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Submissions

Ergon Application for Ring Fencing Waiver

Author

David Havyatt

Background

Ergon Energy Corporation has written to the AER on 28 October 2015 seeking a waiver of the ringfencing guidelines to apply to “the ownership and operation of Grid Utility Storage System (GUSS) units to augment Single Wire Earth Return (SWER) feeders and remove the need for traditional pole and wire upgrades” (the Application).

Energy Consumers Australia opposes the waiver of the ring fencing guideline in this case. Further Energy Consumers Australia regards ring-fencing as an inadequate policy for dealing with the relevant issues.

Materiality

Ergon in its application notes that under section 21 of the ring-fencing guidelines the AER may issue a waiver “provided that the AER is satisfied that the DNSP can demonstrate that the administrative cost to the DNSP and its associates of complying with the obligation outweighs the benefit or any likely benefit to the public.”

The issue of the balance between the costs and benefits has been argued by Ergon on the basis that the relevant installation is small. Competition and regulatory law processes are bedevilled with the problem of small increments. In any case where the incremental argument is mounted the decision maker needs to consider what will happen when the applicant increases the size of the exempt business by the same amount as already approved. At what point is the decision making no longer about the increment being applied for rather than the totality of the service?

Clearly were the storage capacity being installed by Ergon much larger, none of the arguments for waiver would stand. Ergon argues that in installing the GUSS units it is not engaging in a business because they do not charge for the energy. Ergon claims that no ‘sale of electricity generated’ will occur.

Ergon is potentially right that the GUSS product will not change customer energy usage (except in so far as it might increase due to greater reliability). However an imbalance will occur for these consumers. The energy that will be stored in the GUSS product will presumably be stored in periods of the day where the wholesale price of energy is lower and consumed when the wholesale use of energy is higher.

Meanwhile the consumers on the line will pay existing tariffs which are probably only consumption tariffs. The retailer is obtaining a small marginal increase in margin on the back of the investment by the network provider.

These are, indeed, all small amounts across the total NEM, or for any retailers and distributors involved. But it is not zero, and could be significant with wider deployment. If the customers were on a time of use tariff the issue is worse.

There exists a hypothetical alternative that the customers on the line could make an investment in storage to achieve the same outcome.

Control

The GUSS product has as one of its essential characteristics that it is a fully automated operation and is not under the control of the network. This augments the protection from the network utilising the GUSS for arbitrage.

However the fact that it is fully automated means there is no essential reason why the GUSS product needs to owned by the network at all. That is, instead of the alternatives being GUSS owned by Ergon or GUSS owned by a ring-fenced entity that is owned by Ergon, there is a third alternative that Ergon contracts with a third party to provide the service of the GUSS product.

The benefit of the third party arrangement is that if the number or size of units increases to the point where the trading in energy becomes significant this is well separated from Ergon. This will be particularly beneficial if there is a subsequent addition of solar PV to charge the batteries.

Inadequacies of Ring-Fencing

In the Position Paper attached Energy Consumers Australia has outlined why ring-fencing the operation of potentially competitive businesses inside regulated businesses is not good policy. In brief, any proposal to permit ring-fencing will foreclose the development of the competitive market.

The case of the GUSS product is highly specific to SWER lines. However, to signal that the AER will countenance the operation of storage businesses by networks with or without ring-fencing will signal that network businesses will be allowed to participate in this market.

Conclusion

Ergon is faced with three options to deploy the GUSS product;

1. Deploy them as part of its own business with a waiver;

2. Deploy them through a ring-fenced operation; and

3. Deploy them by acquiring the operation of the GUSS product from a third party.

Only the third of these is a sustainable long-term proposition. Ergon does not need the waiver to be able to procure the GUSS capability for its network, nor does it need to establish an entity to ringfence the product.

The application for waiver should be declined.