New Access Code: What does it mean for competition?

Western Australia’s Electricity Networks Access Code (Access Code), the state’s independent regulation framework for Western Power’s network, is set to undergo a major shake-up.

The changes being considered would introduce new objectives, force Western Power to assess non-network solutions, facilitate the deployment of stand-alone power systems and distribution connected storage, and create ‘multi-function assets’.

We take a look at why this is important and what it means for Western Power and the future of competition in the Wholesale Electricity Market (WEM).

Why is the Access Code changing?

The Access Code establishes a framework for third party access to Western Power’s electricity transmission and distribution network. Its objective has historically been to promote the efficient investment in, and operation and use of, networks and services of networks in order to encourage competition in markets upstream and downstream of the networks.

The Access Code has remained relatively unchanged since its inception in 2004 but in the intervening years the energy sector has undergone a massive transformation. More households and small businesses than ever are installing solar photovoltaic and battery systems, and utility scale renewables have been consistently entering the market. This rapid shift and evolving consumer preferences has altered the landscape in which electricity network businesses operate. And it’s against this backdrop that the State Government has sought to make changes to the Access Code to support the delivery of its Energy Transformation Strategy and the underpinning workstreams.

The first steps towards this change took place on 19 November 2019 when the Energy Transformation Taskforce endorsed the development of the proposed changes to the Access Code, which seek to achieve the following three objectives:

1. Increasing opportunities for new technologies, including facilitating the deployment of distribution connected storage and stand-alone power systems, providing opportunities for third party service providers to deliver non-network solutions to Western Power, streamlining the regulatory approach for Whole of System Plan projects, and amending the change management process for Western Power’s Technical Rules.

2. Maximising network utilisation, including ensuring appropriate price signals to end-use customers, facilitating cost recovery for Advanced Metering Infrastructure, and implementing aspects of a constrained network access framework.

3. Improving the access arrangement process, including introducing a Framework and Approach, removing the further final decision, and providing regulatory certainty around access arrangement timeframes.

The Energy Transformation Workstreams and the proposed high-level changes to the Access Code are shown below.

Figure 1: Energy Transformation Strategy workstreams and proposed changes to the Access Code

Source: Energy Transformation Strategy: Proposed Changes to the Electricity Networks Access Code Consultation Paper

Then, on 28 November 2019, the Electricity Industry Amendment Bill 2019 (the Bill) was introduced into the Legislative Assembly. The Bill provides for an alternative access regime for non-covered networks in the Pilbara in WA’s northwest, but it also broadens elements of the Southwest Interconnected System (SWIS) access regime. As the Explanatory Memorandum states:

The objective of these amendments is to ensure that Western Power can provide SPS [stand-alone power systems], and that Western Power may exercise a right of entry onto land in relation to an SPS. The amendments are also to enable provisions which, in circumstances to be prescribed by the ENAC [Access Code]:

• permit SPS to be deployed by a network business regulated under the ENAC (including Western Power’s network); and
• permit the cost of SPS to be recovered through the regulated network tariffs of that business.[i]

All of this culminated in Energy Policy WA publishing a consultation paper together with the proposed changes to the Access Code in May. Public submissions on the amendments to the Access Code closed on 26 June.

A new role for Western Power

Any change to the Access Code would attract interest from stakeholders across the WEM and beyond, not least because it remained untouched for such a long period of time.

WA’s DER Roadmap released in April 2020 again pointed to potential changes in the Access Code, including regulated services such as small-scale edge of grid stand-alone power systems and distributed connected storage. But the proposed changes went far beyond what many had expected. In fact, for the first time, it gave Western Power the ability to generate unregulated revenue from these regulated assets.

To do this, the draft Access Code introduces a new concept of ‘multi-function assets’. The consultation paper points to storage as a multi-function asset, noting:

“distribution connected storage works would be considered a ‘multi-function asset’ as the storage works are able to provide both regulated network support services and unregulated (for the purposes of the Access Code) essential system services and/or energy arbitrage services”.[ii]

Of course, Western Power does already provide some unregulated services – like vegetation management, salvage of materials, and power training services – but they are not regulated by the Economic Regulation Authority because they are subject to natural competition.[iii]

But this type of unregulated service – the provision of essential system services and energy arbitrage – is different and a major expansion of Western Power’s remit. Here’s why: it allows the network operator to use network facilities for both regulated and unregulated services (or, as they are called in the Access Code, ‘excluded services’), and recover regulated monopoly costs while also generating revenue from unregulated services. Put another way, Western Power could earn from unregulated services provided by its regulated multi-function assets.

