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Preparing for the consumer for the future

Keynote speech from Downstream, The Energy Sector's Annual Strategic Forum, by Electricity Authority Chief Executive Sarah Gillies.

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  • Corporate
  • Strategy

It’s great to be here today, a year on from me taking up the role. I want to give you a sense of the changes we’ve made in the last year and where the Electricity Authority is heading.

I wanted to build on the things I spoke about last year. If you were here last year you’ll know I didn’t leave much time for questions and I’m keen to not let that happen again!

The Electricity Authority has been having a hard look at itself over the past year. We have also had the MBIE-commissioned baseline review and a number of changes in our Board and senior management.

The result is a clear move towards being a modern regulator – one that balances performance with conformance. And one that has a strong focus on priorities that deliver on a clear set of outcomes – for the benefit of consumers and of New Zealand.

Today I am going to share with you the future the Electricity Authority is focused on. I’m going to talk to you about:

  • Our priorities – our vision and how that is guiding us to plan our work
  • Some of the changes we’ve made
  • Some of the work we’re focused on right now
  • The change we want to make to deliver for consumers

Our vision

We’ve been thinking about the future at the Authority. Not just about where the organisation is headed, but what is our vision for the future. If we have a clear idea of where we’re heading, it will help guide the work we do now. Here’s where we’ve landed:

Consumers have choices in accessing the energy they need now and in the future, to ensure they and New Zealand prosper.

Deliberately and unashamedly aspirational. The vision provides an unequivocal focus, from the inputs that go into our electricity sector to the impact they have on consumers. It reinforces that our role, as the regulator, is to improve outcomes. The vision is self-explanatory but I want to focus on a couple of key words:

  • Choices - consumers have more choice now and in the future. Enabling choice is a key aspect of the Authority’s role – without competition consumers won’t have choice.
  • Energy - recognises that, while we are driving to an electrified future as a country. For the short and medium term, consumers need access to energy and, as the regulator, we are fuel agnostic.

The Authority is also taking a system view – we are part of the energy regulatory system. A reliable and efficient electricity industry requires all the parts to work together to deliver – and to have future investment and innovation. This builds on the theme I spoke about last year – thinking as a system, not as component parts. Focusing on outcomes not outputs.

Under this vision are the outcomes we are driving towards:

Sustainable, accessible and secure and resilient will be familiar to you as they’re based on the limbs of the energy trilemma. Within each (and we recognise they can overlap), we have specific outcomes over three time horizons.

Our statutory objectives and functions guide and enable us.

Planning for the unknown is challenging but we must have a plan to ensure regulation is an enabler rather than a barrier to transformation. This plan makes sure the Authority’s work is anchored to a vision for the future – it gives us a roadmap for where we’re heading and it helps us shift from talking about outputs and projects to thinking about outcomes.

I am not going to talk through all of this today but I thought I’d pick one area to show you what we’re doing. Secure and resilient is one of those big picture outcomes.

A secure and resilient future

Improving security of supply is top of mind for staff and a focus area for our Board.

The Authority is looking to support a secure and resilient system that moves beyond moving from winter-to-winter. That is not a criticism. It is an observation and applies equally to the Authority.

We implemented changes last year that are making a difference but an accessible, sustainable, secure and resilient electricity system requires a multi-horizon plan over which there are key milestones. And we have one.

The first part is the outcomes we expect to see over three horizons to drive to a secure and resilient future.

Three horizons

For example, in horizon one (the short term) we want to make sure emerging risks to the power system are well understood and plans are in place to mitigate these risks.

Moving into horizon two, we want to build on that to make sure different parts of NZ manage the risk and opportunities of the transition in ways that reflect their regional circumstances.

By the third horizon, we are working to ensure consumers and communities are empowered to generate and share electricity, without compromising security of supply. These are just some examples of the outcomes in each horizon.

Those outcomes have guided our roadmap for improving security of supply.

Horizon 1 priorities

For example, over the next 12-24 months we expect to see existing hydro and thermal assets continue to firm intermittent generation while:

  • New generation is developed; and
  • Small scale battery energy storage systems enter the market .

