Energy security in the transition

17 March 2025

Tim Jordan, Commissioner

Committee for Economic Development Australia, The Energy Security Series

Fullerton Hotel, Sydney

Thank you to CEDA for the chance to speak today.

I’d like to also acknowledge the traditional custodians of the land we’re meeting on and pay my respects to Elders past and present.

When I saw the title of today’s session, I wondered for a moment: why another talk about the energy trilemma? We’ve all been to lots of those.

But security, affordability, and sustainability define the terrain of energy policy.

They are not going away.

These three goals are built right into the national energy objectives that we apply every day in our work at the Commission.

What’s notable about our current moment is the focus on security.

Energy security concerns seem to peak in the wake of energy price shocks.

Whatever the cause, the fact is: energy security concerns are on the march globally – and Australia and New South Wales face this challenge too.

Today, I’ll talk about how we think about energy security at the Commission – as the rule-maker for Australia’s electricity and gas markets, and adviser to governments.

And I’ll talk about how that’s relevant for us nationally, and for New South Wales.

I’ll highlight two areas that need special attention this year:

wholesale electricity market reform, to set us up for the next phase of the transition, and
integrating fast-growing consumer energy resources.

But first I want to touch on a complication, which is the increasing noise around the energy transition.

It’s very loud out there. When you read the energy news clips, you could be forgiven for thinking black is white, up is down, and all things are equal all at once.

There is a lot of noise.

Why is that? Well, we’re in a period of heightened disruption.

The global energy crisis of the early years of this decade still reverberates.

Globally, that major disruption, and a period of extraordinarily high prices, shifted the focus to security and affordability.

High global energy prices hit Australian consumers.

That’s because significant parts of our energy system depend on prices set in global markets, which are turbulent at times.

What else is causing the noise? Energy is tied up with geopolitics, and it always has been.

There’s no denying that geopolitical risk and uncertainty are heightened at the moment.

The International Energy Agency has called out how geopolitics is creating risks for energy security and the transition.

And, on top of that, the energy transition is not a smooth, linear replacement of one energy system with another.

Two systems — the old and the new — are co-existing, and it’s complicated.

There are dead ends, reversals, and setbacks.

These disruptive conditions are ripe for noise.

So, how do we identify the signal amid all this noise?

At the Commission, the way that we find the signal is by taking a balanced, long-term view of the energy landscape.

We focus on the long-term trends, and we avoid putting undue weight on the latest headlines.

One of the trends we see is that clean energy investment globally is very strong.

Investment in renewables, particularly in solar, is setting new records. Investment in grids is picking up.

Battery investment doubled globally in just one year, between 2022 and 2023, and continues to grow rapidly. EV sales continue to grow, driven by declining costs.

The global transition to an energy system built on renewables, and the electrification of transport and industry, continues at pace.

This aligns with what we said our recent strategic statement.

There we talked about change in the global energy system happening on the scale of the Industrial Revolution – but at a faster rate.

The Commission’s role is to deliver long-term outcomes for Australia’s energy consumers. That’s our mission and purpose.

That means helping consumers benefit from power system that is low-cost, low-emissions, reliable, secure and safe.

Last year we spent some time thinking through the longer-term opportunities and challenges that the energy system faces in Australia.

In an attempt to increase the ratio of signal to noise, our strategic narrative identified eight challenges and opportunities that we think are important for achieving a consumer-focused net-zero energy system.

I’ll run through all eight briefly now.

One, equity. First, we said we need to ensure equitable outcomes across households, empowering them to choose how they participate in energy markets.

Two, we said energy security and reliability need to be maintained through unprecedented change.

This means having sufficient firming and storage capacity; it means incorporating new technologies; and it means managing the changing mix of assets and actors.

Three, we said energy policy and other policy areas need to be coordinated to enable good outcomes.

We need faster updates to regulatory frameworks, as energy system changes affect the community and the environment, and interact with most areas of economic activity.

Which led to our fourth point – that trust is necessary for change.

Building and maintaining trust allows faster uptake of new technologies.

Our fifth point was that the transition is capital and labour-intensive, and we need to attract those inputs to deliver it.

With the value of construction in the energy sector nearly doubling in the last five years, we are competing globally for capital and labour. We need to remain an attractive sector to invest and work in, and we need to continue to invest in skills.

Six, data needs to be managed and accessible to support the changing energy system.

New technologies across the grid mean our energy system is rich in data – but we need to coordinate and make available that data to ensure an energy system that is cost-effective, resilient, secure and flexible.

Point seven, community and environmental needs must be met alongside the need for new infrastructure.

As the energy sector’s impact on the workforce, on communities and the landscape changes, we must have clear objectives that build support for the energy transition and reduce sources of uncertainty and friction.

And finally, our eighth point was that we need a plan for gas. We have a very good plan at a system level for the electricity transition, but no such clarity yet about a system-level plan for gas.

That lack of clarity makes investing in gas, and regulating the gas system, challenging.

The risk is that we veer off track and put carbon reduction goals out of reach.

All of the challenges and opportunities we identified in that strategic statement are linked to security, affordability, and sustainability.

Sometimes, energy security and the energy transition are set up as opposing goals.

But to my mind, there’s no choice between energy security and the energy transition.

We can and must have both.

In my view, security and affordability favour renewables.

Of course, renewables are variable, so they require a range of backup generation options, and smarter and better-connected grids, to manage this variability.

And we need flexible, diverse clean energy sources – diverse across technologies, across scales and across geographies.

That is the path to an affordable and sustainable energy system that is also secure, and it’s the path laid out in the Integrated System Plan.

We often talk about energy security in the broad sense of maintaining adequate and reliable energy supply.

But ‘security’ has another specific connotation in the electricity context.

We use ‘system security’ to refer to the capacity of the power system to keep a set of very important technical parameters within defined limits.

So, how is the transition going on that front?

There are a few things that make system security a high priority for our work program in the sector.

Firstly, the change in the generation mix.

Australia is seeing a comparatively large shift from synchronous machines like coal-fired generators to inverter-based resources like wind and solar.

The second factor is the shape of our transmission network.

Ours is exceptionally long and thin, with limited interconnection. It’s not the meshed network that other countries can rely on.

The topology of our system exacerbates the challenges with system security arising from high levels of inverter-based resources.

And a third factor is the massive uptake of rooftop solar in Australia.

Rooftop solar is brilliant for consumers, let’s be clear.

But it brings power system security challenges, especially when rooftop output is very high and the residual load on the system is very low.

These three factors create engineering and operational challenges.

If not addressed, they risk a system that can’t be operated securely within those important technical parameters.

As the transition progresses, we need to build on our strengths to maintain a reliable and secure power system.

The exit of synchronous resources will require investment in synchronous condensers, in grid-forming batteries and other solutions.

The Commission has had over many years an extensive work program on system security. This work, across frequency, system strength and inertia, is essential as the sector changes.

What else do we observe, as the national rule-maker and strategic adviser to governments?

Another trend we notice is direct state and territory policy interventions as they respond to the concerns of their communities.

However, we also note that these interventions are happening at the same time as interconnection is increasing, signalling more cooperation and electricity trading between the states under the national framework.

The NEM is seeing more interconnection, starting with Project Energy Connect between southern states, but over time increasing transfer capacity between all regions.

