On 2 March 2023, the Australian Energy Market Commission (AEMC) initiated a rule change request from the Australian Energy Council (AEC) proposing an ancillary service spot market for inertia in the national electricity market (NEM) to ensure the secure and efficient operation of the power system through the energy transition.

On 12 December 2024, the AEMC published its Directions Paper, outlining the key issues and an economic assessment of operational procurement options. We are seeking feedback from stakeholders on this analysis.

Stakeholders are invited to provide submissions by 5 February 2025. 

The AEMC’s Directions Paper is seeking feedback on an economic case for an inertia spot market 

The directions paper outlines the Commission’s economic analysis of whether operational procurement, including a spot market, could enhance the secure and efficient operation of the power system, particularly in the context of the energy transition.

The Directions Paper focuses on evaluating the economic case for operational procurement of inertia as a first step, recognising that further technical analysis would be needed to assess implementation and feasibility.  

The Commission’s analysis, informed by advice from HoustonKemp, examines both minimum inertia, required to maintain system security, and additional inertia, which could provide broader efficiency benefits.  

The directions paper considers whether inertia exhibits the necessary economic characteristics to justify implementing an operational procurement mechanism, such as a spot market. It also considers the potential benefits of procuring additional inertia operationally, the current uncertainties in estimating these benefits, and the implementation factors that would need to be considered in any operational procurement mechanism.  

Key findings include: 

• for minimum inertia, a medium to long-term contracting framework likely remains the most effective market structure at present,
• for additional inertia, operational procurement may deliver benefits to consumers. However, the choice of procurement mechanism and its detailed design should be guided by practical considerations, including further technical detail and whether the expected benefits can exceed the implementation and operational costs.
• early estimated potential benefits of operational procurement for additional inertia in the NEM range from $7.7 million to $30 million per year – this estimate may need to be revisited based on stakeholder feedback and further work on the detailed design and practical considerations. 

The AEMC is seeking stakeholder feedback on these findings to help determine whether operational procurement could deliver significant value as part of an enduring framework for inertia.  

Overview of the rule change process

On 2 March 2023, the Australian Energy Market Commission (AEMC) initiated a rule change request from the Australian Energy Council (AEC) proposing an ancillary service spot market for inertia in the national electricity market (NEM) to ensure a secure and efficient operation of the power system through the energy transition.

On 2 March 2023, the AEMC published a consultation paper to seek stakeholder feedback on: 

• key challenges arising from declining system inertia and the adequacy of the existing inertia framework in ensuring the secure and efficient operation of the power system in the long-term;
• further work required to better understand the power system needs and inform the development of a long-term inertia arrangement; and
• AEC’s inertia spot market proposal and other alternatives. 

Following the consultation, the Commission prioritised finalising the Improving Security Frameworks (ISF) rule change to streamline the inertia procurement framework in the planning timeframe. The ISF reforms, now being implemented, introduced several targeted improvements to the inertia framework.  

On 12 December 2024, the Commission published a directions paper to seek stakeholder feedback on an economic assessment of operational procurement of inertia.

Given the complexities associated with the proposed operational procurement of inertia, including understanding power system needs and technological capabilities, the Commission has extended the timeframe for a draft determination to 27 June 2025.  

Further, the reasoning for not making a rule within a year of the rule change initiation was published on 15 February 2024 in accordance with section 108A of the National Electricity Law. The s108A report is available below.