Four legs good, two legs bad

Good governance stems from the notion of accountability: that no matter where an agent sits in the system, they are effectively held to account by others: the staff by management, management by the CEO, the CEO by the Board, the Board by shareholders and governments by voters. It is a wheel of fire which requires constant diligence to function effectively.

This applies equally to the operation of the electricity system. It’s an essential service that was once run strictly by governments. Their performance in managing it was measured at the ballot box.

Since the creation of the National Electricity Market that has changed. Governance of the system is more diffuse: three central agencies, a shandy of government owned businesses  and private companies. This model was designed for more halcyon days, not the upheaval imposed by a relatively dysfunctional political response to climate change. Electricity systems don’t run on media releases or ideology. They run on energy.

Governance of the electricity market is proving difficult. A recent review of the Energy Security Board was equivocal about its retention and extension. Established in 2017, the ESB’s main role has been to get the three framing agencies (AEMO, AEMC and AER) around the same table. It’s useful, but only a minor achievement in and of itself.

The agency at the real dead centre of the current system is the Australian Energy Market Operator (AEMO). It literally is responsible for keeping the lights on every day. It runs the market that buys and sells the electricity and settles all the accounts. It registers participants, makes sure enough generation is available and plans and forecasts days, weeks, months and years in advance. It is the entity which is in the gun if there is a blackout, because its job is to prevent them at all costs.

This is a difficult job made much harder by the ad hoc decarbonisation of the electricity system, including having to manage invisible rooftop solar power systems, ageing coal generators and the natural intermittency of most new generation. There has been no government plan about where we are going and how we get there, just a collection of subsidies for renewable generators.

The AEMO is a business that is “owned” 60 per cent by governments and 40 per cent by industry and funded by various levies on industry participants, which ultimately flow back to consumers. Its costs have started to increase significantly in recent years: up by 36 per cent since 2018. AEMO is reaching increasingly into areas outside its original remit. For example it has evolved its planning role into a central planning role.

Based on the recommendations of the Finkel Review, AEMO has ended up drafting its own Integrated System Plan (ISP), which paints its best guess at how the grid might pan out over the next decades. AEMO doesn’t just want to think about this, it wants to start building it.

This is risky because any plan, no matter how well-crafted, is invariably almost certainly partly wrong. Not because the planners are reckless, but because the nature of markets, technology, innovation, demand and politics mean that an efficient solution will find its own future which is hard to predict.

Last week the industry stakeholders asked the question: could we do this better? Asking such a question is entirely necessary if governance is to be an effective shepherd for performance.

The Australian Energy Council and Energy Networks Australia commissioned Cambridge Economic Policy Associates (CEPA) to conduct a governance review of AEMO,  released last week. AEMO were invited to participate in the process.

The CEPA review found that while AEMO’s Board is formally accountable to government and members, there appears to be limited requirements for consultation, review or approval more common in governance for other related organisations.

Given the absolutely critical role AEMO will be playing this century, CEPA has identified a number of improvements, stretching to more mandated disclosure of information for members or perhaps economic regulation: where AEMO’s budget has to be approved and signed off by the Australian Energy Regulator.

The fact that industry is united in its concerns about the way AEMO is executing its role is an example of governance in action. AEMO has had to organically evolve to meet challenging new conditions. It is now being held to account by its shareholders, so that its role and accountability remains bounded in the structure of governance that is needed to make the National Electricity Market work.