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Contributed by: Craig Shrive, Patrick Senior, Felicity Ellis and Sophie Vinicombe

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Published on: May 03, 2021

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Messaging on climate change priorities from Climate Change Commission received loud and clear by Commerce Commission

The Commerce Commission (Commission) last week reached out to stakeholders to obtain input on what to prioritise in its regulatory work programme for the regulation of the electricity, gas and airport sectors under Part 4 of the Commerce Act, by way of an open letter (Open Letter). The Open Letter indicates that the Commission, a key economic and consumer-protection regulator, is open to considering what role it should play to support the Government's direction on climate change policy.  

The Open Letter drew particular attention to decarbonisation, the use of new energy sector technologies, and the impacts of COVID-19, as a "changing context" that the regulatory framework should take into account to ensure it remains fit for purpose. The Commission is canvassing feedback on how to prioritise these issues in the context of its existing work programme.
 
While COVID-19 is a relatively new issue, the issue of decarbonisation has existed for some time.  It was recently brought to light with the publication of draft advice by He Pou a Rangi - Climate Change Commission, which we address in a previous alert here. The Commission's Deputy Chair, Sue Begg, suggested that while this increased focus on decarbonisation was inevitable due to the expectations of consumers, businesses and the Government – the draft advice was expected to accelerate the pace of change.
 
He Pou a Rangi - The Climate Change Commission's draft advice makes express reference to the role that it expects distribution networks will need to undertake to assist the country to meet its emissions budgets – in light of an increased reliance on electric vehicles and, more broadly, renewable electricity. It signalled significant change for the investment required in the energy sectors. The Open Letter is evidence that the message has been received by the Commerce Commission.  
 
Key outcomes that the Commission has identified for a regulatory regime that is "fit for purpose" include:

  • supporting the transition to a low carbon economy;
  • encouraging innovative approaches;
  • providing regulatory certainty and predictability conducive to efficient investment; and
  • identifying an effective role for the Commission in the context of wider regulatory systems and competitive energy markets.

It is clear that the Commission sees the issues of decarbonisation and encouraging innovation in new technologies as inherently linked. 
 
The Open Letter draws attention to a key question at the intersection of innovation and regulation under Part 4 of the Commerce Act – that is, is the job of the regulator (and the regulatory framework) to intervene to direct sector behaviour, or is it simply to remove any barriers that would preclude the sector from innovating itself. In the words of the Commission:

We welcome your views on whether there are currently any significant barriers in either Part 4 itself or the IMs (input methodologies) to achieving these outcomes and how we could better support these outcomes through improvements to our incentive-based regulation or other uses of our powers under Part 4.

The Commission is already subject to a mandatory requirement to "promote incentives and avoid imposing disincentives for Electricity Distribution Businesses (EDBs) to invest in energy efficiency and demand-side management" (under section 54Q of the Act). This provision was introduced in 2008 and was intended to address an inherent effect of price cap regulation, where price/revenue paths disincentivise investment by EDBs in energy efficiency. The Commission therefore has a clear mandate to account for energy-saving initiatives in developing regulatory frameworks, and is undertaking its regulatory responsibilities.
 
The Open Letter indicates an appetite to consider new approaches that will better support the Government's climate change objectives. Ultimately, the question will boil down to what changes, if any, should be made to existing regulatory rules (which include IMs). As demonstrated by the Commission's consideration of the impact of emerging technologies in the electricity sector during the last input methodologies review, it is challenging to translate complex and uncertain issues being faced by regulated entities into appropriate technical rule changes.   
 
The Open Letter is primarily addressed to energy network participants regulated under Part 4, but the Commission has indicated that, to the extent it relates to the review of input methodologies scheduled to commence next year, it may also be of interest to stakeholders in the airports sector.
 
The full text of the Open Letter can be read here. The Commission has called for responses by 5pm on 28 May 2021.

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