Policy and law
What is the government policy and legislative framework for the electricity sector?
Scope of the responses
These responses relate to the National Electricity Market (NEM) in Australia.
Although brief reference is made to the electricity markets in Western Australia and the Northern Territory in question 2, the NEM is the predominant electricity market in Australia. The NEM operates as an interconnected electricity network across the states of Queensland, New South Wales, Victoria, South Australia and Tasmania and the Australian Capital Territory
The NEM is one of the longest alternating current systems in the world, covering approximately 4,500 kilometres.
Policy and framework
The policy underlying the NEM is contained in the National Electricity Objective (NEO) as set out in section 7 of the National Electricity Law (NEL).
The NEO is as follows:
The objective of this Law is to promote efficient investment in, and efficient operation and use of, electricity services for the long term interests of consumers of electricity with respect to: (a) price, quality, safety, reliability and security of supply of electricity; and (b) the reliability, safety and security of the national electricity system.
The legislative framework for the NEM is contained in the following legislative scheme:
- National Electricity (South Australia) Act 1996 (SA);
- the NEL;
- the National Electricity Rules (Rules); and
- the legislation of the other participating jurisdictions that adopt each of the above, subject to certain derogations.
The Rules have the force of law in each participating jurisdiction in the NEM.
The prescribed requirements and tests for the making of the Rules are set out in Part 7 of the NEL.
A person is entitled to submit a Rule change request to the Australian Energy Market Commission (AEMC).
Under the NEL, the AEMC may make a Rule only if it is satisfied that the Rule will, or is likely to, contribute to the achievement of the NEO.
Retail energy regulation in the NEM
The National Energy Customer Framework (NECF) regulates the retail supply and distribution of electricity to customers.
The NECF has been adopted for the retail supply of electricity in South Australia, New South Wales, Tasmania, the Australian Capital Territory and Queensland. In Victoria, the Essential Services Commission has harmonised the Victorian energy regulations to be substantially consistent with the NECF.
2Organisation of the market
What is the organisational structure for the generation, transmission, distribution and sale of power?
The Australian Energy Operator (AER) is established under the Competition and Consumer Act 2010 (Cth) (CCA).
The functions and powers of the AER are regulatory in nature, including:
- monitoring compliance with the NEL and the Rules and instituting and conducting proceedings;
- making and monitoring compliance with network revenue or pricing determinations; and
- regulating retail electricity markets under the NECF.
The functions and powers of the AEMC include, primarily, the Rule making functions and powers as prescribed under the NEL.
The AEMC must establish a panel known as the ‘Reliability Panel’, which has responsibility for matters including the monitoring, reviewing and reporting on the safety, security and reliability of the national electricity system.
The statutory functions of the Australian Energy Market Operator (AEMO) involve, primarily:
- the operation and administration of the wholesale exchange in the NEM; and
- maintaining and improving power system security, planning for the development of the transmission grid and providing ‘shared transmission services’ by means of the transmission system of each participating jurisdiction.
Operation of the NEM
The NEM is an ‘energy-only’ wholesale electricity market. Generators recover operating and capital investment costs over time by means of the sale of electricity through spot and contract ‘markets’. Generators do not receive any payments for capacity or availability.
AEMO runs a central dispatch process every five minutes that determines the electricity each generator must dispatch to meet demand. The highest priced offer required to meet demand represents the dispatch price. A separate spot price is set for each region of the NEM.
The volume and price of electricity in each five-minute dispatch period varies. Generators participate in the central dispatch process by submitting dispatch offers in up to 10 price bands.
Generators and customers in each region sell and buy electricity at the wholesale (spot) price for that region, determined as an average dispatch price over 30 minutes. All ‘dispatched’ generators receive the same price for electricity in that 30 minute period.
The principal customers are energy retailers, who bundle electricity with network services for sale to residential, commercial and industrial energy users.
The transmission and distribution networks in the NEM are structured as a series of natural monopolies (both government and privately owned) which are subject to economic regulation of price or revenue and at the transmission functional level, regulated rights of access.
Chapter 6 of the Rules (for distribution) and Chapter 6A of the Rules (for transmission) set out the regulatory framework for the AER to apply in the economic regulation of transmission and distribution network service providers.
Western Australia has two separate electricity networks, known as the South West Interconnected System (SWIS) and the North West Interconnected System (NWIS).
The SWIS is a ‘capacity’ market. Generators and demand side management service providers are paid for the capacity they can provide to the market when required. AEMO determines the capacity required each year and issues ‘capacity credits’ (being notional units of generational capacity) to market participants registered as generators under the SWIS Market Rules. Retailers and large load customers are required to purchase a quantity of capacity credits in accordance with their capacity allocation.
A capacity credit can be traded between market participants and is valid for a particular reserve capacity year (as defined in the Market Rules).
