Seal of approval, or kiss of death?

On Friday, Australia’s energy ministers met and quietly signed off on the Post-2025 package of reforms presented to them by the Energy Security Board. It was not, however, the triumphant return of the market that some had hoped for. Rather energy ministers agreed to give themselves more power to manage the energy transition. This may be the last genuine attempt to revive the market. We are witnessing the slow motion end of a harmonised technocratic approach to managing the National Electricity Market (NEM). It will endure as a dispatch mechanism and framework. But its gradual decline appears assured.

What happens from here depends where you live. Each state is choosing different policy levers (or different strengths of the same lever). The most controversial aspect of the ESB package was the proposed new capacity mechanism. It has been dubbed “Coalkeeper” by green activists and some renewables developers, even though the ESB have been at pains to point out that more flexible technologies are designed to be the main beneficiaries. It’s also controversial amongst a number of energy policy wonks who believe a capacity mechanism is an inefficient solution to the challenges of maintaining reliability. The mechanism was published with a list of principles to guide its development.

There are 14 principles in total, but the last four are notable for their confirmation of the increasing power and role of individual states and territories (jurisdictions) in the energy transition. Principle 11 makes clear that the mechanism is intended to be technology neutral, but that a jurisdiction can choose which technologies are eligible in its own region. Jurisdictions can also calibrate the level of reliability the mechanism should target in their own region (principle 12) and the final two principles provide that jurisdictions can opt in or out of the mechanism.

This means that the capacity mechanism (which is yet to be fully designed let alone implemented) joins a growing list of elements of the electricity market that are being devolved back to the individual jurisdictions. Other elements that the ESB has recognised may differ across NEM regions include:

  • Strategic reserve – also yet to be designed
  • Investment schemes (basically any scheme that provides financial support for new generation or storage resources in the market: Victoria’s VRET, the ACT’s reverse auction, the NSW LTESAs, the Commonwealth’s UNGI program, etc.)
  • Triggering the Retailer Reliability Obligation
  • Transmission planning – in particular Renewable Energy Zones, which both Victoria and NSW are developing their own processes for
  • Ministerial levers for emergency backstop measures to manage distributed energy resources (i.e., too much rooftop PV).

It’s perhaps not surprising that the energy ministers collectively signed off on the full set of recommendations, given that they were essentially signing off on formalising the return to state-directed electricity systems. Federal energy minister Angus Taylor was probably the least enthusiastic, but he has his own dog in the fight – the increasingly powerful government owned energy market player Snowy Hydro.

This signals the end of the ideal of a “national” (sorry WA, NT) harmonised approach to the gas and electricity sectors. But key elements such as the NEM-wide bidding and a dispatch model to determine the spot price will remain as do the three NEM-wide energy agencies: AEMO, AEMC, AER. The supernumerary Energy Security Board – a Finkel review recommendation from four years ago is being slimmed down to the three bosses of the agencies. Independent chair Kerry Schott and deputy David Swift are stepping down and their roles abolished. AEMC chair Anna Collyer will also chair the ESB, which has carriage of most of the detailed design work necessary to implement the post-2025 reforms.

There remains plenty of devil in the detail of the mechanisms yet to be designed. Existing jurisdictional schemes will need to be retrofitted into the shared principles, or rather the principles will need to be designed around them. Even the NEM-wide initiatives will have to account for jurisdictional differences, such as the proposed congestion management model for transmission. The NEM is more physically interconnected than when the national frameworks were first set up and this is expected to increase further. So, it will be interesting to see how equity issues around jurisdictional differences are handled. If one jurisdiction adopts a tighter reliability standard, a strategic reserve, or some other lever to ramp up reliability, it will be paid for by consumers in that state. But neighbouring states may benefit too because the additional assets will also be able to contribute to their reliability. Some jurisdictions may be tempted to “free ride”, especially if they have a neighbour with more acute reliability concerns that is more motivated to implement a jurisdictional scheme or a tighter version of one of the NEM-wide mechanisms.