It’s the Commission’s job to find a way to make policy actions work across jurisdictions and to work with each government to achieve their goals.

There’s a range of security and reliability risks to be managed in our changing electricity system.

Some other recent work we’ve done at the Commission, including through the Reliability Panel, has focused on these risks.

We’ve looked at the changing nature of reliability risk in a weather-dependent system, and whether the reliability standard should be expressed differently.
We’ve looked at the physical resilience of network assets to extreme weather, and the role of distribution businesses in investing to resist and recover from extreme weather events.
And we’ve looked at cybersecurity, and clarity about who is responsible for preparing for cybersecurity incidents and managing the response when they occur.

Having talked about some of our recent work, in the rest of my talk I want to focus on 2025, and two critical areas that need our collective focussed effort to maintain energy security in the transition.

The first is wholesale energy market reform.

In November last year, energy ministers announced an independent review of the NEM’s wholesale market settings.

This review, led by Tim Nelson, is a timely and important piece of work.

In our submission – published on our website last month – we highlighted some challenges that are affecting investment at the moment.

For example, the period of overlap between new generation and storage entering and the old fleet exiting has led investors to expect low prices in a period of oversupply, hampering investment.

There is no strong in-market signal for generators to exit, which exacerbates that problem.

We noted that new assets offer different services, and contracts will need to continue to evolve to underwrite investment in those assets.

We noted a mismatch in contract tenor expectations. New projects need long contracts to satisfy financiers, but many power buyers are only offering short-term deals.

We observed that assets that appear to be a good match for our system needs, such as pumped hydro, are struggling with business cases.

And there are services that we know our system needs that may not be provided in the future without their own value stream.

In our discussion about the way ahead, we made several points:

The current market has many strengths that we should leverage, including generally strong signals from the spot market to coordinate operation and investment.
We said that building on the current market design allows for faster implementation of changes. While no market design is perfect or complete, the essential features of the current NEM are well suited to a future dominated by variable renewables.
We said solutions should be efficient, effective, and targeted.
We noted that targeted underwriting mechanisms could directly address specific needs, such as for long-duration storage or peaking capacity.
- Transparent, competitive tenders could be part of the enduring market design.
- Importantly, auction volumes can be ramped up or down based on changing needs.
- Auctions can be modified to incorporate insights from earlier rounds.
- Ensuring that auctions are competitive is critically important for long-term consumer outcomes.
- And underwriting contracts should be designed to support healthy secondary markets, which are so important for our system.
We said that price volatility will remain a feature of the market. Prices drive investment in an efficient mix of resources to meet consumer demand, including investment in storage and firming.
- Price volatility is an essential feature of our market. It creates powerful signals for risk management, which in turn drives investment.
- Virtually all consumers are shielded from wholesale price volatility, and that’s exactly how it should be.
- Market interventions should accept and leverage price volatility in the wholesale market.

The second area of critical work needed to maintain security in our future system is integrating CER.

Australia is at the global frontier of rooftop solar. Solar and batteries mean great opportunities for self-sufficiency and cost savings.

Consumers will reap significant benefits from EVs and efficient heating, cooling and cooking.

But at the scale these assets are growing to, they will significantly challenge our energy system, and things will probably have to change.

Reducing system risks, while getting value out of CER and maintaining the trust of consumers, is a problem Australia is well placed to manage.

Under the National CER Roadmap, there is significant work underway to better regulate CER and develop a two-sided market.

The work covers everything from compliance with technical standards to the ‘solar backstop’ to the accelerated smart meter rollout.

It is imperative that this work is delivered in full and in line with the timeframes in the Roadmap.

CER and distributed energy resources will play a critically important role in Australia’s energy future, helping to reduce overall system costs, improving reliability, and achieving secure, low-emission energy for all.

The transition to electric vehicles is a critical opportunity. We are going to need ubiquitous chargers, so that access to charging is equitable and convenient.

And we will need to ensure that at least some EV charging load is responsive, so that we don’t have to build out the system at great expense.

If these and other CER resources are integrated well, the power system will operate efficiently and securely, and consumers and industry will enjoy the benefits of lower bills.

At the AEMC, we are contributing by driving CER reforms in the national rules.

Our recent final rule on Integrating Price-Responsive Resources in the NEM allows aggregated CER, DER and price-responsive load to be scheduled and dispatchable.

This enables even more low-cost renewables to compete in the market, resulting in lower electricity and ancillary service costs, lower emissions and ultimately lower prices for consumers.

All these points highlight the need for a period of coordinated policy development in 2025 to deliver what the energy system needs.

I believe that New South Wales, at the heart of the NEM, will play a leading role in the next phase of the transition.

Indeed, I have to praise New South Wales for the approach it has taken to the transition, which has been stable, comprehensive and bipartisan.

This state has a nation-leading framework in place that adds to the resilience of the transition overall by providing predictability for investment.

New South Wales has put in place a contracting framework for new generation and storage which has been largely mirrored in the Federal Government’s Capacity Investment Scheme.
It has set up an independent consumer trustee to safeguard New South Wales consumers.
Its Electricity Infrastructure Roadmap aligns with AEMO’s Integrated System Plan.
Its roadmap is designed to deliver projects in the state’s Renewable Energy Zones in a timely way that minimises the impact on communities.

Rightly, there are still tweaks to be made to the framework, particularly to get transmission right.

The state government is reviewing transmission planning to avoid duplication and reduce complexity. That is welcome.

We recently compared state-level REZ frameworks, and found they vary widely across the country. We will be publishing a report on that shortly.

A lot of transmission investment is underway, but there is a vast investment task still ahead.

Consumers will bear the cost if it is not done efficiently and in a timely way.

This is something that the actors in the transformation of our networks — transmission companies, investors, regulators, governments, and us as the rulemaker — must all keep front-of-mind.

But there are many reasons to be positive about the ability of New South Wales to respond to this challenge, and remain a national leader in the energy transition.

I’ve covered a lot of ground but it’s very timely for us to focus on energy security at this stage of the energy transition.

It is a challenging environment, no doubt.

But there is much we can do.

It’s critical that we make a concerted push on reforms to the wholesale market, and on integrating consumer resources.

The challenge for all of us is to take a long-term view, focusing on the signal and not getting distracted by the noise.

I wanted to end with a quote from a French energy historian, Jean-Baptiste Fressoz, who has a new book out called More and More and More.

Fressoz says that we have never in history done an energy transition, in the sense of replacing one fuel with another.

He says that each major new energy source feeds off the others, as we add another fuel to the stack. He documents this extensively.

He concludes that if we are to transform our energy system in the way that we must, while still meeting our energy needs, it will be an unprecedented transformation through sheer force of will.

We should recognise the scale of the challenge we’re taking on.

But I think we are making progress towards the transformation here.

May it continue.

Developing hydrogen in the NEM

30 June 2022

CEDA - Developing the NSW hydrogen industry, Four Seasons Hotel Sydney

Anna Collyer, AEMC & ESB Chair

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Introduction

Thank you for your welcome and for the great conversations and speakers we’ve enjoyed over lunch.

I begin by acknowledging the Gadigal people of the Eora Nation, the traditional custodians of this land. I’d like to pay my respects to their Elders - past, present, and emerging - and extend those respects to all Aboriginal and Torres Strait Islander people present today.

