AEMC Chairman, John Pierce, has presented a discussion paper and addressed the attendees at the Maddocks Energy Signature Lunch on 7 August 2013.

The Hitchhiker’s Guide to the National Electricity Market: What was the question again?

The National Electricity Market (NEM) is approaching its 15th anniversary in December 2013. In this paper the AEMC Chairman, John Pierce, addresses market achievements and challenges; revisits reasons for the NEM’s development; and outlines priorities for further improvements.

John Pierce has described Australia’s National Electricity Market as “rather unique and somewhat enviable,” particularly when viewed in an international context.

The market has historically performed well, he said. More recently sharply rising retail prices, falling demand, low but volatile wholesale spot prices and other developments have led some to question whether the system still performs well.

“It is important to recognise that further improvements need to be made – and there is a work program underway to achieve this.

“We need to understand questions around what we want our energy system to do; whether existing institutional and governance arrangements will develop solutions; and address the impacts of broader policy settings including, for instance, those designed to address emissions levels.”

“If change is going to do good for consumers and not set us on a course of putting band-aids on band-aids then we need to make sure that economic and policy implications; commercial and financial impacts; and technical and operational aspects are understood, aligned, and incorporated. Robust processes will take all these into account.

Above all, he said, our conversations on how to improve the NEM need to explicitly address the question of how risks are allocated.

“In the NEM, generators plan investments instead of central authorities and investors bear the risks of investment decisions, not consumers – a very specific allocation of risk with strong incentives for effective corporate governance arrangements within businesses,” Mr Pierce said.

“When assessing changes to competitive, regulatory or policy sectors of our energy universe the hitchhikers guide to the NEM should read:

  • clarify the question – so you know what to do with the answer;
  • always take a towel with ‘how are risks allocated?’ printed on it;
  • manage the change process in a way that takes your fellow travellers with you;
  • when making changes, always align the economic, commercial and technical aspects; and
  • remember consumers are at the centre of the universe, not waiting in a restaurant at the end of it.

Key points

  • The National Electricity Market (NEM) and the governance arrangements of the sector were established in the 1990s as part of a broader suite of economy wide reforms. With electricity as a vital input for a range of industries, improving the efficiency of the electricity sector was viewed as a key aspect of lifting Australia’s overall economic performance.
  • The electricity sector reforms have worked well, delivering reliable supply at competitive prices for most of the NEM’s history.
  • The AEMC’s current strategic priorities review is considering a range of issues across the energy sector. This paper discusses two of our proposed strategic priorities for electricity market development – the first relates to the central role of the energy consumer; the second involves market and regulatory arrangements to support efficient investment.
  • This first priority – consumers – represents new opportunities for market development. A new and rather exciting area of the AEMC’s work program is the consumer engagement blueprint that we are formulating with the NSW government as part of the NSW competition review. As energy markets become more complex, it is important to provide ways to make it easier for customers to engage in the market to further enhance competition.

Read the J. Pierce discussion paper

“The Hitchhikers Guide to the NEM: What Was The Question Again?”

For information contact:

AEMC Chairman, John Pierce (02) 8296 7800

Media: Communication Manager, Prudence Anderson 0404 821 935 or (02) 8296 7817

14 August 2013