Infrastructure Partnerships Australia Energy Symposium, Sydney, 28 February 2023
Benn Barr, CE AEMC
*check against delivery
The challenges and opportunities delivering the energy transformation
The Australian Energy Market Commission is an independent authority, advising Australian energy and climate change ministers, and is directed by an expert five-member commission.
In essence, we make the rules that make the space for the changes the National Energy Market needs to keep the lights on. Unlike traditional rules, ours are less about prescription and prohibition, and more about mapping and incentives. We also conduct reviews that set the scene for sector-wide reforms.
We work with the operator, AEMO, and regulator, AER – you heard from the AER’s Chair Clare Savage earlier today.
We respect and rely on a growing array of stakeholders:
the traditional – generators, retailers, distributors, consumers, researchers, governments…
and increasingly, others now being drawn into the heart of the energy sector… car manufacturers, property developers, venture capitalists, service stations…
That stakeholder map will keep growing. We need everyone involved, because there’s no escaping change in the way we produce, store, distribute and consume power now if we want to get to net zero by 2050.
Scale of work
In fact, 2023 marks a crucial turning point in the energy sector in Australia. But I said that at the start of 2022 and no doubt will say it again in 2024, 2025, and onward. In the same way that we’ve seen record-breaking temperatures, year on year, now we’re seeing the pace of change in energy increase exponentially – and so it should!
It’s no longer a debate about where we are headed. We all understand the scale of the transformation required to reach our 2050 goals. This is like a global Manhattan Project meeting the moonshot, with WW2 reconstruction added on for good measure.
Talking about the scale of change is a cliché – but it’s a cliché because it is blindingly true. We are well beyond asking, ‘what are we going to do?’
The good news is that the alignment that has so often eluded the sector, around integrating energy and climate policy, is settled. Plans will continue to evolve on this journey to net zero, but we are firmly in the delivery stage for infrastructure.
But all that doesn’t mean we aren’t still asking ‘how the heck do we get it all done?’ A lot has to happen – a lot needs to go right – for us to achieve our net zero goals. The energy sector is the fundamental linchpin for getting it done in Australia.
Optimism and reality checks
The last 12 months have given us optimism. We have the collective will to head in the same direction and we are amending the National Energy Laws as a signal of this to include emissions reduction for the first time. This is a profound change that brings together energy and climate policy.
However, the last 12 months have also given us a reality check. It’s a very tough environment out there – it’s volatile with the global energy crisis, skills shortages, inflation and more.
It’s a time for making hard decisions. The time for magical thinking on this challenge is over – there isn’t some piece of technology or one change that is going to make all this happen and keep prices down and lights on.
We don’t need advocacy to shift thinking anymore. The thinking has already shifted. Now, we need real hard-headed collaboration to get things done.
Hard things are hard
When Barak Obama was in office he had a plaque on his desk that read ‘Hard things are hard’.
That might sound glib, but I think it sums up where we are now. Obama understood that hard issues don’t have a perfect answer. That it’s easy to complain about problems when you’re the underdog, but hard to work through implementation once you’re in charge.
That’s where we are at. These are hard problems, but they’re the problems we – at last – broadly agree need to be solved.
Now comes the hard work of collaboration – of listening – to get the solutions happening. We aren’t always going to agree completely, but from our end, we commit to listen and adapt the solutions as we go.
I want to talk about three key areas and three key themes of our work that underpin delivery in the physical build the sector has to complete. That’s the AEMC’s role – to lay out the enabling framework for the investment to occur in the long-term interests of consumers.
The three key areas of investment I will touch on during this speech are:
I’ll talk about how we get this work funded, and the challenges facing the infrastructure investment needed in transmission, wholesale generation and for households.
The work ahead of us all is complex, interdependent, and interrelated.
At the AEMC we’re guided by the national energy objectives for reliability, safety and security in electricity, gas and retailing – and, as I mentioned, we soon will have decarbonising targets added.
All our actions are underpinned by the aim of creating long-term benefits for consumers.
When we look at our challenges, we like to think not only about the ‘what’ that has to happen, but also the ‘how’ of the driving forces that allow us to achieve outcomes for customers: affordability, reliability and security and emissions reduction.
Currently we’re working to three themes: transformation, resilience, innovation. You could see them as three certainties in a highly volatile environment.
We must fundamentally transform the power system – in fact, that’s well underway. The transformation comes in many forms but most noticeably in infrastructure, with billions and billions of public and private sector dollars pouring into the construction we need. If you scan the IPA website using the ‘energy’ filter, the pipeline currently shows 140 infrastructure projects – just the tip of the iceberg.
But no matter how much we build, the system must work in new ways. We need a resilient grid that functions without the big, hot, spinning machines that have served us in the past to make our supply reliable, safe and secure. We need investment and government and industry working together to get us the generation we need.