To support this, our specific security of supply priorities for 2024/25 are:

  • Permanent implementation of our initiatives from Winter 2023
  • Review of Ancillary Services (Instantaneous Reserve, Frequency Management) to ensure they are fit-for-purpose for the changing power system
  • Progressing work from our peak electricity capacity issues consultation paper
  • Improving intermittent generation forecasting
  • Updating regulatory settings for distribution networks to support non-network solutions and flexibility services
  • Developing regulatory ‘sandbox’ guidelines to facilitate trials of new technologies and business models
  • Progressing our future security and resilience programme, including preparing for the future operation of the system
  • Implementing the Market Development Advisory Group’s recommendations

This is our approach to strategy. I promised last year we needed to operationalise our earlier strategy work –– that’s what we’re doing.

DeLorean future gazing

I started by saying we’re focusing on consumer outcomes and what the consumer of the future will experience and want. So what does the consumer of the future look like?

I’ve been to the last few Downstream conferences and have noticed a few speakers turn to the classics for inspiration. Mark Toner talked about the Wizard of Oz last year and in another year, Paul Goodeve was inspired by the Little Yellow Digger.

I don’t have a courageous lion, digger or crystal ball but all this talk about the future got me thinking about Marty McFly and Doc Brown. How handy it would be to be able to jump into the DeLorean and check out the future and work out what we need to do now to make sure it works out ok. Unfortunately, I don’t have a DeLorean but I do know the energy future will be very different from what we experience and regulate today.

2050 Consumer of the future

It’s likely the consumer of the future will have greater access to and choice over different energy products and services. Consumers will be in the driver’s seat of their energy management and we’ll be talking about energy as a service in which new intermediaries will play a key role, aggregating consumer needs and preferences.

As a mother of two teenage boys, I’m imagining a future as a grandmother living not too far from her family. The solar and battery combination will be more than enough to keep our thermal efficient home running even when the kids come to stay.

My future is one in which everyone can access the electricity they need, when they need it. Exporting energy is part of my budget spreadsheet and my energy management system controls it all on my behalf to make sure I’m optimising my energy use, but also giving back and across my community.

Thinking ahead and planning now is key to ensuring a secure energy future for all. Inequities will prevail if we don’t spend time thinking about all the moving parts necessary to get us to the brave new world in which automation will play a key role alongside consumer control.

The future is a story of demand as well as supply and the investment required goes across the electricity system – from generation, distribution through to retail, the meter and behind.

Investment, disruption and innovation are necessary to ensure the system has multiple solutions to a reliable future at least cost. We know we need more, but that more will involve a variety of solutions including a mix of new technology and big hardware to respond to increasing pressure on the networks and the overall system.

With the right price signals the right investments will be made in the right place at the right time. This has been a mantra for the Authority for a while. This goes to the heart of our statutory objectives and what we mean by an efficient industry.

We need accurate market signals to attract the investment required across the system. We’ve done a lot of work on this as part of the transmission pricing methodology and we’ve got work underway in the distribution space.

But we also need a permissive regulatory environment that enables people to test their thinking and intended solutions well ahead of committing to them. The future requires an innovate, test and learn approach – not a paper based exercise that is detached from the realities of operations.

Back to the future: 2023 scorecard

Let’s just take a step back. Just over a year ago I stood in this very same spot, talking about my commitment to driving a performance organisation. I talked about the changes I wanted to make as I took up the role of CE through collaboration, increased transparency and predictability, more engagement on the ground, delivering on behalf of consumers (particularly our most vulnerable) and a pragmatic and proactive regulator who works with others and data to make evidence-based, well-informed decisions on behalf of consumers.

I made some commitments and asked you to hold me to account. And over the last year as I met with you, many of you talked to me about what I said.

I believe we are making the shift to the organisation we need to be and have lived up to our promises.

We actively focused on increasing engagement with industry and consumers and listening. Our Consumer Care Guidelines consultation attracted over 1,000 submissions.