I’d also like to note that NAIDOC Week begins this Sunday, with the theme, Get Up, Stand Up, Show Up – an invitation to us all to go beyond acknowledgements and good intentions.

First Nations people are affected in so many ways by the energy sector – land access, respect for cultural sites, hiring opportunities, remote connections and retail policies, to name just a few.

Next week AEMC staff and commissioners will be hearing from Marlee Silva, a young Gamilaroi/Dunghutti writer and podcaster. I hope your organisation, like ours, will use this NAIDOC prompt to get up, stand up, and show up – working out how we can turn thoughts into action.

The difference a few weeks make

I see many familiar faces here, and I know some of you heard me speak about hydrogen not long ago at the Adelaide conference.

This – I can assure you – is not that speech: because what a difference a few weeks can make!

Before the market suspension, hydrogen was important. Now? I won’t hesitate to call it urgent.

And I say that to you as the chair of the AEMC and the ESB, with both bodies being technology-agnostic. At the AEMC, we often say we don’t back winners – our job is to create settings that allow the market to choose the winners.

This is still true, but with hydrogen’s potential to firm and strengthen so many aspects of the NEM, it’s hard to picture any ‘winning’ solution that will get us to net zero without it.

A worthy pursuit

That you’re gathered here suggests you already understand the reasons I’d say that. Felicity and Darren have also added to this discussion over lunch.

Permit me a few minutes for my own top four considerations for hydrogen, based on a safe, decarbonised future power system:

First, reliability - Hydrogen is set to become the largest industrial customer for electricity in the NEM’s history. It’s a very flexible customer, who is well-placed to provide demand response services to the grid. And, if you then use hydrogen-fired power stations to make energy and give it back to the grid on demand, it effectively works as a massive storage system.

Second, security - unlike most customers, hydrogen electrolysers can quickly turn on and off, helping to balance supply and demand and stabilise the frequency of the system.

Third is affordability – and this is the kicker today. Hydrogen needs power to create power – and it needs far more power than we currently have.

Making the leap to green hydrogen is expensive, and a challenge we all have to consider. The potential is recognised in AEMO’s ISP today, but so is the prohibitive cost. As a result, AEMO sees hydrogen as very much a long-term goal for domestic use, largely limited to transport fuels, and not until the 2040s.

And yet, there are economies of scale – the more we build the better we get at it, so we all hope the price will come down. NSW is aiming for close to $2 a kilogram by the end of this decade.

My fourth and final consideration is social licence. So far, hydrogen comes to us with less social and political baggage than almost any other power option.

Broadly speaking, most of us agree that developing green hydrogen is a worthy pursuit.

Big and bold

So, hydrogen presses a lot of buttons for the NEM – some of them are buttons we haven’t installed yet, although we are well on the way.

Nationally, we’re on a journey of a thousand miles for hydrogen, and while we’ve made some leaps, there are many small steps that will get us there.

The AEMC’s hydrogen review is one of these small steps, allowing hydrogen blends into the existing gas pipelines. What this means producers can run real-life pilots, which is what we need to help bring that cost down.

Elsewhere, big and bold plans are afoot and need to be:

backed by research and innovation,
driven by both government and private sector investment,
and supported by regulatory frameworks.

I’m quite taken by Minister Kean’s NSW strategy foreword, where he calls the plan a

promise to embrace the future and harness human ingenuity and creativity, to do the right thing by our planet and leave no one behind.

Regulating for invention

Ingenuity and creativity are things that, believe it or not, we can regulate for.

At the AEMC we can’t know exactly what shape a net zero power system will take, but we can define the problems we need to solve to get there. Then, we use market settings, or rules, to create rewards for people who find the solutions.

This is how we make space for innovation – by setting out the challenges as clearly as we can and delivering incentives for participation.

Hydrogen is no exception to this process. As AEMO reflects in its ISP predictions, hydrogen as we know it now is just too expensive – ingenuity and creativity are essential to make it a real player.

And there are new markets on the way that will cry out for the kinds of innovations we’re seeing in the development of hydrogen.

For example, a potential capacity market, new essential system services markets, or even a possible market for transmission congestion relief.

Electrolysers, or in some cases hydrogen power plants, could provide services in these new markets.

Thinking of the NSW strategy – like the hydrogen hubs beginning in the Hunter and Illawarra, or the new gas/green hydrogen-powered Tallawarra B power station – it’s easy to see how they could find applications in these new markets beyond the straightforward production of energy.

I’m pleased to say that across the NEM, and indeed Australia, other jurisdictions are also very active and committed to research, strategy, investment and construction.

South Australia’s $600m Whyalla project is another bold move.

While Western Australia and Queensland have significant hydrogen construction underway or imminent.

Show us your creativity

So, we’re making the frameworks that open up market opportunities – now we want to see your creativity and ingenuity deliver the solutions.

And one of the exciting things about setting up markets that reward innovation is when you see how invention begets invention.

The prospect of our markets rewarding innovation means this is happening all the time in hydrogen and other areas – the urgency of the energy transition is driving a new age of invention.

New products appear and in turn prompt other ingenious concepts – or a process emerges that exists only because someone saw possibility in an apparently unrelated innovation.

Innovation examples

I’ll give you a recent example, because I just found the process so interesting.

After the hydrogen conference I mentioned earlier, a Toshiba delegate got in touch, and asked if he could update our team on an unusual electrolyser project with the promise of very high efficiency.

The project is a bit like bringing together two Lego kits – say Harry Potter and Star Wars. Each kit works well alone, but when combined, you can build something amazing – like a Millennium Falcon full of Hogwarts classrooms.

In essence, this Toshiba project captures spilled renewables in long duration thermal energy storage, which produces heat to add steam to drive a highly efficient electrolyser.

This electrolyser has been in development for quite a while. The need for steam is what sets it apart. The question has been, how to get the heat without adding to the cost.

They’re testing a couple of options, including Miscibility Gap Alloys – MGAs – which were developed by Newcastle University right here in NSW.

MGAs are stackable blocks – which inspired my Lego analogy – that have many possible applications and I’m interested to see where else they might show up.

It’s early days for this Toshiba project -- it’s early days still for hydrogen -- but every step takes us further on that journey of a thousand miles.

Conclusion

As I finish, I want to return to Minister Kean’s words from the NSW strategy.

Leave - no one - behind.

That really resonates with me.

The National Energy Objectives are all about seeking the long-term best interests of customers.

What we find, as we implement the P2025 reforms, is that placing consumer benefits at the front of our considerations helps everyone. I’d like all of us to bear that in mind on this journey towards hydrogen power.

Let’s take the chance, while we still can, to really focus on who – and where – we want our consumers to be, and how we can deliver to them reliably, securely, and affordably.

When consumers are our focus, we create stronger markets that naturally reward innovation and encourage investment because there are customers waiting for those solutions.

When consumers are our focus, our collaborations are more effective and deliver more meaningful and direct ideas to our work programs.

And when consumers are our focus, it’s of course easier to build social licence because we are always thinking about what will attract them and repay their trust.

Thank you.

Evolution of the energy market

26 November 2015

Speech by Chairman John Pierce at CEDA energy series - the nem in transition - “The restaurant at the end of the universe: Evolution of the energy market” - 26 November 2015

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Thank you and good afternoon ladies and gentlemen.

