AER Releases Draft Export Tariff Guidelines
Fast Facts.
On 19 January 2022 the Australian Energy Regulator (AER) released the draft Export Tariff Guidelines and explanatory statement for consultation with submissions due by COB 8 March 2022.
The AEMC made its final rule determination on Access, pricing and incentive arrangements for distributed energy resources (DER) on 12 August 2021, aimed at supporting the integration of DER (solar PV, batteries and electric vehicles) into the grid.
The final rule removes the prohibition on export tariffs (i.e., the ability to charge customer for exporting to the grid), requires distribution networks to set a basic export level (i.e., the minimum export service the distributors must provide to all customers with DER), and enables DNSPs to introduce export tariffs (or two-way pricing).
The final rule requires the AER to develop Export Tariff Guidelines to provide guidance about how distributors should define the basic export level, and how they should develop and justify proposals for two-way pricing.
Proposal for two-way pricing can only be introduced with a network’s tariff structure statement (TSS), submitted every five years as part of its next regulatory revenue proposal. All proposals for export tariffs must be approved by the AER. If a network does not propose to introduce export tariffs as part of its next TSS, it will be required to outline its strategy for transition to two-way pricing in the future.
Under the final rule, existing customers will not face export tariffs until 1 July 2025, unless they elect to participate earlier.
Background
There has been a rapid proliferation of DER in Australia over the last decade – approximately 2.8 million (or 30%) of Australian households have installed solar PV, which is expected to more than double over the next decade. In fact, under AEMO’s draft 2022 most likely ‘Step Change’ scenario, by 2050, over 65% of detached homes are projected to have rooftop PV, many coupled with battery systems, and 60% of all vehicles are expected to be EVs.
This significant uptake of DER means that energy flow, which was traditionally one-way, is now two-way as households meet their own energy needs and export their excess energy to the grid. This is already causing a range of challenges, such as minimum operational demand, system disturbances, and negative price events.
The regulatory arrangements are therefore changing to address these issues, enable more DER to be exported to the grid, and create new services and markets (see our previous RP Insights about new guidance for DER integration).
These reforms include the AEMC rule changes on access pricing and incentive arrangements, DER technical standards, and governance of DER technical standards; along with the ESB’s broader DER implementation plan as part of its final Post-2025 market design. This plan sets out a range of technical, market and regulatory reforms over a three-year roadmap aimed at valuing consumers DER and flexible demand while ensuring consumer protections and reliable and secure electricity supply.
Key Issues
The AEMC’s Access, pricing and incentive arrangements for DER rule change requires the AER to develop and publish the Export Tariff Guidelines (the Guidelines) by 1 July 2022. The objective of the Guidelines is to provide information and guidance to distributors and stakeholders about the basic export level, and the process for development and approval of export tariffs. The Guidelines are non-binding and are intended to be principles-based rather than prescriptive to cater for the individual circumstances of distributors.
What are export tariffs, and why are they beneficial?
Currently, network tariffs are designed to recover the costs of consuming energy from the grid (one-way flow energy), and typically consist of fixed, variable and increasingly demand (or capacity) elements. Network tariffs are charged to retailers, who choose how to pass these costs onto their customers.
An export tariff is a charge for exporting energy into the grid and may consist of:
A cost for exporting to the grid – signalling to customers when they should use or store their energy, or that exports to the grid will drive the need for network investment (i.e., to increase network hosting capacity, enabling additional DER to be exported);
A rebate for exporting to the grid – signalling to customers when the network would benefit from their exports (e.g., at times of minimum operational demand, or for network support purposes), and rewarding them for doing so.
Networks may choose to introduce two-way pricing that includes both an import (or consumption) component and an export component. Effective two-way pricing is intended to signal and promote efficient network investment; enable additional DER to be integrated to the grid (including batteries and EVs over time); reward customers for the flexible demand; and facilitate new markets and services.
What is the basic export level?
The basic export level is the threshold (calculated by reference to capacity, energy or other approved measure) up to which a customer may export energy to the grid at no charge. The basic export level must be made available to any customer that is assigned an export tariff for two regulatory control periods (i.e., 10 years).