The Northern Territory has an independent electricity network and supply industry that is primarily administered by the Utilities Commission of the Northern Territory. However, as part of a recent process, the AER has been given responsibility for network price regulation and oversight of network access. On 1 July 2016, the Northern Territory adopted the Rules (certain provisions of the Rules have not yet commenced and will commence from 1 July 2019).
Regulation of electricity utilities – power generation
Authorisation to construct and operate generation facilities
What authorisations are required to construct and operate generation facilities?
The authorisations required to construct and operate generation facilities include a combination of the following:
- environmental, planning and works approvals under state (and potentially federal) environment protection and state planning legislation;
- the grant of environment protection licences and approvals for the operation of the generation facility under state (and potentially federal) environment protection legislation;
- the grant of a generation licence by the relevant state regulator under state electricity legislation; and
- for the purposes of the NEM, as required pursuant to section 11 of the NEL, registration under the Rules (unless a prescribed exemption is applicable).
Grid connection policies
What are the policies with respect to connection of generation to the transmission grid?
The policies are summarised and discussed in questions 1 and 9.
Alternative energy sources
Does government policy or legislation encourage power generation based on alternative energy sources such as renewable energies or combined heat and power?
Federal and state government policy and legislation has encouraged power generation based on renewable energies. For example:
- the federal government signed the Paris Agreement - this agreement was made within the framework of the United Nations Framework Convention on Climate Change. Australia has set an emissions reduction target of 26-28 per cent on 2005 levels by 2030;
- The Renewable Energy (Electricity) Act 2000 (Cth) - this Act introduced a national Renewable Energy Target (RET) scheme requiring electricity retailers to source a proportion of their electricity from renewable energy facilities. Compliance is achieved by the retailer obtaining renewable energy certificates. The object is for 20 per cent of Australia’s electricity to be generated by renewable energy facilities by 2020;
- the federal government also implemented the Carbon Farming Initiative Amendment Act 2014 (Cth) to provide the framework for its Direct Action Policy (DAP). The central feature of the DAP is the establishment of the A$2.55 billion Emissions Reduction Fund (ERF) to be applied for investment in carbon abatement; and
- the Clean Energy Regulator will issue ‘Australian carbon credit units’ (ACCUs) for carbon emission reduction projects which are created and audited under approved methods. The Clean Energy Regulator may enter into contracts for the purchase of ACCUs following a ‘carbon abatement purchasing process’ to be conducted in accordance with the Carbon Credits (Carbon Farming Initiative) Rule 2015.
State legislation and ‘renewable energy action plans’ have been also introduced. For example:
- Victoria introduced the Victorian Energy Efficiency Target Act 2007. The Victorian Energy Efficiency Target Scheme has now been amended to set targets for each year from 2016 to 2020. The Victorian government recently introduced a renewable energy target of 25 per cent by 2020 and 40 per cent by 2025; and
- in September 2013 the New South Wales government released its ‘Renewable Energy Action Plan’. The object of this plan is aligned with the object of the RET scheme.
What impact will government policy on climate change have on the types of resources that are used to meet electricity demand and on the cost and amount of power that is consumed?
The National Greenhouse and Energy Reporting (Safeguard Mechanism) Rule 2015 (Cth) (the Safeguard Mechanism) was introduced by amendments to the National Greenhouse and Energy Reporting Act 2007 (Cth) (the NGER Act) made by Schedule 2 of the Carbon Farming Initiative Amendment Act 2014 and commenced on 1 July 2016.
The Safeguard Mechanism applies to ‘designated large facilities’, being facilities that emit more than 100,000 tonnes of carbon dioxide equivalent (CO2-e) per annum of direct (or ‘scope 1’) emissions, as defined in the NGER Act . The Safeguard Mechanism requires designated large facilities to establish an emissions ‘baseline’ (calculated in accordance with prescribed criteria in the NGER Act, based on the highest level of emissions by the facility over the historical period between the years 2009-2010 and 2013-2014).
Once a designated large facility baseline has been established, the Safeguard Mechanism imposes a requirement on the person with operational control of the designated large facility (as determined in accordance with NGER Act) to ensure emissions from the designated large facility are under that baseline.
However, the electricity sector has been given special treatment under the Safeguard Mechanism, so that a ‘sectoral baseline’ has been set for electricity generation facilities that are connected to any of Australia’s major electricity networks. The sectoral baseline for the electricity sector is 198 million tonnes (or tCO2-e).
As part of the annual National Greenhouse and Energy Reporting data, the Clean Energy Regulator will publish the total scope 1 emissions for all grid-connected generators . The most recent data published by the Clean Energy Regulator is the aggregate scope 1 emissions for the electricity sector for 2015-2016, which totalled approximately 180,874,878 tCO2-e (Clean Energy Regulator: Electricity sector emissions and generation data 2015-16 (27 October 2017)).
Under the Safeguard Mechanism, the ‘sectoral baseline’ approach will apply unless the total of eligible direct emissions exceeds the baseline in any financial year. If the sectoral baseline is exceeded, baselines for individual facilities will apply in place of the sectoral baseline.