It’s a pleasure to be here today with so many who have a stake in the future of our energy market.

All of us are seeing accelerating change in the dynamics of the sector. A sector made up of diverse organisations, often with different world views – from competitive retail services and energy generation; to the regulated networks; government policy-making and regulatory agencies; and consumer and environmental organisations.

It is the interconnectedness among all of us that is remarkable.

What unites all of us is a shared stake in a resilient energy sector – one that is flexible and can adapt to whatever the future may bring. One that is efficient, secure and reliable, keeping prices as low as possible for consumers.

One of the main themes emerging from our extensive consultation has been the critical importance of policy integration. Environmental policy, which has tended to be developed externally to the energy market, can directly influence how effectively the market operates, and outcomes, including movements in wholesale and retail prices. Critically, the relationship between the two, and more fundamentally, changes to risk allocation as well as the level of consumer market.

Fundamentally, markets and regulatory arrangements can be thought of as mechanisms for allocating risks between the parties involved. In a sector such as energy, the ability of the system to operate effectively and ultimately, the outcomes for consumers, depends on 2 the various policy and regulatory interventions taking a consistent approach to risk allocation.

Setting environmental and social policy objectives is, of course, the role of governments. That’s what they are paid to do. Our role lies with the mechanism used to achieve the objective and in seeing it done in a way that supports the efficient operation of the energy market and the long-term interests of consumers.

Successful policy integration needs to satisfy three conditions:

It is done in a way that supports the efficient operation of the electricity market and the long-term interests of consumers. For this to happen, it should be compatible with the pricing mechanisms used to trade electricity
It must be consistent with the allocation of risk between, say, businesses and consumers that underpins an efficiently operating market.
It should have the ability to meet an emissions target, and meeting its objectives whatever the future brings - in demand growth, technological changes and relative input prices. That is, it should not be dependent on today’s expectations or forecasts of these variables.

Integration of the tools used to control emissions with the energy market is really the only means of achieving both energy and emission reduction policy objectives.

But it’s not just policy integration that needs to be addressed. We are also seeing changes in:

technology on both sides of the meter
new business models based on offering energy services, not just energy, and
Consumer preferences in sourcing and using these services.

The simple truth is that change will always be a feature of energy markets, and hence, policy and regulatory arrangements. What’s important is the way that policy and regulatory change is managed – it must be transparent, based on clear objectives and relatively predictable.

To this end, we consult widely with the increasingly broad array of organisations that have a stake in the future of our energy market. We have just completed one of our key market development exercises and today I’m very pleased to be releasing the results of our stakeholder consultation on the Strategic Priorities for Energy Market Development. Looking around the room, I see many who gave valuable and considered input to our recommended focus areas for market development.

So let me give you some context around each of the three Strategic Priorities.

1. Consumer Priority: Enabling consumers to make informed decisions in competitive retail markets

The first is our Consumer Priority – enabling consumers to make informed decisions in competitive retail markets. Starting with the proposition that it is consumers themselves who are the best judges of what works for them, much of our work over the past five years has been driving more opportunities for consumers to make informed choices about the way they use electricity 3 based on the benefits that end-use services provide to them.

The Power of Choice reforms, in particular, have laid the foundation for the energy system to be positioned to respond to new technologies in a way that is in the consumer’s interests. These technologies are changing how consumers participate in energy markets and include battery storage, microgeneration, smart devices and connected home products and services.

These technological changes sometimes drive either predictions of achieving an energy nirvana or imminent Armageddon. Regardless, we need to look beyond the widgets to focus on the function they perform and adjust the regulatory and market processes where necessary to accommodate them. Many of the functions they perform are not new – what is new is that the technology allows these functions to be performed much closer to, and within the control of consumers.

We call this the ‘consumer-driven transformation’ of the energy sector.

Some of you might remember Douglas Adams’ trilogy of five books, ‘The Hitchhiker’s Guide to the Galaxy’. Consumers are increasingly sitting at the ‘centre of the universe’, not waiting to be served ‘in a restaurant at the end of it’.

While some may take the view that the best form of consumer protection is effective competition, the peculiarities of energy have meant that governments have in place an energy-specific consumer protection framework that places obligations on businesses that go beyond those required by the more general Australian Consumer Law.

Given changes in business models and the move from selling kilowatt hours to a broader range of energy services, the Energy Council is undertaking a review of the energy specific consumer protection framework including the jurisdictional derogations.

Successful implementation of the distribution network tariffs reforms that is currently underway, is a vital step in the development of an effective retail energy services market.

But these price reforms alone will not be enough.

People need information in a form that allows them to make informed choices.

So over the next two years, the Consumer Priority will focus on protection, engagement and participation so that consumers can benefit from the innovations in energy markets.

2. Gas Priority: Promoting the development of efficient gas markets

Turning now to our second priority: the promotion of efficient gas markets.

We saw the first LNG cargos exported from Gladstone in January this year - an historic moment for the east coast gas industry. The market has now entered a transitional period to a new supply and demand balance - by 2020, natural gas used for LNG production will account for over 70% of total east coast demand.

The Energy Council asked the AEMC to consider the direction that east coast gas markets should take, given the new LNG industry market dynamic and the Victorian government asked us to look in detail at specific arrangements for Victoria. We are guided by the Council’s Vision for Australia’s future gas market which will, over time, provide market participants with a more flexible and transparent way of buying and selling gas.

We are looking at some important issues in developing recommendations for the Energy Council, which will be released publicly next month. These include the extent to which different gas market development pathways promote trading and risk management, preserve signals for investment in pipeline capacity, and address new levels of complexity. Lower transaction costs and fewer barriers to entry will promote more competition in the wholesale markets which can be expected to benefit retail prices.

The focus over the next two years will be implementing those recommendations endorsed by the Council.

3. Markets and Networks Priority: Encouraging efficient investment and flexibility

Our third priority focuses on encouraging efficient investment and flexibility in markets and networks.

We are at an inflection point in energy markets with changes in the costs, technology, consumer preferences, patterns of demand and environmental policy. The pace of change is creating new opportunities for new business models to emerge that demand greater flexibility to maintain market resilience.

So it’s critical that market and regulatory arrangements create the right conditions for business evolution that promotes the long-term interests of consumers.

Companies are now competing to offer energy services, not just energy. They will manage an individual consumer’s energy needs:

managing the risk of buying energy in a more dynamically-priced environment
provide tools to respond to time-of-use pricing
optimise appliance settings
choose when to charge electric vehicles
And when to sell stored energy back to the grid.

This is driving a redefinition of where the lines are drawn between functions that are subject to economic regulation and those that can be provided through competition. It is also redefining the relationships between different parts of the sector, where they potentially compete, and the circumstances under which they co-operate.

This has important implications for how competition for retail energy services develop, how we think about the role of the retailer and the evolution of networks, in particular, at the distribution level. Distribution businesses are evolving from ‘one-way’ energy delivery systems into multi-directional ‘smart grids’. The regulatory frameworks must support these innovations in a way that clearly distinguishes between those that relate to functions of the network and hence are subject to regulation and those that belong in a competitive energy services market.