This will put Western Power in competition with non-network providers. Western Power will be able to go through the non-network providers to have a relationship with users – as it is now doing with its “100MW challenge” – potentially impact the revenue received by the non-network providers and diminishing the business case for others to provide storage services in the market.  

This new role for Western Power has the potential to re-shape the WA electricity market particularly if retailers exit or do not enter because they cannot compete with the monopoly network provider in the provision of competitive services.

It is something that Western Power itself acknowledged in a 2016 rule change request which, coincidentally, sought to change the definition of ‘distribution services’ to allow it to provide non-network solutions, saying:

In theory there could be a negative efficiency impact if allowing DNSPs to use regulated revenues to invest in certain technologies, such as storage and embedded generation, prevented competition from developing in such markets.[iv]

And that’s exactly what could happen now. The draft Access Code, which includes efficiency as a key objective, currently gives the network operator the ability to prevent competition and expand its role in the WA energy market. It’s a worrying signal to market participants.

Ring-fencing

The ability for monopoly network operators to provide competitive services is an issue that has been considered long before now. In 2016, the Australian Energy Regulator (AER) established the Ring-fencing Guideline that is binding on all Distribution Network Service Providers across the National Electricity Market (NEM).

The purpose of the Ring-Fencing Guideline is to prevent regulated businesses from discriminating in favour of their related parties to disadvantage competitors operating in these markets. The ring-fencing framework puts specific obligations on network businesses, including regular reporting of compliance as well as preparation of annual compliance reports that are assessed by appropriately qualified independent assessors.

While that guideline applies only to those operating in the NEM, a similar ring-fencing of Western Power’s new multi-function asset competitive business could well be valid to avoid cross-subsidisation, where it uses regulated revenues to subsidise competitive activities and gain an unfair advantage over non-network providers.

This was even foreshadowed by Western Power in its 2016 rule change request:

“The Ring-fencing Guideline sets out the ring fencing obligations DNSPs must comply with if they intend to provide energy related services. These draft ring fencing obligations depend on the nature of the service and not on the underlying technology or asset. Through clarifying the definition of distribution service, this rule change complements the ring fencing arrangements proposed by the AER and facilitates the achievement of the AER’s principles. Similarly, this rule change request seeks to allow DNSPs to invest in non-network solutions only where they do so in order to provide a regulated service and there is no potential for competitive services to occur as there is no customer driven transaction.”[v]

The draft Access Code gives Western Power the opportunity to step beyond its traditional role and provide competitive services from its regulated assets. Despite this, important protections, such as ring-fencing measures, have not been included in the proposed changes to the Access Code.

Looking ahead

A lot has changed over the last few years. The market has evolved. There’s now more solar and batteries on the grid than ever before, and load curves are shifting as a result. And there’s a recognition that, as a result, storage and stand-alone power system will play a greater role across the WEM. The challenge is how to best incorporate those technologies.

It was only a few years ago that Western Power put forward a rule change request which specifically acknowledged that competitive services from storage technologies should be ring-fenced using an arrangement similar to the AER guidelines. Fast forward a few years and the proposed changes to the Access Code give Western Power the clear ability to use regulated revenue to support its unregulated services, crowding out competition. There’s no sign of ring-fencing.

Submissions on the proposed changes to the Access Code are now being considered by Energy Policy WA. It will be intriguing to see if any amendments are made to the current draft. 

[i] See p20, Electricity Industry Amendment Bill 2019 Explanatory Memorandum

[ii] See p21, Energy Transformation Strategy: Proposed Changes to the Electricity Networks Access Code consultation paper

[iii] See p13, Attachment 7.1 Cost and Revenue Allocation Method (CRAM) 2016/17

[iv] See p25, Rule Change Proposal – Removing barriers to efficient network investment

[v] See p13, Rule Change Proposal – Removing barriers to efficient network investment