If a facility’s emissions exceed (or are expected to exceed) its baseline in any financial year, the person with operational control of the facility has a number of options available to manage the excess emissions, including:
- applying for a calculated baseline or an emissions intensity baseline variation;
- surrendering ACCUs to offset emissions and bring net emissions below the baseline;
- applying for a multi-year monitoring period to allow additional time to reduce emissions; or
- applying for an exemption where emissions are the result of exceptional circumstances such as a natural disaster or criminal activity.
Under the NGER Act, the Safeguard Mechanism provides a range of enforcement options for the Clean Energy Regulator where a person with operational control of a designated large facility (a ‘responsible emitter’) fails to take one of the above actions. These options include entering into an enforceable undertaking, issuing an infringement notice, or court proceedings to seek an injunction or civil penalties.
National Energy Guarantee
On 13 October 2017, the Energy Security Board (ESB) provided advice to the Federal Minster for Energy regarding retailer reliability, emissions guarantee and affordability, following AEMO’s report into dispatchable generation. The advice recommended the establishment of dual reliability and emissions guarantees, which would impose requirements on electricity retailers to meet their retail electricity load using a portfolio of resources that include a minimum amount of ‘flexible dispatchable capacity’, and at an emissions level that is consistent with Australia’s international emissions reduction commitments.
Under the ESB’s proposed model, each of the emissions and reliability guarantees would be imposed as conditions of registration by a retailer as a wholesale market customer in the NEM, under the Rules.
The reliability guarantee would require retailers to hold forward contracts with dispatchable resources that cover a predetermined percentage of their forecast peak load. The amount and type contracted would be based on the system-wide reliability standard as determined by the Reliability Panel at the AEMC.
The emissions guarantee would be established by the federal government setting an emissions target (consistent with Australia’s international emissions reduction commitments) that would then be adapted to impose a requirement on retailers to meet their customer loads from a mix of electricity generation sources that equated to a predetermined average emissions level. Retailers would be required to disclose how they have met their guarantee through either their contracts with existing generators or with generators to develop new capacity.
In February 2018, the ESB released a consultation paper seeking feedback from market participants on a series of high-level options for the eventual design of the emissions and reliability guarantees (referred to collectively as the National Energy Guarantee (NEG)).
The paper confirmed that the ultimate design of the NEG will require energy retailers to contract with, or directly invest in, generation, storage or demand response so that:
- there is a minimum amount of dispatchable energy available to meet consumer and system needs (ie, reliability requirement); and
- the average emissions level of the electricity they sell to customers supports Australia’s international emission reduction commitments, as set by the Commonwealth Government (ie, the emissions requirement).
The paper also confirmed the ESB’s preference for implementation of the NEG through existing governance arrangements in the NEM.
Following periods of consultation, in August 2018 the Council of Australian Governments (COAG) released an exposure draft of the proposed changes to the NEL that would implement the NEG. The draft laws were prepared by the ESB based on the Final Detailed Design of the NEG.
However, at the time of publication, neither COAG nor the federal government have decided to proceed with the NEG.
Does the regulatory framework support electricity storage including research and development of storage solutions?
The AEMC released a report in December 2015 that examined whether the existing regulatory frameworks are sufficiently flexible to integrate energy storage technologies. There were several issues with the regulatory framework that were identified as potentially acting as a barrier to the integration of storage in the NEM. However, it was also identified that batteries and storage technologies can be accommodated within the existing regulatory framework, although it has been acknowledged by the AEMC that improvements could be made to facilitate installation. For example, in many cases, a storage device can be treated as a generator having the same capacity and characteristics. Also, in relation to network regulation, storage can be classified as a contestable service.
On 28 November 2017, the AEMC made a final rule to change the settlement period for the electricity spot price from 30 minutes to five minutes.
The Rule, which will take effect from 2021, will mean all settlement periods are reduced to five minutes, producing a more granular and more accurate price signal for investment in fast-response technologies such as batteries (as well as new-generation gas peaking plants).
In order to ensure the rule change is effective, the operational dispatch and financial settlement periods will both be aligned to five minutes, which will reduce the time interval for financial settlement in the national electricity market from 30 minutes to five minutes.
Does government policy encourage or discourage development of new nuclear power plants? How?
In its 2015 Energy White Paper, the Australian government has identified that there are legislative restrictions on the use of nuclear energy in Australia. In particular, it was stated that approval cannot be provided for the construction or operation of nuclear plants in Australia under either the Environment Protection and Biodiversity Conservation Act 1999 or the Australian Radiation Protection and Nuclear Safety Act 1998.
In the Energy White Paper, the Australian government has not committed to either supporting or not supporting the use of nuclear energy in Australia. It stated that it would consider the outcomes of the South Australian Royal Commission into its future involvement in the nuclear fuel cycle including the mining, enrichment, energy and storage phases for the peaceful use of nuclear energy. The Royal Commission delivered its report on 6 May 2016, recommending that the South Australian government pursue the removal, at the Federal level, of the current prohibition on nuclear power generation to allow this form of generation to contribute to a low-carbon electricity system if required.