To use a sporting analogy, every player on the energy sector playing field should understand the position they are playing and the rules of the game.

To this end, we will continue our work program focused on technology and provide recommendations to the Energy Council where changes are required to the regulatory frameworks.

Let me finish by saying in the face of change, we are not operating with yesterday’s logic.

The intensive consultation that helps shape our thinking on Strategic Priorities for Energy Market Development, also helps us provide policy advice and changes to the regulatory frameworks that are adaptive to changing circumstances, without losing sight of the objective.

And that objective remains the same as it’s always been: a resilient energy sector – one that is flexible and can adapt to whatever the future may bring. One that is efficient, secure and reliable, keeping prices as low as possible for consumers and providing meaningful choices to help them manage their energy needs.

I invite you to continue to help us shape our thinking, to actively participate in our reviews and forums and to request change when it’s needed. I look forward to continuing the conversation.

Thank you.

ENDS

Long term priorities for development of the National Electricity Market

03 June 2014

CEDA Speech by John Pierce – 3rd June 2014

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Thank you Simon and CEDA for putting on today’s event. A few weeks ago I was across the Ditch in Wellington, killing a little time in a coffee shop before an appointment. There were two people sitting next to me having a very engaged and animated conversation.....about house insurance. They were comparing notes on the different policies they were on and of other policies from different companies they had received quotes from.

Two things struck me about their conversation. The first was the level of emotion..... there was none. Their tone was very ‘matter of fact’ without a hint of angst or frustration borne of confusion. They had the demeanour of people who were confident they knew what they were talking about.

The second was the range of things they were comparing……premiums of course, but also the level of excess, exclusions and how pleasant and 2 informative the voice on the other end of the phone was when they rang this company or that.

And I thought, “that’s it!”

How can we get to a world where people are as comfortable shopping for energy as they are house insurance…….or car insurance or bank loans or a myriad of other services where we take choice and competition for granted.

Now I often hear people say that energy is complicated. Well guess what so are the financial services or telecommunications sectors or even groceries, if you try and explain the retail offerings to people by describing the processes and technology that make up the supply chain.

Of course it wasn’t long before John Pierce the human being, eavesdropping in a coffee shop reverted to Pierce the econocrat who thought “confident, well informed consumers”….. notice how that term depersonalises our thought processes…..” is one thing, but if their choices are going to result in efficient operation, investment and innovation along the supply chain and hence make a positive contribution to productivity growth in the economy more generally, the prices and other characteristics of the services being offered to these individual consumers need to reflect the costs to the system of supplying them. The supply chain then needs to be 3 flexible enough to respond to these consumer choices. Generally this requires price levels AND structures to be capable of communicating the consequences of these choices on underlying demand and supply at each link in the supply chain.”

Pierce of the AEMC recognised that these two New Zealanders were unknowingly living the consumer priority in the Australian Energy Market Commission’s Strategic Priorities for energy market development. The econocrat was thinking about the market priority and both are needed.

Pierce the human being thought it best not to burden the house insurance shoppers with this revelation and left for his appointment without disturbing their search for Pareto Optimality.

The Consumer Priority aims to allow consumers to participate confidently in the energy market and that they can see a benefit to themselves from doing so. Participate in the competitive generation and retail markets, through their consumption and contract choices and in the network sector, through the impact of these choices and through participation in the regulatory processes.

Underpinning this is a view as to who you want to be driving the way the sector operates and develops in response to changing technologies, costs and relative prices.

Importantly, and in common with the market priority, it also requires reflection on how risks of various types are allocated, primarily between consumers and equity investors, but also in this game, taxpayers.

In the old world of state-based utilities, the sector’s development – perhaps quite appropriately for the times – was largely driven by planners employed in what was often labelled the “Power Development Division” where the focus was on building generation capacity. When energy demand was growing at 6 per cent plus per annum some would argue that this focus was fair enough.

A consequence of this type of industry structure however is that investment risks fall on consumers. When demand growth slowed to around 3 per cent per annum but generation plant was still being built as if it was 6 per cent, prices rose to recover the costs of the excess capacity.

With the start of the wholesale NEM more than 15 years ago, it was recognised that the drivers of the way the sector developed would shift from generation to retailers and the way networks were regulated.

It was also recognised, indeed intended, that investment risk would shift to the owners of generation capacity. If too much capacity was built wholesale prices would fall. Competing generators need not be any better at forecasting the future than the planners, but the consequences would sure be different.

What we are experiencing now is….. admittedly what can at times be in an untidy manner……. a transition to the next phase of that trend where consumers, doing what they do best – making consumption decisions – drive the way the sector develops.

Consumer representatives, governments, the businesses operating in the sector, and market institutions such as the AEMC and the Australian Energy Regulator all have a role in facilitating this transition. For the Commission’s part perhaps the two most important or at least visible pieces of work are the Rule changes flowing from the Power of Choice Review and our reviews of retail competition.

Power of Choice was a package with numerous elements. Each element to varying degrees depends on the others. Three fundamental building blocks though are the Rule changes dealing with (i) the way network charges are structured, (ii) the development of a market for the data that new metering technologies can provide consumers, retailers and distribution network operators, and (iii) arrangements that allow for multiple trading relationships at the consumer’s connection point.

All are a bit “techy” and looked at individually each in isolation might not seem world shattering. Taken together however they create the opportunity for consumer choice about how they use this stuff to drive efficient delivery of energy services.

The work we have done as part of the Retail Competition reviews identified four things energy consumers need for there to be coffee shop conversations like the house insurance conversation I overheard in New Zealand.

A trusted source of advice that allows them to compare “apples with apples”,
Knowing that consumer protections were in place and that the reliability of their physical supply was unaffected by shopping around,
That the potential savings made shopping around worthwhile, and
That doing so would be relatively easy to do and not overly time consuming.

Energy of course is an all-pervasive input to economic activity. There is a strong link between the productivity of this sector and that of the broader economy. This is why the energy sector was a particular focus of the microeconomic and competition policy reforms of the 1990’s and the resulting wholesale market arrangements have been an enduring reform success.

Creating the conditions that allow consumer choice to drive the way the sector and the market for energy services develops will help open the next chapter of what is a productivity improvement story.

Governments naturally tend to have objectives that go beyond these consumer and market priorities for energy market development. Concerns for vulnerable customers and the environmental impacts of the sector are obvious examples. That is quite appropriate of course because after all they are elected to govern and I am not.

How these objectives are pursed,…… whether the instruments used to implement them are compatible with the way energy is bought and sold and the risk allocation that allows the market to operate……. however has important implications for how effectively the energy market can work in the long term interests of consumers.

Like the market arrangements themselves, policy instruments that depend on a particular view of the future, on predictions of relative prices and technology costs are likely to result in inferior outcomes to those that can achieve their objectives whatever the future may bring.

Thank you.

Impacts of climate change policy on the energy market

01 October 2009

The Chairman of the Australian Energy Market Commission, Dr John Tamblyn, delivered a presentation discussing the impacts of climate change policy on the energy market at the Committee for Economic Development (CEDA) Energy Series Forum held on 1 October 2009 in Sydney, NSW.

