What else happened at last Friday’s virtual energy ministers’ meeting?

COAG Energy Council met by teleconference last Friday. This meeting of Australia’s energy and resource ministers typically takes place twice a year and allows the commonwealth and states and territories to thrash out the high-level direction of energy market reform. Unsurprisingly, the focus of the meeting was the immediate issue of keeping the lights on through the pandemic. Ministers still found time to sign off on a range of other matters.

The most significant decision was an agreement to raise the level of reliability in the NEM by:

These measures are expected to keep unserved energy to no more than 0.0006% in any region in any year. Unserved energy is the demand that doesn’t get met on the rare occasions when the system simply does not have enough supply available to meet all demand. The existing standard that the market operator AEMO is supposed to work to is 0.002%, so this decision aims to reduce that by two-thirds. The standard was the subject of a thorough review by the independent Reliability Panel less than two years ago, and so this is an extraordinary abandonment of energy market governance that is the result of intense lobbying by AEMO.

Details of the two new measures are scant although there will be consultation on the detail before implementation. The capacity reserve will presumably look like a permanent, expanded version of the Reliability and Emergency Reserve trader. A key issue of any such reserve is  – why would resources choose to be part of this reserve instead of part of the market? The implication is that it would pay more than the market but be cheaper for consumers than the more direct solution of raising the market price cap, which would be available to all capacity. In the long run, this would mean that resources gravitate away from the market and towards the capacity reserve until it is the market. The other possibility is that a capacity reserve may be more suited to demand response participation than the current energy only market. But the NEM is also on the verge of implementing a wholesale demand response mechanism to address this issue.

The current trigger for the RRO – which requires retailers to be able to satisfy the regulator that they have bought enough contracts to cover their customers’ aggregate peak demand –  is if AEMO forecasts a breach of the reliability standard three years out. The alternative applies to South Australia only, and is if the SA Energy Minister chooses to trigger it (which he has). Options for amending the trigger include extending this ministerial discretion to other regions, allowing it to be triggered one year out instead of three, or tweaking the threshold for the trigger. It’s not clear yet which of these options are under consideration. Given the RRO has yet to be tested in practice (although it will be in SA in 2022-23), it will be hard to evaluate the implications of changing it.

One thing is clear  – increased reliability will come at an increased cost to consumers, who may notice little if any difference, given that most interruptions to their supply are due to a network problem rather than the system running out of power. But those few occasions when it does happen are highly publicised and politicians prefer to avoid them.

Interestingly, another decision from the meeting was to progress the development of a two-sided market. This would result (in the long-term) in consumers making their own decisions about how much they value reliability, bypassing the existing system-wide regulatory arrangements.

Two-sided markets and the other issues arising out of the meeting – interim and longer-term approaches to ensuring system security, ahead markets, allocating the costs of inter-regional transmission lines, an accelerated decision process for new transmission lines and new rules for establishing Renewable Energy Zones – will be covered in future blogs.