Guiding the electricity market through COVID-19

Wednesday, 15 July, 2020

Guiding the electricity market through COVID-19

The latest measures designed to guide the national electricity market through the COVID-19 pandemic have been announced by the Australian Energy Market Commission.

In a final determination on how to adapt its wide-reaching five-minute settlement reforms to the reality of COVID-19, the Commission has announced it will give energy businesses an extra three months to get ready for the change — now set for October 2021.

Five-minute settlement involves the biggest IT overhaul Australia’s energy market has ever seen. It is a major market reform to inject more fast-response energy options into the power system and will mean the wholesale electricity spot price is settled every five instead of every 30 minutes. The change will benefit batteries, new generation gas peaker plants and demand response (where energy use is traded in the market).

The Commission has also confirmed it intends to help some retailers to continue supporting vulnerable customers during COVID-19. In a new directions paper on energy retailer cash-flow stress, it said eligible retailers will be able to defer bills owed to energy networks until February. This will help reduce the risk of multiple retailer business failures, and in turn help protect customers’ access to power and keep energy prices competitive.

“Since the onset of the pandemic, we have been working in the interests of energy consumers to strike a balance between easing regulatory pressure on the energy sector while progressing critical power system reform,” said AEMC Acting Chair Merryn York.

“This has involved many conversations with — and feedback from — stakeholders, who are experiencing the pandemic differently and have different views on the best way forward. It’s imperative the energy sector adapts to COVID challenges and at the same time, we must protect the major reforms we’ve set in motion so the transformation going on in our energy sector stays on track. This is important now more than ever.”

On five-minute settlement, the Commission has given businesses an extra three months to make up for time lost in responding to the early challenges of COVID-19. But it has ruled against a proposal to delay the start date of the reform by 12 months. The Australian Energy Market Operator (AEMO) submitted the proposal for a 12-month delay after the AEMC, AEMO and the Australian Energy Regulator (AER) canvassed options with the energy sector for easing regulatory pressure and cash-flow impacts during the pandemic.

“We tested whether a longer delay would help or hinder energy businesses during COVID — both in terms of managing cash-flow stress and their resourcing capacity to continue working on the change,” York said.

“Modelling shows the costs of a longer delay would outweigh the benefits that a delay would bring to some businesses’ cash flow. It would cost the industry between $19 million and $41 million to delay the reform compared with a savings benefit of $10−$24 million.

“Smaller retailers, who are at most financial risk during COVID-19, might face nearer term cash-flow pressures now that a longer delay has been ruled out. But there are other ways to manage those risks. One measure is to put network charges on hold for six months for smaller retailers with customers experiencing financial hardship.”

Today’s paper on deferring network charges seeks stakeholder feedback on the best way to put a scheme into practice. The AEMC will make a final ruling on the details next month.

Network charges make up more than 40% of the average retail bill, so deferring them for hardship and payment plan customers will mean smaller retailers can better manage cash-flow stress from growing numbers of people who can’t pay their bills. More than 1000 people a week are registering with their retailer for hardship assistance, the AER said.

Government-owned retailers and the ‘Big 3’ providers (AGL, Origin and Energy Australia) are not included in the scheme because the Commission considers they should not get cash-flow relief.

Retailers covered by the arrangements will be able to defer network costs for all households and small business customers on hardship and payment plans. They will have to cover the additional costs of this, with 3% p.a. interest charged.

The scheme will also help distribution network businesses manage the flow-on effects by allowing them to defer their own payments to transmission network businesses over the same time frame.

“This scheme is not designed to tackle the long-term implications of a recession on the energy sector, but it will help as financial reality bites for many people in the second half of 2020,” York said.

“Normally the Commission would regard retail players leaving the market as competition doing its job, but COVID is unprecedented — as are new requirements on retailers not to disconnect small customers who can’t pay their bills. If too many retailers go out of business because they can’t manage this financial risk, it would reduce consumer choice, could increase prices and even threaten people’s access to power.

“Both of the measures announced today are about keeping the lights on and protecting consumers as the power system continues to transition and grapples with the challenges of the pandemic.”

Image credit: ©

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