And the third thing, the element that’s got us this far, and needs to take us much further, is innovation. New ways of thinking, making, acting, and combining processes that accelerate the deployment of the massive changes we need to meet our goals.
Today I’ll use those 3 themes and the three areas of investment we need to share some examples of how market rule changes are supporting our shared journey to net zero.
The first challenge around transformation is the work required for transmission – AEMO’s Integrated System Plan calls for $14+ billion in new spend. That’s going to be very hard – we haven’t built many big powerlines in Australia. Our recent experience is that things – unsurprisingly – take longer and are more expensive than we anticipated.
There are issues we need to fix with the regulatory framework, but just as importantly, if not more importantly, there are issues with how we build this infrastructure to maintain the community's willingness to be engaged with, and pay for, the development.
Two landmark regulatory reform workstreams relate to transmission.
TPIR – removing barriers
The first is our Transmission Planning and Investment Review – TPIR – which is removing barriers predicted in AEMO’s ISP. The final report of the three stages is due soon (may go from March to May 2023). Accompanying rule changes from the earlier stages will also begin next month and should be implemented by the end of this year.
The first round of rule changes cover the near-term reforms that will reduce the uncertainty for transmission planning and investment. That is, financeability, social licence, cost recovery for planning activities, and the feedback loop that’s necessary for effective implementation.
The next round of rule changes will cover the longer-term reforms. A key area is ensuring that the economic assessment process supports timely, efficient delivery of the 10,000 or so kilometres of new transmission that must be built.
This brings me to the second landmark workstream the ESB’s Transmission Access Reform.
On Friday, Energy Ministers agreed a way forward on this important reform area. They outlined getting this right via a voluntary congestion relief market with priority access. That will be worked on for further consideration by mid-2023.
They also took off the table other models characterised by locational marginal pricing.
Importantly, ministers highlighted that, if implemented, the reforms deliver estimated net benefits to industry and consumers of up to $ 5 billion NPV and lower emissions of 23 million tonnes of CO2 by 2050.
TAR – maximising utilisation
While TPIR is about getting the transmission funded and built, TAR is about getting the maximum usage and value from the transmission we build in this new grid where variable renewable energy – VRE – is the primary power supply.
To set the scene, VRE appears in vastly more locations than thermal power stations and typically needs to be placed in open areas with high levels of sunshine and wind, while power stations were often located close to coal seams or urban areas. VRE also needs to be complemented by dispatchable plant-storage and flexible load.
It all has to be connected with transmission, and given the scale of that task, the connections have to be as efficient and accessible as possible.
One way to understand the goal of TAR is to think of road infrastructure.
We build roads to facilitate the movement of traffic, but we don’t build a separate road to connect every possible point A to every possible point B. Why? Because roads are expensive to build and maintain, and we would have a wild scrabble of wasteful infrastructure.
So instead, we build commuter corridors and arterial connections to connect people to important infrastructure like schools/hospitals. If you’re a town planner or a property developer, the existence of various types of roads also sends a signal about where to build services and population centres.
In the same way, as we shift from a few big thermal generators to lots of smaller VRE sources we want to avoid underutilised, expensive transmission lines.
Instead, access reform will send signals to investors on the best place to build generation, storage and dispatchable assets so we only build the transmission we need. This will build the value in renewable energy zones and ultimately get energy to customers as efficiently as possible at the lowest cost.
This has been an incredibly contested reform over many years and last Friday was a landmark day in its progression. This is exactly what we mean by the hard work. And what has got us here has been industry getting involved – the proposed voluntary model was put forward by Edify Energy.
Our Chair Anna Collyer, and the ESB team, then worked with industry, governments and consumer groups to make sure input is taken into account, but they’ve also borne in mind that we can’t magic away the changes that are coming.
The physics of the new system means that if we don’t make these changes to transmission access, we’ll have to invest even more into the transition. When the scale of the task is so large, we make reforms that deliver efficiency whenever we can.
So now, to the second theme, resilience. How do we keep the lights on and the system reliable and secure during this massive build-out? And also while we’re replacing most of our thermal fleet over the next 10 to 20 years.
I want to talk about two parts to resilience – how do we get the investment and then, once we have it, how do we operate the system to keep it secure? Both questions are interlinked, hard and utterly essential.
In terms of investment in wholesale generation – we have seen jurisdictions step in to support the market. In NSW, QLD, VIC, and via the Commonwealth Government Capacity Investment Scheme, we have governments underwriting or providing support to generation investment.
This is a rational response to the current challenges and market dynamics. However, Governments understand that their investments must partner with, and not crowd out, private sector investment.
At the AEMC we are also thinking about the market and looking at the settings longer term and how they provide both investment and operational signals.
We have three pieces of work in this area:
In the short term we are looking at the Interim Reliability measure. We’re about to commence a review that looks at the short-term measures in place to manage reliability risks.