In 2017, the Finkel Report (see below) observed that the establishment of nuclear power would require ‘broad community consultation and the development of a social and legal licence’. Owing to the ‘strong awareness of the potential hazards associated with nuclear power plant operation, including the potential for the release of radioactive materials’, the Finkel Report concluded that any development of nuclear power technologies would require significant time to overcome the social, legal, economic and technical barriers in Australia.
Regulation of electricity utilities – transmission
Authorisations to construct and operate transmission networks
What authorisations are required to construct and operate transmission networks?
In accordance with clause 2.5.1 of the Rules, a person must not engage in the activity of owning, controlling or operating a transmission network unless that person is registered by AEMO as a transmission network service provider (TNSP).
In addition, a number of the state jurisdictions require TNSPs to be licenced (or hold an authorisation) pursuant to the state’s legislative regime for electricity regulation.
The relevant state authorisations typically include:
- an environmental approval;
- planning and construction approval; and
- appropriate land rights, by way of easement, lease or licence granted by landowners over which the transmission network will pass.
Eligibility to obtain transmission services
Who is eligible to obtain transmission services and what requirements must be met to obtain access?
Clause 5.3 of the Rules specifies the process by which a registered participant or proposed registered participant may make a request to establish or modify a connection to a transmission network.
An offer to connect must be fair and reasonable and must be consistent with the safe and reliable operation of the power system in accordance with the Rules. The TNSP and the connection applicant must negotiate in good faith to reach a connection agreement. In the event of a dispute, Part K of Chapter 6A of the Rules provides for commercial arbitration of that dispute.
There is no ability for a generator in the NEM to secure ‘firm’ access rights to the transmission network. Accordingly, generators that are connected to the transmission network face congestion risk. The AEMC previously developed a proposed Optional Firm Access (OFA) model, pursuant to which generators would be entitled to pay TNSPs for the right to secure ‘firm’ access, and be charged by TNSPs in accordance with the costs of providing that access to firm capacity.
The AEMC’s final report to the Standing Council of Energy and Resources concluded that the implementation of OFA would not contribute to the achievement of the NEO, although circumstances may arise in the future where there is a need for significant additional investment where the location and type of investment is uncertain, in which benefits may be derived from an OFA.
Government transmission policy
Are there any government measures to encourage or otherwise require the expansion of the transmission grid?
There are no specific governmental (eg, tax) incentives offered for expansion or augmentation of transmission networks.
In accordance with the Rules, the AER will approve forecast capital expenditure only where it is satisfied that the forecast reasonably reflects, among other things, the efficient costs of meeting demand and maintaining the quality and reliability of services.
Other incentives for TNSPs in the NEM include an efficiency benefit sharing scheme (EBSS) for operational expenditure, under which the AER determines the manner in which benefits of efficiency gains are shared between network businesses and network users. In accordance with the Rules, the AER has the power to apply an EBSS to capital expenditure for both transmission and distribution network businesses.
In July 2018, Chapter 5 of the Rules took effect. The amendments to the Rules in this Chapter introduce changes to transmission connection arrangements that are broadly intended to increase transparency and contestability for connection services.
Rates and terms for transmission services
Who determines the rates and terms for the provision of transmission services and what legal standard does that entity apply?
The AER must make transmission determinations for TNSPs in accordance with Chapter 6A of the Rules for prescribed transmission services and negotiated transmission services.
A TNSP is required to prepare a ‘negotiating framework’ that sets out the procedure to be followed for the purposes of negotiations to agree upon the terms and conditions of access.
In addition, the TNSP must submit to the AER a ‘revenue proposal’ and a proposed ‘pricing methodology’ relating to the transmission services provided by means of the transmission system owned, controlled or operated by that TNSP. This process involves forecasting the revenue requirements needed to cover efficient costs and provide a commercial return on capital investment.
The AER makes a final decision in respect of the transmission determination. Upon the AER making that final decision, the transmission determination will apply for a prescribed ‘regulatory control period’(being a period of not less than five years).
Section 7A of the NEL specifies the Revenue and Pricing Principles, which provide that a regulated network service provider should be provided with a reasonable opportunity to recover at least the efficient costs the operator incurs in providing direct control network services and complying with a regulatory obligation or requirement or making a regulatory payment.
The costs that a TNSP can recover are determined using the ‘building block’ approach. This approach is used to ensure that the expenditure of each transmission network service provider is amortised appropriately over time.
The maximum allowable revenue calculated using the building block methodology is converted into network prices using demand forecasts. In the case of TNSPs, the network pricing is set according to a ‘revenue cap’ methodology and the AER sets the ‘maximum allowed revenue’ for each year of the regulatory control period.