The Reform Journey Continues: Energy Markets and Climate Change Policies

19 February 2009

Chairman of the Australian Energy Market Commission, Dr John Tamblyn, presented a paper on Australian electricity markets and climate change policies to the Committee for Economic Development of Australia (CEDA) in Melbourne, Victoria, on 19 February 2009.

This paper explains why competitive energy markets are integral to the delivery of climate change goals in Australia, and considers whether the current frameworks for energy markets are likely to be up to the task of facilitating at efficient costs the implied transformation in where and how we produce and consume electricity. This transformation is expected to be driven primarily by the explicit pricing of emissions of CO2-equivalent gases through the Australian Government’s Carbon Pollution Reduction Scheme (CPRS) and by the subsidising of investment in new renewable generation capacity through the expanded 20% Renewable Energy Target. The paper describes the potential interactions between these policies and behaviour in energy markets, and discusses the ability of existing mechanisms in energy markets to promote efficient outcomes.
The paper puts this in the context of an ongoing process of reform aimed at promoting competition and which has already seen significant transformation of the market over the past 15 years.

Improving Transmission Regulation and Network Congestion Management in the National Electricity Market

10 May 2006

Improving Transmission Regulation and Network Congestion Management in the National Electricity Market

An address by John Tamblyn

Chairman, Australian Energy Market Commission

CEDA Energy Reform Series Sydney, 10 May 2006

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Introduction

While substantial progress has been made in developing the Australian energy market since the reforms of the 1990s initiated by the Council of Australian Governments (COAG) and those undertaken following the December 2003 report to COAG by the Ministerial Council on Energy (MCE), further challenges remain for the reform agenda in delivering the objective of an efficient, reliable and secure energy market which serves the long-term interests of the Australian community.

This paper examines some of the remaining challenges for the Australian energy market in meeting the objective of efficient and reliable energy supplies and the contribution that the Australian Energy Market Commission (AEMC) can make in performing its role in the energy market.

As part of the new governance arrangements for the National Electricity Market (NEM) the AEMC is now well positioned to assist in meeting that objective through its function of energy market Rule-making, conducting market reviews initiated by the MCE, and energy market development more broadly.

Our role

In performing its role, the AEMC has adopted a conscious policy of consulting first with all stakeholders on the matters under review before conducting its analysis and reaching draft and final decisions. Our energy market work is also guided by two broad themes which are to:

Provide greater clarity, certainty and consistency in the application of regulation through the Rule-making role; and
Develop regulatory arrangements which provide a better alignment between the investment and operational incentives of transmission operators and the requirements and interests of market participants and energy consumers.

The AEMC now has before it a wide range of Rule change proposals and reviews which have the potential to impact directly on the efficient design and performance of the energy market in the medium and longer term.

It should be emphasised at the outset that the Australian energy market is currently performing very effectively as a result of the reforms and developments of the last 10 years.

The result has been the delivery of high levels of reliability and security of energy supply at internationally competitive prices – with substantial benefits to Australian households, industry and the economy as a whole

Significant challenges remain to be addressed in the next phase of energy market reform in order to ensure that the balance of energy supply and demand at competitive prices is maintained in the period ahead.

Forecasts of demand for and production of electricity and gas over the next 15-20 years indicate a requirement for substantial investment in electricity generation and gas production and in transmission and distribution infrastructure which must be sufficient to maintain the reliability and security of energy supplies in response to changes in the level and pattern of energy demand.

Maintaining reliable electricity supply

Taking this longer-term view, a priority issue for the NEM over the next 5-10 years is to ensure that the price signals and investment incentives provided by the market design and regulatory arrangements continue to bring forward appropriately timed, located and co-ordinated investments in both generation and transmission capacity that are sufficient to “keep the lights on” in the medium to long term.

This central performance objective for the NEM is a complex one to meet because of the hybrid design of the electricity market. The price signals and incentives that drive generation investment are provided by the competitive electricity wholesale market, while the incentives and obligations governing transmission investment are provided by the economic regulation framework, the periodic revenue cap decisions of the Australian Energy Regulator (AER) and the reliability requirements of the Rules and of relevant State and Territory legislation.

It will be essential therefore to ensure that the arrangements governing the operation of the wholesale market on the one hand and economic regulation of transmission on the other, are sufficiently well aligned and co-ordinated to ensure that the decentralised decisions of generators and the regulated decisions of transmission service providers result in both generation and transmission capacity being made available at the times and locations required to meet the future power demands of the market on an ongoing basis. The success of the regulatory framework and the market incentives in addressing these issues will have a direct bearing on the efficiency and reliability of the NEM in future.

Placing the focus on the need to maintain efficient, reliable and secure power supplies in the long term underlines the importance of the inter-relatedness of generation and transmission in the overall performance of the market. It also highlights the necessity of taking into account the interactions between generation and transmission in framing future policy, legislation and Rule changes and in the future administration of the wholesale market and power system and the economic regulation of the transmission system.

The principal elements of the AEMC’s current work program enable us (and indeed require us) to take an integrated, market-wide view of the impact and effectiveness of the regulatory framework as a whole in facilitating the achievement of the NEM objective. This paper gives a very high level overview of the work program with particular reference to the AEMC’s current work in reviewing the Rules for the economic regulation of transmission services and arrangements for the management of network congestion in the NEM.

The AEMC’s current work program priorities. The AEMC’s current work program includes a number of priority projects which impact on three important and inter-related drivers of the performance of the NEM; network investment and operation, efficient operation and performance of the wholesale market and the reliability and security of supply. These projects include:

A review of the Rules for the regulation of electricity transmission directed to facilitating efficient and timely investment in and use of transmission across the NEM while aligning the long-term incentives of transmission service providers with other market participants including end-users
A review of options for the management of material network congestion in the NEM to improve the efficiency of despatch, pricing and risk management in the wholesale market;
Rule proposals regarding the principles and processes for changing the boundaries of pricing regions in the NEM and specifically to change the boundary of the Snowy pricing region of the NEM which is subject to material network congestion; and
A comprehensive review by the Reliability Panel of the settings which govern the overall reliability of the NEM bulk supply system.

This work will have direct implications for the efficiency of the transmission and generation sectors and the interactions between them and for the performance of the NEM in terms of efficient, reliable and secure power supplies into the future.

These projects are described in turn below to illustrate their linkages and their potential implications for the longer-term design and performance of the NEM.

Review of electricity transmission Rules

The National Electricity Law (NEL) requires the AEMC to review and rewrite to the extent necessary, the transmission regulation Rules of Chapter 6 of the National Electricity Rules (NER). The review is being conducted in two stages:

First, the Rules governing regulation of transmission revenues; and
Second, the Rules for transmission pricing.

The revised Rules are to commence on or before 1 January 2007 and the MCE has made a regulation to that effect.

The Rules for the economic regulation of transmission services have been a long standing challenge for the NEM. They have been the subject of extensive reviews by NECA and the ACCC, with the ACCC’s Statement of Regulatory Principles (SRP) reflecting the current status of electricity transmission revenue regulation.

Regulation of access to essential infrastructure services has also been reviewed by the Productivity Commission, the Exports and Infrastructure Taskforce and the Expert Panel appointed by the MCE to report on energy access pricing.