Largely this change helps AEMO procure services outside of the market if the balance between supply and demand is going to be tight. It also sets boundaries for how the Retailer Reliability Obligation works to eliminate reliability gaps well before they occur.
Even more importantly for the longer term, we will soon be commencing another rule change from the Reliability Panel on the market price cap.
The market price cap has traditionally been the mechanism designed to send long-term investment signals. The Panel has recommended it increase from $15,500/MWh to $21,500/MWh by 1 July 2027. However, when the Panel was looking at the level of the market price cap, it recognised that increasing the cap is only the first step in the long-term solution.
So, this year the Panel will work on what happens after July 2028.
This work will look at the form of the reliability standard as well as the MPC settings to address the changing reliability risk profile. This means for the first time recognising that the market may need different investment signals – the market price cap and a signal that recognises the tail risk volatility in the market.
This will make sure we have sufficient investment in generation, particularly in the type and duration of storage we need to manage reliability risk as the market transforms.
Finally, to innovation and households. In the infrastructure context, innovation is anything that will get us where we need to be in a smarter, faster, cheaper, and better way than we currently expect.
A critical area that can be overlooked is also the least predictable – consumer energy resources, or CER. Basically, CER is household rooftop solar, although we anticipate increasing activity from the growing domestic battery fleet and the future of two-way EV charging.
For now, we’re relying on those rooftop panels at a scale no one imagined back when the TV advertised hot water as ‘free from the sun’.
We’re at an interesting juncture – where panels purchased for personal use, with a side-benefit of government subsidies and feed-in tariffs, have become a significant part of the national power infrastructure.
But while the market and governments view CER that way, research tells us most individual owners are still largely unaware or uncaring of their role.
Understanding the way consumer behaviour affects our reliance on CER is a key task at present, alongside several workstreams designed to make it easier and more attractive for CER owners to participate in the power system the way the economists and engineers would like them to!
Flexible trading unlocking benefits
An example of supporting innovative approaches to CER is our rule change to unlock flexible trading arrangements. This clears the way for new kinds of enterprises, such as home energy management services, that, in the words of one such business, ‘can turn a shouting match into a symphony’.
Our flexible trading project builds on the ground-breaking changes for what we then called DER access and pricing, back in 2021. This was a watershed reform that obliged power companies to make their networks smarter and better able to handle energy flowing both ways so more solar can connect.
Again, this reform only happened because of the hard work to collaborate on it by industry and consumer groups – SAPN, St Vincent De Paul, the ENA, and the Total Environment Centre. Working hard on the issues – no solution will suit all.
The next phase needs the same kind of practical collaboration.
Flexible trading arrangements enable the separation of controllable load – like solar panels, batteries, EVs, and pool pumps – from uncontrollable resources, namely the primary source of electricity to a customer’s home.
If we get this right it not only gives customers more ways to use and manage their energy but it creates incentives for new businesses to the market to go forth and innovate to deliver for the household and the system.
Another example: recently the University of New South Wales conducted a study in orchestration, called the UNSW SolarShift project, which demonstrated ways to operate multiple household electric hot water heaters as mega batteries.
Work like this informed our 2021 integrating storage rule change, opening the way for more innovative forms of batteries and storage in the NEM. It is also possibly an area where innovative businesses could contract with households for separately metered access to their hot water heaters, trading that stored energy appropriately within the NEM.
We call this rule change ‘unlocking the benefits of CER’ and it’s opened more in-depth conversations with R&D and innovative business start-ups than ever before. We are moving beyond asking “do we want to create a two-way market with flexible trading” and onto identifying what it looks like and how we get there.
And as always, we want to make sure our market regulatory systems have the right balance between customer protection and allowing the flexibility of innovation that’s essential for those consumers to have.
The challenge is immense –hard things are hard!
How do we build the nationwide infrastructure efficiently, in time, and within our ability to pay, and do so while keeping lights on for all consumers at an affordable level?
As is the way with big challenges, there are also big opportunities if we ask – and answer – the right questions. Like:
How do we get the amount of infrastructure we need built in less time than we actually have, and make sure it’s used optimally, without waste or congestion?
How do governments and industry work together on long-term signals for generation investment?
How do we shift consumer behaviour with CER so we can have confidence in the supply from millions of rooftops beyond direct market control?
If we can’t successfully answer these and more questions, and deploy the solutions, if the sector is too volatile in terms of price or reliability, or if we can’t get the skills we need… we simply aren’t going to get it done.
As a rule maker – we need to listen – we need to work with industry, investors, and governments to get it done. Sometimes that means disagreeing and saying things that are difficult. But it does mean truly listening.
The time for magical thinking is over. Whether you are a rule maker, investor, industry representative of government, the time for working together on hard issues is here and the time for simple slogans that dumb-down key reforms is long, long gone.
This is the challenge ahead if we are to build a new system that is going to transform, be resilient and innovate over the next 10 years