Entities responsible for grid reliability
Which entities are responsible for the reliability of the transmission grid and what are their powers and responsibilities?
AEMO is primarily responsible for assuring reliability of the transmission grid in the NEM. The relevant powers and responsibilities are summarised in the response to question 2.
Reliability of the transmission network is determined in accordance with the standards specified in the NEL and the Rules. In particular, clause 4.3 of the Rules specifies the scope of AEMO’s responsibilities for ensuring power system security, including in relation to the transmission network.
In July 2018, AEMO produced an Integrated System Plan (ISP), which is a cost-based engineering optimisation plan that forecasts the overall transmission system requirements for the NEM over the next 20 years.
The ISP was produced in response to a recommendation from the Finkel Report (see below), and is intended to assist in planning for the NEM in light of the fundamental changes in the sources and dynamics of the Australian electricity sector.
Regulation of electricity utilities – distribution
Authorisation to construct and operate distribution networks
What authorisations are required to construct and operate distribution networks?
As with the response to question 9, subject to certain exemptions (including for embedded networks), a person wishing to engage in the activity of owning, controlling or operating a distribution system must be registered by AEMO as a distribution network service provider (DNSP) in accordance with clause 2.5.1 of the Rules.
In addition to the requirements for registration under the Rules:
- for a person to own and operate a distribution network, several of the state or territory jurisdictions require DNSPs to be licenced (or hold an authorisation) pursuant to the legislative regime of that state or territory for electricity regulation; and
- the construction of a distribution network may require environmental or planning approvals in accordance with the applicable state or territory jurisdictional requirements, similar to those required for transmission network services (see question 9).
Access to the distribution grid
Who is eligible to obtain access to the distribution network and what requirements must be met to obtain access?
In accordance with Chapter 5 of the Rules, and as described in the response to question 10, a person seeking connection to a distribution network is required to make an application to the applicable DNSP in accordance with the process specified in clause 5.3 of the Rules.
Under the Rules, a person may apply to a DNSP for provision of ‘direct control’ services or ‘negotiated distribution’ services.
Access to distribution services is negotiated by the DNSP and the connection applicant in accordance with the Rules. In particular, in accordance with clause 5.5 of the Rules, a DNSP must negotiate in good faith with the relevant connection applicant to reach agreement in respect of the distribution network access arrangement sought by the applicant, subject to those arrangements being consistent with good electricity industry practice.
Government distribution network policy
Are there any governmental measures to encourage or otherwise require the expansion of the distribution network?
There are no specific governmental (eg, tax) incentives available for expansion or augmentation of distribution networks.
In accordance with the Rules, the AER will approve forecast capital expenditure only where it is satisfied that the forecast reasonably reflects, among other things, the efficient costs of meeting demand and maintaining the quality and reliability of services.
An EBSS for operational expenditure also applies to DNSPs (see the response to question 11).
Rates and terms for distribution services
Who determines the rates or terms for the provision of distribution services and what legal standard does that entity apply?
In the NEM, DNSPs are subject to both revenue and price regulation. Pursuant to Chapter 6 of the Rules, the AER makes a distribution determination that applies to a DNSP for a regulatory control period of not less than five years.
A distribution determination imposes controls over the prices of direct control services, the revenue to be derived from direct control services, or both.
Under Chapter 6 of the Rules, the same pricing principles as described in respect of transmission network services in question 13 are applied by the AER in making distribution determinations. However, the methodology used varies as between the participating states and territories. In particular:
- a revenue cap applies to DNSPs in Queensland and Tasmania;
- a weighted average price cap applies to DNSPs in New South Wales, Victoria and South Australia; and
- a maximum average revenue cap applies to the DNSPs in the Australian Capital Territory.
Regulation of electricity utilities – sales of power
Approval to sell power
What authorisations are required for the sale of power to customers and which authorities grant such approvals?
Retailers must obtain an authorisation (or licence in jurisdictions that have not adopted the NECF) unless an exemption applies. An authorisation will apply in all NECF participating jurisdictions as the AER does not have the power to limit the jurisdiction where the retailer can operate.
The AER is responsible for granting and monitoring compliance with authorisations and the NECF. In participating jurisdictions that have not implemented the NECF, the relevant state regulator is responsible. A prospective retailer must apply to the AER or the applicable state regulator for an authorisation or licence (as the case may be).
Power sales tariffs
Is there any tariff or other regulation regarding power sales?
There are two classes of mass market customer contracts: standing retail contracts and market retail contracts.
Standing retail contracts
Standing retail contracts are basic contracts for residential and certain small business customers who do not negotiate a market retail contract. In some states (such as Tasmania) the designated retailers are obliged to offer standing retail contracts at regulated prices set by an independent energy regulator. In Victoria, although all retailers must offer standing retail contracts, standing offer rates are determined by the retailer and not the regulator.
The provisions of standing retail contracts are more regulated than market retail contracts and the rights of retailers to vary the terms or rates are also limited by legislation.