Principal goal for the review of transmission revenue and pricing

The AEMC’s principal goal for the review of Rules for transmission revenue and pricing is to establish in the Rules a clear and certain regulatory framework that facilitates efficient investment in and operation of transmission services that meet the technical, economic and commercial requirements of users of those services and of the NEM as a whole. To a large extent the AEMC has codified the provisions of the AER’s Statement of Regulatory Principles (SRP) in the Rules in response to submissions to that effect from a majority of stakeholders and in order to increase the clarity, transparency and certainty of regulation and the accountability of the AER’s processes and decisions.

Adopting a rules-based approach to transmission regulation in place of the previous guidelinebased approach reflected in the AER’s SRP is consistent with the separation of Rule-making and Rule administration that is a central feature of the new energy market governance arrangements which gave rise to the establishment of the AEMC and the AER.

Clarification of regulatory process and methodologies in the Rules was also supported by the Expert Panel that reported recently to the MCE on energy access pricing.

Key themes

The AEMC has identified the following key themes to guide the conduct of the review and they were reflected in the Rule Proposal it published in February for consultation with stakeholders.

First, the AEMC sought to provide greater certainty and transparency in regulatory processes and methods by:

Specifying in the Rules the form of regulation to be applied in different market circumstances, the methodology for determining regulated revenues and the form of incentives to be adopted by the AER; and
Codifying a propose-respond process and fixed timetables for regulatory decision-making by the AER;

Second, the Rule Proposal sought to establish a more certain environment for long-term investment in transmission services by:

Specifying in the Rules the opening regulatory asset base (RAB) for each transmission operator and the process for rolling forward the RAB values (excluding the possibility of periodic optimisation of the RAB);
Requiring the AER to accept the transmission operator’s forecasts of capital and operating expenditure if the AER determines they are “reasonable estimates” on the basis of specified criteria; and
Specifying in the Rules the method for determining the Weighted Average Cost of Capital (WACC) and fixing key WACC parameters for five years before they can be reviewed and changed by the AER.

Thirdly, and of most direct relevance to the theme of promoting better co-ordination of the investment and operating decisions of transmission operators and generators, the AEMC’s Rule Proposal sought to achieve a closer alignment between the long term incentives of transmission operators and those of network users and end use customers by:

Providing for presumptive approval by the AER of capital expenditure forecasts for projects that are either for reliability augmentations, to meet regulatory obligations or have passed the Regulatory Test; subject to review of the efficiency of the cost estimates by the AER on the basis of specified criteria;
Requiring commercial negotiations between network operators, generators and large network customers where contestable or negotiated provision and pricing of services is feasible;
Facilitating (through the role of the Regulatory Test in the revenue determination process) the adoption of non-network solutions to network congestion (eg, generation or demand side options) where they are economically feasible; and
Providing incentives for network operators to deliver higher network availability and reliability at times of most value to market participants.

Submissions

A majority of stakeholder submissions were supportive of the general approach of the AEMC’s Rule Proposal and many of the more detailed proposals it contained. However, concerns were raised in the submissions about a number of more detailed aspects of the Proposal.

The following were among the more substantive issues identified in submissions:

Concerns were raised by a number of stakeholders about the degree of codification in the Rules of the regulatory processes and methodologies with a number advocating provision of greater flexibility and discretion for the AER in some respects. As noted above, the provision of clarity and certainty in the Rules about the regulatory framework and its application by the AER was a clear theme in many submissions and has been one of the goals for the conduct of the review. Nevertheless the AEMC will review the nature and extent of guidance that is to be provided to the AER in the Rules and will make adjustments where it considers that appropriate.
Some stakeholders expressed concern about the feasibility and desirability of separately defining “prescribed transmission services” supplied by the shared network and “negotiated transmission services” supplied to dedicated customers under more contestable or negotiated conditions. Under the Rule Proposal only the former would be subject to revenue cap regulation, while the latter would be subject to commercial negotiation, or will be unregulated where the service is capable of competitive supply. The AEMC has formed a working group of market participants to advise it on the classification and definition of these different service types. The AEMC retains the view that it is desirable in principle to limit the application of intrusive forms of regulation to services supplied under conditions of monopoly or substantial market power and intends to develop definitions and processes to achieve that outcome in practice.
Criticisms have been made of the AEMC’s proposals for reopening of the revenue cap within a regulatory period in specified circumstances and to permit an ex post review by the AER of the prudencey of capital expenditure before it is rolled into the RAB. Some stakeholders sought reintroduction of the contingent project regime for large known but uncertain capital projects. This was part of the AER’s SRP methodology but the AEMC had consciously omitted that feature from its Rule Proposal. The Commission will review these aspects of the Rule Proposal in the light of these stakeholder comments in order to assess whether any further modifications are warranted.
Some submissions were also critical of the design, power and balance of the incentive arrangements specified in the Rule Proposal to encourage improved cost efficiency in capital and operating expenditure and improvements in the availability and reliability of network services. These are critically important elements of the economic regulation framework and the AEMC is reviewing those aspects of its Rule Proposal in the light of these submissions.
There was general support for the AEMC’s proposal to specify in the Rules the WACC methodology and certain WACC parameters, on the basis that they are to be reviewed by the AER after five years. A number of submissions welcomed the provision of increased certainty in the short term while retaining the flexibility for periodic adjustments in response to changes in financial market conditions.

While the AEMC remains open to varying the approach set out in its initial Rule Proposal in the light of the comments in stakeholder submissions, in framing the Draft Determination, it will continue to seek an appropriate balance between the need to:

manage the market power of transmission operators;
provide incentives for efficient investment and operations; and
establish appropriate transparency and accountability obligations for the regulator

As already noted, a particular theme for the conduct of this Review has been to develop regulatory arrangements which align the incentives and behaviours of transmission operators with the requirement of participants in the wholesale market and the interests of electricity customers. The alignment of incentives and co-ordination of activities of the transmission and generation sectors is particularly relevant in the management of network congestion in the NEM which is examined next.

Network congestion and regional boundary changes

The AEMC’s work program also includes an MCE directed review of options for improving the management of network congestion in the NEM and Rule proposals seeking changes to the boundaries of NEM pricing regions in cases of material and enduring network congestion.

Network congestion occurs when the available network capacity is insufficient to permit the despatch of the least cost combination of available generation to meet demand across the NEM. Congestion can result in electricity spot price differences between NEM pricing regions, reflecting the despatch of higher cost generation in importing regions. Such regional price differences are intended to reveal the marginal cost of network congestion and to signal to market participants when and where it would be efficient to invest to avoid the cost of congestion.

In the short run, options for managing the costs and risks of network congestion include financial hedges by participating in the settlement residue auctions (SRAs), by entering into bilateral contracts with other market participants or by contracting with customers to temporarily reduce their consumption.

In the longer run, the options include investment in appropriately located network or generation capacity, sustained demand side participation initiatives and non-electricity alternatives.

The regional pricing structure is a central design feature of the NEM. The boundaries of pricing regions were initially established at points across the NEM where transmission connections were weakest and network congestion was material and sustained. Change to regional boundaries provides one means of adapting to changes in the location of network congestion which is material and persistent. Boundary changes allow the cost of congestion to be priced transparently in the wholesale market and managed through financial hedges where investment to reduce or eliminate the congestion has been shown to be uneconomic.

