In reference to protecting my constituents in Queensland, I can see that a central market will be the opposite of what our Constitution pushes. It will destroy competitive federalism. Any comments?

CHAIR: That was not really a question.

Mr Pierce : Not in my role as chair of the AEMC.

CHAIR: Thank you, all four of you. Thank you for your contribution today. If there are any further questions on notice, we will make sure they get to you. If there is anything that you agreed to take on notice, obviously the secretary will be in contact.

Senator XENOPHON: Chair, I will put some technical questions on notice. I will put them in on Tuesday.