Market retail contracts
Market retail contracts are negotiated between the customer and the retailer. The prices are set by the retailer not the regulator. Market retail contracts must include the minimum terms and conditions prescribed by applicable law.
All jurisdictions participating in the NEM have full retail contestability.
Prices for the retail supply of electricity have been deregulated in South Australia, Victoria and New South Wales. Market monitoring, in place of retail price regulation, commenced in southeast Queensland on 1 July 2016.
Rates for wholesale of power
Who determines the rates for sales of wholesale power and what standard does that entity apply?
See the response to question 2 under the subheading ‘Operation of the NEM’.
Public service obligations
To what extent are electricity utilities that sell power subject to public service obligations?
The designated retailer (being the local area retailer, where there is no connection or the financially responsible retailer, where there is an existing connection) must offer to supply electricity to small customers at the standing offer prices and under the retailer’s standing retail contract. Under the NECF there is also a retailer of last resort scheme, which provides for the continuity of supply to customers of a failed retailer by the retailer of last resort appointed by the AER.
Under the NECF, retailers are required to develop and implement a customer hardship policy for customers experiencing payment difficulties caused by hardship to assist these customers to pay their energy bills. These policies must be approved by the AER.
Which authorities determine regulatory policy with respect to the electricity sector?
Regulatory policy is determined by the Ministerial Council on Energy (taking into account reviews conducted by the AEMC) together with the economic regulatory functions and powers conferred upon the AER.
Scope of authority
What is the scope of each regulator’s authority?
A summary of each regulator’s authority is set out in the response to question 2.
Establishment of regulators
How is each regulator established and to what extent is it considered to be independent of the regulated business and of governmental officials?
Each regulator is established by statute as summarised in the response to question 2, independent of each ‘regulated business’ and is a government body.
Challenge and appeal of decisions
To what extent can decisions of the regulator be challenged or appealed, and to whom? What are the grounds and procedures for appeal?
There is no right of appeal from a decision by the Australian Competition and Consumer Commission (ACCC) under its informal merger review process. The potential acquirer would either seek a declaration from the Federal Court or pursue an application for authorisation (discussed further in question 27).
The Competition and Consumer Amendment (Abolition of Limited Merits Review) Act 2017 (Cth), which received royal assent on 30 October 2017, abolished the limited merits review regime, which had allowed decisions regarding regulated assets to be challenged in the Australian Competition Tribunal on limited grounds (factually erroneous, incorrect or unreasonable). Now, AER decisions are no longer subject to merits review and may be challenged only on judicial review grounds in the Federal Court. In essence, judicial review is available only in limited circumstances where rules of natural justice or procedural fairness have not been observed or an error of law has been made.
Acquisition and merger control – competition
Which bodies have the authority to approve or block mergers or other changes in control over businesses in the sector or acquisition of utility assets?
Section 50 of the CCA and the other provisions of the CCA insofar as they relate to section 50, represent the statutory regime for the assessment by the ACCC of a potential acquisition in an electricity market in Australia.
In addition to the ACCC, the Foreign Investment Review Board (FIRB) may also recommend to the Treasurer not to permit an acquisition of shares or assets by a foreign person in certain circumstances under the Foreign Acquisitions and Takeovers Act 1975 (FATA) (see question 31 for further detail).
Review of transfers of control
What criteria and procedures apply with respect to the review of mergers, acquisitions and other transfers of control? How long does it typically take to obtain a decision approving or blocking the transaction?
The section 50 test
The test under subsection 50(1) of the CCA is whether a proposed acquisition would have the effect, or be likely to have the effect, of substantially lessening competition in any market in or concerning Australia.
This question is determined by the use of the ‘future with-and-without’ test. This test requires a consideration of the likely state of future competition in the relevant market ‘with’ and ‘without’ the proposed acquisition. The ‘without’ scenario, or ‘counterfactual’, is the likely state of affairs in the market in the absence of the proposed acquisition.
Informal merger review process
The informal merger review process is administrative (ie, non- statutory) in nature. However, it is supported by provisions of the CCA, including section 80(1A) (the power conferred upon the ACCC to apply for injunctive relief), section 87B (enforceable undertakings) and section 155 (information gathering powers).
Statutory merger authorisation
Following amendments to the CCA in November 2017, the statutory pathway for approval of a proposed acquisition of assets or shares is to obtain a grant of a merger authorisation from the ACCC, a decision that is subject to review by the Australian Competition Tribunal. A review by the Tribunal of a determination by the ACCC in relation to an application for a merger authorisation is not a re-hearing of the matter.
If merger authorisation is granted, section 50 of the CCA will not prohibit completion of the acquisition in accordance with the authorisation.
The test for merger authorisation under the CCA requires that either: the acquisition would not have the effect, or be likely to have the effect, of substantially lessening competition in any relevant market; or the public benefit that would result, or be likely to result, from the acquisition outweighs the public detriment that would result, or be likely to result, from the acquisition. The most prominent public detriment will be competitive detriment. The analysis requires identification of a counterfactual and a comparison of the ‘future with’ and the ‘future without’ the proposed acquisition.
