by John Pierce AO
Chair, AEMC

When the national electricity market started at the end of 1998, the global scars of the Asian financial crisis were still fresh.

In the two decades since, we’ve seen further jolts – from the Russian ruble crisis to the bursting of the dot-com bubble, global financial crisis, the end of the mining boom and this summer’s horror bushfire season.

Yet over that time, Australia’s economy has weathered these shocks as it was so well placed due to hard-won reforms that ranged from floating the dollar, to financial market de-regulation, to taxation reforms to competition policy, to creating a 5,000 kilometre long interconnected electricity market.

This year with the COVID-19 crisis, we are again reminded of the importance of reform – including of striving for a more secure, reliable and cheaper energy system.

For consumers restricted from many of their ordinary daily activities, reliable energy supplies are vital to their well-being as they help their children with remote learning, do videoconference calls from home and tune into streaming services.

Competitively-priced electricity and gas will also be key to the eventual economic recovery when the COVID-19 public health crisis passes by helping support business and jobs. 

Right now, the Australian Energy Market Commission is doing its bit by helping to ensure the power system is resilient enough to deal with what crisis brings.

Over the last several weeks, along with my energy market body colleagues Clare Savage and Audrey Zibelman, we have been consulting exhaustively on our plans to both protect consumers and to ease the regulatory pressure on industry during the pandemic. Last week I was part of Minister Taylor’s round table with energy retailers – continuing the vital dialogue which is underway for some years to keep the energy sector delivering the best outcomes for consumers.

At the same time, we are deeply committed to ensuring that important energy market reforms are progressed in a way that accommodates and responds to the conditions that we all now find ourselves in. 

As well as keeping the lights on during the crisis, it is crucial that we continue working on reforms that will help position Australia for a successful recovery when the crisis recedes.

The three market bodies, with our distinct roles and shared objectives are working together to ease the path of transition.

With Australia creating $294 million in GDP for every petajoule of energy consumed in 2017-18, it’s clear that secure and reliable energy supplies are fundamental to our future success and prosperity. As commerce and industry kick-starts the recovery, access to diverse energy sources at the lowest costs will help encourage investment.

We can’t lose sight of what we want our energy systems to look like post-crisis.

Work to unlock innovation made possible by new technologies and digitalisation is going ahead, albeit with considerable flexibility. 

Five-minute settlements are a critical reform to help get the NEM ready for new technologies that can be deployed with lightning speed. Batteries and fast-start gas generators, of particular interest while gas prices are tumbling, are two examples. These will allow the wholesale market to operate in a more dynamic way.

The change is part of the fundamental redesign of the market taking place as it continues to transform to a low-emissions future.  The plan was announced to the industry in 2017 to give it time to adjust given that it requires such a big investment in their IT systems. We will now consider AEMO’s request to delay the start date to deliver a financial buffer to the sector so that it can focus on core functions amid COVID-19.

New Chief Executive Benn Barr, a veteran of over 27 years in public policy, will be leading us on our work this year to ensuring consumers have secure and reliable energy supplies.

We will be doing this through our ongoing projects of rule changes and independent policy advice, and through our membership of the Energy Security Board, where the market bodies are driving reform together with Kerry Schott.

Security

Firstly, to security.

Australia’s energy markets are undergoing profound structural change.  Historically, it’s the biggest shake-up the sector has seen to date. 

New, more geographically dispersed technologies are replacing ageing coal-fired generators.

Underscoring this, some 16 per cent of electricity consumed in the NEM was generated by wind and solar PV last year.

Recent reports speculating pandemic-related delays or scrapping of large-scale renewable plants this year are sobering.

But the renewables revolution is a process that spans decades. Some 15GW of coal, gas and other synchronous capacity are expected to exit the market by 2040 and 30-40GW will enter as the transition continues.

However, as the generation mix changes, system security services once provided by spinning thermal generators are scarce at times because new technologies don’t necessarily provide them. Services like inertia, frequency control and system strength, have been deteriorating. This is making it harder to ensure the system still operates within the technical limits of voltage and frequency in real-time across the grid. If this is not addressed, the system can become unstable and experience blackouts, which can take a heavy toll on customers.

We are considering rule changes that promote system security in the NEM at the least cost to families and businesses and contributing to the ESB’s system security services work program.

The AEMC has already made major changes to improve system security, including to deliver on recommendations from the 2017 Finkel report.

It is important as the nation responds to the COVID-19 threat that our energy systems and markets are operating in a stable and secure state. Falling demand as a result of an economic downturn could itself pose a challenge to the stability of the grid were it to be severe enough. As our economics team highlight in this edition of Spotlight, demand may be eroded as trade-exposed businesses confront a contraction in the global economy, so the sector must stay vigilant.

Improving the resilience of the power system to frequency events is a central pillar of our security work. The importance of that was highlighted by the events of August 2018. A lightning strike caused interconnectors exporting power out of Queensland and South Australia to trip simultaneously. Industry in Victoria, NSW and Tasmania, and some households and commercial users in NSW all suffered supply interruptions. Changes are already well underway. We recently made a final rule that introduces a mandatory obligation on generators to help to control power system frequency. That will be implemented as planned this year. 

Our commitment is to the ongoing reform of the frequency control frameworks. We are working in collaboration with the ESB and other market bodies to review and reform how electricity generators operate their equipment to help control the frequency in the power system.  That broader program of work will allow us to develop financial incentives for frequency control. We are considering a rule change proposal by Infigen Energy for the development of a formal market for procuring fast-acting responses to changes in frequency and a separate rule change to procure operating reserves to respond to sudden fluctuations in supply.

Our work also includes the review into the system strength frameworks that the AEMC initiated. System strength keeps generators operating securely and helps the system to ride out disturbances and faults, such as lightning strikes on a power line. While frameworks were put in place in 2017 to address immediate issues, the time has come to adjust those. We are working closely with other market bodies on this project and it will feed into the ESB’s 2025 market design work.

AEMO’s release last week of the Renewable Integration Study underscored the importance of the security work the ESB is charged with and which the market bodies are working on collaboratively. The study is an important technical foundation for the reform work. 

A future-proof grid

Second, to keep the energy grid reliable – so there is enough capacity to produce and transport power to consumers – for households and businesses at the lowest cost.

While reliability has historically held up well, there has been a tightening supply-demand balance across recent years, particularly on hot days.   

We are working on key reforms aimed at maintaining a reliable and secure power supply over the longer term include the consultations we are leading on two-sided markets, a demand response mechanism and transmission access reform.

In the more immediate term, work is afoot on interim reliability measures that were put forward by the ESB and agreed to at March’s Council of Australian Governments (COAG) Energy Council meeting. These include amending the trigger for the retailer reliability obligation.

Our bid to future-proof the system includes work that enables consumers to participate more actively as buyers and sellers of energy.

But this requires issues such as grid congestion and access to be addressed. Overhauling the way generators hook into the grid will help ease network bottlenecks related to the move from a system of large, remote generators to geographically-dispersed renewables.

During the year, through the ESB’s market design review process, the Commission will work with stakeholders to hone the model and to ensure the sector can factor its implications into their investment and operational decisions. Transmission access reform is a key plank of the ESB 2025 market design project and complements AEMO’s Integrated System Plan, to ensure the right transmission is built.