Terms of reference

The MCE’s terms of reference for the review of network congestion management options require the AEMC to address three key issues:

Improved arrangements for managing financial and physical trading risks associated with material network congestion;
Development of a regime to manage material network constraints until it is addressed through investment or regional boundary change; and
The relationship between a constraint management regime, regional boundary review criteria and triggers, the Regulatory Test and the operational and investment incentive arrangements for network service operators.

Key themes guiding the Review

The AEMC has identified the following key themes to guide the conduct of the Review. It considers that an effective congestion management regime should:

Improve the efficiency of the NEM – in the short run in terms of efficient despatch and pricing of congestion and in the long run in terms of efficient investment responses;
Facilitate efficient management of the physical and financial risks resulting from network congestion; and
Protect the security of the power system and the reliability of supply.

Network congestion and its consequences is another influence on the performance of the market which occurs at the intersection between the transmission network and the wholesale market. In developing measures to manage congestion, the AEMC will be taking account of the linkages and interactions between the two sectors, including the implications of its current review of the Rules for the regulation of transmission services.

The MCE has also submitted a Rule change proposal containing processes and criteria for assessing and deciding changes to the boundaries of NEM pricing regions. Under the proposal, the AEMC would assess any request for a boundary change against new forward looking, economically based criteria to determine whether the proposed boundary change is likely to result in a material and enduring economic benefit to the market.

The intention of this proposal is that regional boundary changes would be the last resort in a staged approach to network congestion management and would only be considered in cases of material and sustained congestion which had not been addressed effectively by other measures, including investment in network, generation and demand side measures.

It is worth emphasising here that network augmentation, (if it is found to be economic under the Regulatory Test) is an alternative to a boundary change as it would reduce or remove the congestion as a concern. However, if investment (network or non-network) is not an economic option and the congestion is material and sustained, a boundary change would be an appropriate response to enable the costs and risks involved to be priced transparently in the spot market. It is also worth noting that any transmission augmentation response would reflect the network business’s response to the incentives and constraints imposed by the economic regulation framework, while a boundary change response would seek to manage the congestion through the wholesale market and hedge contract mechanisms. This is a further example of the important intersections between the transmission network and the wholesale market in the NEM.

Other Rule proposals

The AEMC is also processing two Rule proposals seeking alternative changes to the boundary of the Snowy pricing region to address the material and persistent network congestion that has been evident in the region for some time. Any changes made to the Snowy Region boundary as a result of these Rule change proposals could have implications for both spot prices and relative despatch volumes for generators trading in and through that part for the NEM. For various reasons, including the environmental sensitivity of the Kosciusko National Park, network augmentation to date has not proved to be a feasible response to the congestion.

The proposals are currently at the early stages of analysis and will be assessed against the NEM objective in terms of their potential contribution to improved efficiency in the NEM (efficient despatch and pricing) improved risk management, power system security and reliability of supply.

The AEMC’s work on congestion management and regional boundary change is ongoing and is a further example of the need to recognise and address in the regulatory framework issues which involve complex interactions between the transmission network and the operation of the wholesale market. As with the regulation of transmission revenues and prices, effective solutions to network congestion will also require measures to better align the incentives provided to market participants through the operation of the wholesale market and those provided to network operators and users through the economic regulation framework.

While the reviews of the transmission regulation Rules and network congestion management arrangements should contribute to improved alignment and co-ordination between the transmission and generation sectors, it is also essential that the resulting outcomes are consistent with the delivery of a secure power system and reliable electricity supply at the standard expected by the community.

Review of the NEM reliability settings

As already noted, continuing reliability of electricity supply depends on adequate levels of generation and transmission capacity being available at the time and location required to meet consumer demands. Security of supply depends on that generation and network capacity being operated safely and securely within the technical limits of the plant and equipment that makes up the power system.

Delivery of the levels of investment and performance required to maintain power system security and supply reliability involves the interaction of the decisions and actions of generators and transmission operators with the signals, incentives and obligations provided by the competitive wholesale market, economic regulation of the transmission network and the settings of certain technical standards and related obligations.

The current NEM reliability settings are an important element of this broader framework of electricity market arrangements and comprise:

An explicit reliability standard for NEM generation and bulk transmission (the bulk supply system) currently set at 0.002 percent of unserved energy over the long term;
Price mechanisms designed to ensure that the wholesale market provides price signals sufficient to encourage the supply and demand side investment and usage responses required to meet the reliability standard comprising:

- a price cap known as Value of Lost Load or VoLL and a market floor price; and

- a cap on financial exposure known as the cumulative price threshold or CPT; and

Intervention mechanisms which are set up as a last resort safety net to address potential short-term shortfalls of generation capacity relative to the NEM reliability standard:

- A “reserve trader” mechanism through which NEMMCO can purchase in advance additional reserve generation or demand-side reductions; and

- A power for NEMMCO to direct generators to provide additional supply to meet capacity shortfalls.

These short term intervention mechanisms are not designed to address investment shortfalls, but can require existing generation plants to be made available and operated. Measures are taken to minimise or eliminate price distortions when interventions occur. The reliability settings are inter-related. The reliability standard sets the level of reliability performance the market is expected to achieve over time (reflecting an assessment of the community’s valuation of reliable power supply relative to the costs and risks inherent in its delivery). VoLL and CPT constitute a limitation on spot market price outcomes that are designed to provide the incentives for the market to invest to deliver the necessary generation capacity while managing the financial risks. The intervention mechanisms are available to address reserve shortfalls should the price mechanisms fail to deliver.

The AEMC has requested the Reliability Panel to undertake a comprehensive, integrated review of the effectiveness of these NEM reliability settings, including whether there is a need to improve or change them. The AEMC has called for this comprehensive review to ensure that the reliability settings to apply in future are appropriately aligned and integrated so as to promote efficient reliability outcomes that reflect the expectations of Australia’s electricity consumers. The outcomes should ideally apply for a period of time into the future to provide a stable environment for investment to take place.

The reliability settings for the NEM will interact directly with the other NEM arrangements referred to in this paper – the Rules for the regulation of transmission services and improved arrangements for the management of network congestion.

Some concluding observations

“Electricity supply is fundamental to our industry and lifestyle. Its cost is a key determinant of the economy’s cost structure and an important source of our competitive advantage. As our economy and population grow we will need more investment in our electricity supply.”

Clearly, the Australian community and economy need to be assured of efficient, reliable, affordable electricity supplies today, tomorrow and into the future and that the investment and operating decisions required to deliver it will be made in an efficient, timely and co-ordinated way.

Rule makers and regulators do not make the investments in infrastructure or produce and transport the electricity needed to power Australian businesses and households over the longterm. That is done by energy businesses who respond to the demands of their customers and the risks, incentives and signals provided by the energy market and the regulatory framework that governs it.

However, Rule makers and regulators have a very substantial influence on the behaviour and actions of energy businesses and customers and so, on the efficient and reliable long term performance of the market. These influences are through the development of the Rules that govern the market (in the case of the AEMC) and the administration of those Rules (in the case of the AER and NEMMCO).

The AEMC understands this and is currently progressing a number of priority projects, which have the potential to improve the future efficiency and reliability performance of the energy market through their impact in better aligning the incentives and actions of network businesses and market participants and in increasing the clarity, certainty and consistency of the Rules and their administration by regulators.

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