As part of the Export Tariff Guidelines, the AER is required to develop guidelines for the basic export level. The draft Guidelines the factors that distributors should have regard to in setting the basic export level, including (amongst other things):
The export (or hosting) capacity of the distribution network, and how this may change over time and at different locations;
Expected DER uptake and demand for export services across the network;
Level of investment required in the network to support export services; and
Customer impacts, preferences and feedback.
Distributors’ two-way pricing proposals may consider whether different basic export levels should apply for differing locations, customer types or time of day, and may also offer customers a range of export service and tariff options, incorporating basic export levels.
The basic export level provides an important protection for customers, as networks transition to more sophisticated export services and pricing options over time.
Process and justification for two-way pricing proposals
Distributors are required to include an export tariff transition strategy within their tariff structure statement (TSS) proposals submitted as part of their next regulatory proposal. The Guidelines detail the information that should be included in the TSS to justify the two-way pricing proposal.
Where the distributor is proposing to move customers toward two-way pricing in the next regulatory control period, the transition strategy should outline transitional measures and timeframes for doing so, and how the strategy was developed in consultation with stakeholders.
Where the distributor is not proposing to two-way pricing for the next regulatory control period, they are still required to include a medium to longer-term transition strategy to signal future intentions, including any planned export tariff trials and proposed approach to stakeholder engagement.
Of particular note is the AER’s expectations that two-way pricing proposals are developed through extensive and genuine engagement with consumers – reflecting the regulator’s expectations in the Better resets handbook – towards consumer centric network proposals – which requires engagement with broad range of consumers and stakeholders through appropriate channels, and a demonstration of how consumer preferences, impacts and outcomes have shaped the two-way pricing proposal or transition strategy.
Distributors should also consider the inclusion of their two-way pricing proposals in the overview paper and DER integration strategy, which are required to form part of their regulatory proposal.
Our Insights
The Export Tariff Guidelines are a foundational element of the evolving regulatory framework for the integration of DER into the national electricity system and market. They highlight the critical role that distribution networks can play in enabling new technologies, markets and services, and importantly, the way in which customers can participate in these.
It’s worth noting that the AEMC’s access, pricing and incentive rule change did not mandate two-way pricing for distribution networks but acknowledged that the introduction of export tariffs could be justified where it can be demonstrated that DER, in particular rooftop solar PV, is driving the need for network investment.
For networks to be able to justify the benefits of export tariffs, they will need to consider and design two-way pricing within the context of their broader DER integration strategy and expenditure program. As discussed in our previous RP Insights article on DER integration, this will necessarily require a cohesive strategic, operational, regulatory and consumer-focused approach, including consideration and understanding of:
The network’s ambition and how this may evolve over time e.g., from ‘enabling’ DER integration to ‘leading’ new markets and services e.g., through service and tariff design, interoperability and technology investments;
The intrinsic hosting capacity on the network, and the level of spare capacity in the system, particularly in areas of high DER penetration;
Scenario-driven forecasts of DER penetration on the network, by type and location;
Ongoing visibility of DER on the network to understand, measure and respond to voltage and stability issues as they arise;
The behaviours, preferences and expectations of customers; and
Importantly, the corresponding need for alignment between overall strategic ambition, operational and technological capability requirements, DER investment proposals, and regulatory approaches.
The AER places significant weight on authentic and effective consumer engagement in the development of export tariffs. From a customer’s perspective, understanding a network’s proposed two-way pricing transition strategy will be critical to informing their own DER investment decisions and how they will manage their energy needs, flexible demand and participation in emerging two-sided markets.
For retailers, the effective integration of DER and evolution of network tariff models, will enable greater opportunities for new retail and demand side participation products and services.
Expect customer demands to evolve as they gain greater awareness of emerging DER markets and participation opportunities. For network and retail companies, now is the time to be actively anticipating, planning for, and optimising these opportunities.
For more information, contact Simone Rennie at srennie@renniepartners.com.au
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