In the context of the wholesale electricity markets, a distinction is to be drawn between sustained market power and transient market power. According to the AEMC, the concept of ‘substantial market power’ in the wholesale market should be defined as the ability of a generator or group of generators to increase annual average wholesale prices to a level that exceeds estimates of long run marginal cost, and to sustain prices at that level owing to the presence of significant barriers to entry.
Market definition is an essential first step.
Subsection 50(3) of the CCA sets out an inclusive list of matters that must be taken into account in assessing a proposed acquisition.
Inherent within the test in section 50 of the CCA is the question of whether a proposed acquisition would confer upon the acquirer a substantial degree of market power in any market. In this respect, barriers to entry, expansion and exit are of primary concern.
In an authorisation decision in 2014, the Australian Competition Tribunal confirmed the following:
- the market for the generation and supply of electricity in the NEM is a ‘national market’ including hedging and other derivative contracts; and
- the retail market for electricity is state- or region-based, with a distinction between commercial and industrial customers and mass-market customers.
Prevention and prosecution of anti-competitive practices
Which authorities have the power to prevent or prosecute anti-competitive or manipulative practices in the electricity sector?
For the purposes of the CCA, the ACCC has the power to prevent or prosecute anti-competitive or manipulative practices. For the purposes of the Rules, the AER has the power to prevent or prosecute anti-competitive or manipulative practices.
Determination of anti-competitive conduct
What substantive standards are applied to determine whether conduct is anti-competitive or manipulative?
Part IV of the CCA
A market participant is subject to the provisions of the CCA, including the following:
- a contract, arrangement or understanding that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market;
- since November 2017, engaging with one or more persons in a concerted practice that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market;
- since November 2017, a market participant with a substantial degree of power in an electricity market engaging in any conduct that has or is likely to have the effect, of substantially lessening competition in a market; and
- cartel conduct (which can be both civil and criminal in nature), that is directed towards price fixing, restricting output, allocating customers, supplies or territories and bid-rigging.
The Rules - making false or misleading offers
There is a prohibition on making a dispatch offer, dispatch bid or rebid that is false, misleading or likely to mislead. The making of the offer, bid or rebid is deemed to represent to other generators or market participants that it will not be changed unless the generator or market participant becomes aware of a change in the material conditions and circumstances on which that offer, bid or rebid is based. A rebid must be made as soon as practicable after the Generator or Market Participant becomes aware of a change in material conditions and circumstances.
There are also requirements on generators to specify the minimum rates at which they may increase or decrease output.
Preclusion and remedy of anti-competitive practices
What authority does the regulator (or regulators) have to preclude or remedy anti-competitive or manipulative practices?
The ACCC has significant powers conferred upon it under the CCA, including the following:
- the ACCC has the power to apply to the Federal Court for a declaration, and divestiture where an acquisition contravenes section 50 of the CCA;
- the ACCC can accept an enforceable undertaking pursuant to section 87B of the CCA; and
- the ACCC has the power to apply to the Federal Court for a pecuniary penalty for each act or omission in contravention of a provision of Part IV (other than the criminal cartel provisions) of the CCA.
The Commonwealth Director of Public Prosecutions has the power to apply to the Federal Court for a fine for cartel conduct that is an indictable offence (criminal cartel conduct) determined by criteria substantially identical to those applicable to a pecuniary penalty.
In addition, in the case of an individual, a contravention of a cartel offence provision can be punishable by a term of imprisonment of not exceeding 10 years or a fine not exceeding A$420,000.
The AER has various enforcement powers under the NEL, including that it may:
- accept an enforceable undertaking pursuant to section 59A of the NEL; and
- make an application to the Federal Court or the Supreme Court of a participating jurisdiction for a declaration or an injunction.
If such a declaration is ordered, that order may include an order that the person pay a civil penalty for a breach of a civil penalty provision determined in accordance with the NEL and the Rules.
The AER may serve an ‘infringement notice’ on a person that it has reason to believe has breached a civil penalty provision (other than a ‘rebidding civil penalty provision’).
The NEL contains ‘offence provisions’ a breach or contravention of which by a person exposes that person to a finding of guilt by a court.
Acquisitions by foreign companies
Are there any special requirements or limitations on acquisitions of interests in the electricity sector by foreign companies?
FATA applies to the acquisition of interests in Australian businesses and assets by foreign persons. Notification under the FATA is subject to certain financial and other thresholds.
All notifiable transactions are subject to a review by the FIRB. FIRB makes a recommendation to the Federal Treasurer as to whether the acquisition is contrary to Australia’s national interest. The Treasurer makes the decision. Generally, there is a 30-day period for a decision under the FATA, although this can be extended in certain circumstances, including where the applicant requests the time frame be extended.