We hosted an event; we went beyond the Wellington walls and made a concerted effort to communicate face-to-face more.

Our network pricing team took to the road and many of our people took up the opportunity to head into the field and get up close and personal with industry operations.

In addition, our Board met with consumer groups and stakeholders around the country. Thanks to everyone who has met and hosted us over the past 12 months and to those who have offered to do so.

We increased transparency and predictability.

We published a consultations calendar, as well as more insights to support understanding. In a 'Back to the Future' move we reinstated, but tweaked, the old regulatory managers update – we now have online quarterly updates to give you visibility of our work and provide an opportunity for you to ask us questions.

We are collecting more data so we can make sure we have the information necessary to understand the problem and make well-informed decisions. We also published an indicative work programme with our levy consultation.

You told us we needed to move quickly – that can be a challenge for a regulator. But in the last year we have focused on working differently and more efficiently, including new ways of doing things and in some cases a bit of 'Back to the Future' – bringing back the Code omnibus to help us deliver.

Since March 2023, our Board made 23 decisions. We published 28 consultations and held a bunch of webinars. Quite a few of you have commented on the volume of work we completed at the end of last year.

We continued to collaborate with the sector and worked closely with Transpower and industry to make sure the power stayed on over last winter and for winters to come. We facilitated the establishment of the over-the-counter market working group and used a working group to progress a decision on the future of advisory groups. And speaking of advisory groups, another highlight was supporting the Market Development Advisory Group to deliver their final advice.

I also want to thank the industry – we’ve had some great collaborative discussions. I am heartened by the work so many industry participants do beyond their ‘commercial imperative’ – and I’ll talk a bit more about that in a minute.

In addition, we welcomed a new Chair, some new Board members, new leaders and a new Minister.

We know we have got a lot more work to do and we are racing now to get it done. That’s a good segue into the third thing I wanted to talk about – a bit of detail about the work programme.

Future proofing the market

The MDAG’s advice is a significant and valuable piece of work which informs the Authority’s work programme over all 3 horizons.

At the heart of this advice was the big question about whether the market would still be needed. The conclusion was a resounding yes but it, like the regulator, would need to evolve. MDAG reminds us that a well-functioning market needs to have accurate prices, tools and incentives to manage risk, sufficient competition and public and political confidence.

Our response will traverse nearly every aspect of our regulatory role – of which much had been anticipated ahead of the final advice. MDAG has laid down the challenge and we are up for it – evolution of the market is necessary to enable transformation.

Last Friday we published details of our response and timeframes for taking forward MDAG’s recommendations. It combines work already underway and signposts what else we need to focus on. I encourage you to read it.

Balancing the need for investment with the impact of costs

The importance of distribution networks in the future was also canvassed in MDAG’s work.

At times it feels like we’re playing catch up after the disruption over the past five years of a global pandemic, global supply chain pressures and high inflation. Our friends at ComCom are dealing with the reality of these external shocks as they work through setting the 2025 default price path for distributors.

The distributors and the regulator have no choice but to seek ways to address inflationary pressures with the need for significant investment in the distribution space. The BCG report highlighted the need for big investment to enable rapid electrification.

But there is a cost to that investment.

Consumers will not be immune as costs flow through to power bills. The Authority is aware of the potential impact and is looking closely across the system to see what, if anything, we can do to alleviate the consumer experience.

For example, BCG estimated a necessary investment of $47 billion in distribution and $18 billion in transmission in this decade and the 2030s. If we can achieve a 1% efficiency improvement that will save $650 million (over $32 million per annum, or $17 per annum for each residential consumer).

Remember our vision – Consumers have choices in accessing the energy they need now and in the future, to ensure they and New Zealand prosper.

The Authority is intolerant to a future in which some consumers are suffering energy hardship. We’re not alone in what we can do to have an impact in this space. We need to figure out, as a sector, how to smooth the costs of transition. Savings in investment create tangible benefit for consumers – those savings need to be passed on to protect our most vulnerable.

