AEMC addresses electricity trilemma: Balancing lower emissions, lower prices and a stable, secure market

Australian Energy Market Commission today published its submission to the independent review on the future security of the national electricity market, chaired by Chief Scientist, Dr Alan Finkel.

AEMC Chairman, John Pierce, said that the overall aim of the national electricity market is to provide a reliable, secure energy supply at the best price for consumers.

“It must continue to do that while the sector transforms to meet the emission reduction policy objectives of governments.

“There is a need for strategic priorities which establish clear policy objectives supported by integrated mechanisms that provide a clear path to the future.

“Without clear, national, co-ordinated policy objectives and credible mechanisms that reinforce one another both business and consumers find it difficult to invest – which undermines the reliability of supply.

The Australian energy sector has suffered from a long vacuum around national, co-ordinated policy decisions. This has resulted in pervasive uncertainty which makes it difficult for business and consumers to invest – and undermines the reliability of power supply.

Our submission outlines matters which the Commission believes are critical for the security and reliability of the national electricity market,” he said

Effective integration of emissions reduction and energy policy

International evidence suggests emissions reduction policy needs to be implemented in ways that support investment in and operation of the power sector with effective competition. Otherwise consumers bear the costs of investment risk and ongoing government and regulatory intervention is triggered. The submission references Great Britain’s experience as a “cautionary tale” showing how incompatible mechanisms targeted at emissions reduction and energy objectives have threatened reliability and increased prices.

The submission describes mechanisms that would be more likely to achieve emissions reduction in ways that work in the long-term interests of energy consumers. These mechanisms were developed by the AEMC at the request of the COAG Energy Council and presented to energy ministers in December 2016.

Improving system security

The exit of generators in South Australia has reduced competition among suppliers of frequency control and ancillary services, leading to higher prices for services that are used to maintain power system security. Closures have also reduced system inertia, contributing to destabilisation.\

A range of mechanisms are available to provide the additional services that are required to manage changes in power system frequency caused by increasing non-synchronous generation like wind and solar. These mechanisms are being examined as the AEMC considers a number of rule changes along with its System security market frameworks review. The Commission will be publishing final rule determinations and a security review directions paper towards the end of March 2017. 

Gas reform‘s consequential benefits in the electricity sector

The Council of Australian Governments (COAG) Energy Council has agreed to reforms recommended by the AEMC which would make it easier to buy and sell gas across the east coast. More flexible use of gas for electricity generation helps maintain power system security. And some gas generation technologies can come on line more quickly and increase or decrease output in response to the variable output of renewable energy, with more flexibility than coal-powered generation.

Competitive energy services for more engaged and better informed consumers

Consumers require tools - information, education, access to technology, flexible pricing options - to make good decisions on their energy use and management. The AEMC has introduced ‘power of choice’ rules that make it easier for customers to choose and switch retailers; connect local generators and storage; and receive and respond to price signals to better manage their bills.

More can still be done to provide support to consumers at financial risk. The AEMC’s consumer blueprint, submitted to the COAG Energy Council in October 2013 recommends a suite of initiatives to give consumers confidence that they have the information and support to choose the right energy plan and services for them.

Good governance

In light of unprecedented change the effective and active leadership of the COAG Energy Council is vital in setting a strategic direction for all the participating jurisdictions. The submission says the time-critical nature of energy market reform means it is imperative that development is not frustrated by duplicative, time-consuming processes and delayed decisions.

There are opportunities to improve the effective functioning of the current arrangements by the market institutions, the COAG Energy Council and the officials supporting it including:

• establishing a formal, transparent process for the COAG Energy Council’s determination of strategic priorities which includes public reporting on officials’ progress in developing specific policy proposals;
• communicating the energy council’s work program including the assignment of tasks and timelines to inform stakeholders
• better equipping the energy council secretariat within the Department of Environment and Energy, and streamlining processes related to AEMC rule changes.

In overall terms the AEMC submits that given rapid changes in technology and consumer behaviour it is important for national energy policy to be clear and acted upon consistently.

Giving investors confidence in the market

Investment in the electricity sector is crucial to providing reliable and secure supplies of energy and maintaining competition as the sector transforms. Investors need confidence in the market frameworks so they can manage risks, to remain viable and deliver the best outcomes for consumers.

Risk management tools like hedge contracts help them do this in the national electricity market by operating as a form of insurance against fluctuating prices. Hedge contracts are also used to underwrite investment in new generation capacity so that enough energy capacity is available to meet consumer demand. Risk management structures within the competitive electricity market frameworks operate so that investment risks are borne by businesses who are better able to manage those risks, not consumers.

If market frameworks do not have structures that allow businesses to manage risk, the result is consumers paying for inefficient investment and receiving less reliable supply.

 

Media: Communication Director, Prudence Anderson 0404 821 935 or (02) 8296 7817

7 March 2017