It is the practice and policy of the FIRB to defer any decision until after decisions of other federal bodies have been made (in particular, the ACCC and the Australian Tax Office).
Authorisation to construct and operate interconnectors
What authorisations are required to construct and operate interconnectors?
The rules that govern the construction and operation of transmissions assets are also applicable to interconnectors (see the response to question 9).
Interconnector access and cross-border electricity supply
What rules apply to access to interconnectors and to cross-border electricity supply, especially interconnection issues?
Not applicable in Australia.
Transactions between affiliates
What restrictions exist on transactions between electricity utilities and their affiliates?
In accordance with clause 6.20.2 of the Rules, the AER is required to develop ring-fencing guidelines for TNSPs (with which they must comply under clause 6.20.1 of the Rules).
The guidelines require all TNSPs to ensure legal and operational separation of their transmission business from other related businesses (for the purpose of the guidelines, a ‘related business’ includes electricity generation, distribution or retail supply). Clauses 7.3-7.5 of the guidelines require a TNSP to separate the accounting and functional aspects of regulated transmission services from the remainder of its business.
Rule 6.17 of the Rules requires DNSPs to comply with any Distribution Ring-Fencing Guidelines made by the AER (although the Rules permit such guidelines to ‘vary in application as between different participating jurisdictions’).
The most recent version of the guidelines was issued on 17 October 2017. The guidelines impose a number of obligations on DNSPs:
- there must be legal separation between the DNSP and any affiliate that provides services other than transmission or distribution; and
- the DNSP must not discriminate against a competitor.
Enforcement and sanctions
Who enforces the restrictions on utilities dealing with affiliates and what are the sanctions for non-compliance?
See question 33.
Update and trends
Update and trends
Are there any emerging trends or hot topics in electricity regulation in your jurisdiction?
Following a complete loss of power in areas of South Australia on 28 September 2016 (a ‘Black System event’), the COAG Energy Council commissioned an independent review of the current state of the security and reliability of the NEM by Australia’s Chief Scientist, Dr Alan Finkel, who provided his final report in June 2017 (the Finkel Report).
The Finkel Report identified the poor integration of intermittent renewable electricity generators into the NEM and the unplanned withdrawal of older coal- and gas-fired generators as having compromised security and reliability. The Finkel Report contains a series of recommendations to improve the reliability and security, as well as the governance, of the NEM, including:
- the imposition of reliability obligations for new generators to ensure minimum dispatchable capacity for each region is maintained (eg, by requiring, where necessary, that new intermittent renewable electricity generators also bring forward new dispatchable capacity to the region);
- large generators will be required to give a binding three years’ notice period before closure to signal investment opportunities for new generation (this is subject of a draft rule that is currently under review);
- energy security obligations for new generators and TNSPs to ensure that the system is better able to withstand disruptions (eg, interconnector failures). New generators will be required to have fast frequency response capability. TNSPs will be required to maintain a sufficient level of inertia for each region (a rule to this effect has been introduced); and
- the creation of the Energy Security Board (ESB) that will be responsible for implementing the recommendations in the report and providing whole-of-system oversight for energy security and reliability. The ESB was established in August 2017.
The COAG Energy Council accepted 49 out of the 50 recommendations of the Finkel Report. The only recommendation that was not accepted was the recommendation to introduce a clean-energy target.
AEMO dispatchable generation report
In September 2017, AEMO provided a report to the federal government advising that there is under-investment in the of flexible dispatchable generation sources needed to ensure supply reliability in the NEM, affirming many of the conclusions about NEM reliability and supply mix found by the Finkel Report.
AEMO’s recommendations to address this finding include establishing an immediate ‘strategic reserve’ of approximately 1,000MW of dispatchable energy to ensure supply reliability in Victoria and South Australia, and changes to NEM market design to promote more generation investment before 2021-2022.
ACCC retail electricity pricing inquiry
On 27 March 2017, the Federal Treasurer directed the ACCC to hold an inquiry into the retail supply of electricity and the competitiveness of retail electricity markets in the NEM.
Following the release of a preliminary report on 22 September 2017, on 11 July 2018 the ACCC released its final report. The ACCC report concluded that the rising retail electricity prices had been influenced by a series of factors and pressures across all stages of the electricity supply chain. The report made a total of 56 recommendations for comprehensive reform measures to all aspects of the NEM, with a focus on increasing the affordability of electricity for retail customers.
Among the 56 recommendations, the ACCC recommended amendments to the NEL including:
- to prevent any acquisition that would result in a market participant owning, or controlling dispatch of, more than 20 per cent of generation capacity in any NEM region or across the NEM as a whole;
- to provide the AER with powers to address manipulation of the wholesale market (along with necessary investigation powers and appropriate remedies to detect and enforce compliance with these laws); and
- to require the reporting of all over-the-counter trades to a repository administered by the AER, so de-identified trades can be publicly disclosed (without unintentionally revealing the parties involved).