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Climate, CER and cyber security in the spotlight for revenue determinations

Last month, the Australian Energy Regulator (AER) released its 2024-29 electricity distribution final decisions for Ausgrid, Endeavour Energy, Essential Energy, Power and Water Corporation, Evoenergy and both electricity distribution and transmission for TasNetworks. This is following the networks’ revised proposals, which were submitted in November 2023, and the AER’s draft decision made in September 2023 after initial proposals were submitted in January 2023.

Key areas of focus reflect the changing energy environment and include areas such as climate resilience, enabling consumer energy resources (CER), and cyber security. Sustained, high-quality and honest consumer engagement were key drivers in helping reach practical and well-supported outcomes around new proposed investments in these items.

Climate Resilience

Climate resilience is continuing to rise in importance due to the increasing frequency and severity of natural disasters. Over the past decade, severe bushfires, floods, and storms that have caused damage to network businesses assets and subsequently the reliability of services to customers.

The increasing importance of climate resilience is mirrored in the broad inclusion of resilience-related expenditure proposals across most network businesses in this round of regulatory resets.

As an example, the AER approved Essential Energy’s proposal for Stand-Alone Power Systems (SAPS) to improve climate resilience. Based in NSW, Essential Energy has an extensive rural network and utilising SAPS can remove long stretches of overhead lines from the network, helping to also improve reliability for customers.

Consumer Energy Resources

Most networks noted the need for long-term CER investments as a key outcome of their engagement with consumers. Consumers’ energy preferences and needs are evolving with the increasing uptake of rooftop solar and Electric Vehicles (EVs).

The AER has shown a broad recognition of the need for CER integration and related investments, accepting in full the revised proposals from Essential Energy, Endeavour Energy, Evoenergy, TasNetworks and Power and Water Corporation, and the majority of Ausgrid’s revised proposal. These investments will enable the smoother integration of CER, for example, by deployment of smart grid technologies to assist networks to allow greater amounts and different types of CER to feed into the grid.

Cyber Security

Cyber threats are of increasing concern, especially after recent high-profile data breaches of other essential service providers. Network businesses are treating cyber security of utmost importance, proposing significant new capital and operating expenditure for projects such as IT systems upgrades.

New regulatory compliance obligations have come into place, such as the Security of Critical Infrastructure Act 2018,  reflecting the growing need to ensure a safe and reliable electricity network.

The AER has recognised the increasing threat of cyber events, approving the revised proposals for cyber expenditure across network businesses. For example, the AER has accepted in full Ausgrid’s revised proposal for cyber security that will allow for ongoing compliance with cyber security obligations, IT system upgrades, and cyber awareness staff training programs.

External economic factors

This round of decisions has occurred in markedly different economic conditions than those prevailing five years ago.

Relatively rapid increases in interest rates from historic lows affect the efficient financing costs of network businesses for new and existing investments. These pressures, as well as the impact of higher inflation, flow through the revenue determination process, and have led to upward pressures on maximum revenue allowances.

This is in contrast to recent rounds of network determination processes which have typically occurred during periods falling rates and low inflation.

These changing conditions bring home the difficult regulatory challenges in ensuring both required investment occurs – including enabling investment which will assist in lowering future charges – while also properly recognising cost of living pressures facing households across Australia.

Consumer engagement

The way networks and the AER expects regulatory determinations to be developed are changing. Consumers rightly continue to become increasingly involved and concerned with their energy bill from cost-of-living pressures and expanding availability of CER.

Typically, network determination processes were highly technical and largely followed and determined by specialists. Now, consumer engagement is playing a pivotal part in understanding consumers energy wants and needs to form capital and operating expenditure proposals.

Guided by the Better Resets Handbook, the AER in its final decisions has commended these networks on their respective in-depth and honest consumer engagement. These final decisions conclude the work to determine the maximum allowed revenue networks can recover from consumers over the 2024-29 period.

Future processes will hopefully continue to see networks, regulators and consumers innovate in how they engage to deliver outcomes that deliver on the long-term interests of consumers through the energy transition.