My challenge to my fellow regulators and the system more widely is to focus on solutions, products and services that serve those most vulnerable in our communities. The Board is clear that no one should get left behind during this transition and when we already have people who can’t keep up, that’s a big challenge for the Authority to navigate – but it’s not just our challenge, it’s for all of us to work together to keep at the forefront of our mind when we’re investing, building, innovating and responding.

The shift to a modern regulator

The last thing I wanted to talk to you about is the changes we’re making at the Authority. For us to perform our role and enable this future we need to be different too. I often joke about turning a regulator into a technology company, because that’s my background. However, we can learn a thing or two from technology businesses.

The first thing I learned in technology is to be relentlessly focused on your customer. You might think a regulator doesn’t have customers, but actually we think about the modern regulator being the guardian of consumer interests. That requires a regulator who has an unwavering focus on the consumer and equitable access to energy in the long term. This requires being bold, but also admitting that we don’t have all the answers and need to work well with others. Importantly, we need to demonstrate value for money – we need to be efficient within ourselves.

That brings me back to the collaboration point I raised last year and have mentioned earlier. Industry participants I talk to are also focused on consumers. I think that shared focus on consumers and outcomes for them enables us to work well as an industry and that’s extremely positive. There’s a shared understanding that putting consumers first is critical.

The second thing I learned in technology businesses is the importance of tenacity. Often you’re doing things that haven’t been done before and you’re not sure if they can be done. New Zealand is ahead of the curve when it comes to renewable generation and increasing our reliance on renewables takes us further along that curve.

The Authority is lucky to have many tenacious people – and we’re being challenged to do more, faster in an ambiguous environment so we need more tenacity. That’s something I’m encouraging.

Another thing I enjoyed about technology businesses was working an environment where you were encouraged to try things.

And that’s not easy – it’s like our own regulatory sandbox in which Authority staff get to innovate, test, fail and try again. This isn’t an easy shift for a regulator who has historically worked in a measured, methodical way to find the near perfect solution before letting it out in the wild.

Performance and conformance

The Board is thinking about its role too. It’s driving a more performance-based approach in which we have measurable outcomes and are focused on achieving a balance of conformance and performance.

So what does that mean? Performance is more about strategy, value creation and continuous improvement as we focus on the outcomes we’re after – remember those big outcomes I talked about earlier – sustainable, accessible, secure and resilient.

Those outcomes require the regulator to balance the necessary conformance with a commitment to challenge how we operate in the interests of delivering better outcomes.

The drive for the Authority to be an exemplar modern regulator underpins this focus on continuous improvement and enabling my team to get on with enabling change. Consumers should expect the regulator to strive for excellence on their behalf.

Over the past year, as a team we’ve challenged ourselves to think differently, to move from the status quo or old assumptions to trying things differently, assessing risks against benefits of new ways of doing things.

Are we there yet? No. Shifting the balance from conformance to performance will not happen overnight. Our workload is large and there are limited trade-offs when regulatory changes across the system are necessary to enable the future.

We appreciate the significant support from the industry and consumer groups during our levy consultation. We also recognise the tight fiscal environment and are working hard to continue to find savings that we can redirect into our work programme.

While our funding will impact the speed and scope of our delivery over the coming years, what we can promise is that consumers and the industry can expect evidence-based, timely decision making on what matters most. The Authority will continue to focus its efforts on mitigating risks to consumers and realising the full benefits of enabling new technologies and changes to market operations. Where we can, the Authority will build capacity and capability to work early and often with regulated parties and consumer groups to identify and prioritise the issues that will make the most difference and enable an electrified economy.

The Board has set a clear expectation that we need to work smarter, not harder and that we need to balance delivery at speed with keeping our eyes and heads up across the horizons.

Their wero to me, the leadership team and staff is to be bold, to take risks but always keep our eyes focused on those we serve – New Zealand electricity consumers.

It's not easy and there is and will continue to be discomfort. But that’s where the gold is and the only way, we’ll pave the way for the future and lasting and impactful change.

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