Countdown to COAG Energy Council

4 Aug 2016
John Bradley, Chief Executive Officer

In the countdown to the COAG Energy Council meeting on 19 August, some are speculating that Energy Ministers will act to overhaul the National Energy Market. Ministers face calls to introduce ‘capacity markets’, review transmission investment frameworks and introduce ‘truly national’ energy markets.

The debate has been triggered by a South Australian energy ‘crisis’ that saw high and volatile wholesale electricity and gas prices, and extraordinary intervention by the South Australian Government to request the recommissioning of a mothballed power station.

While the cause of price volatility has predictably been fiercely debated, some blaming high wholesale gas prices or intermittent wind, there seems increasing recognition that Australia’s energy policy coordination is at least part of the problem.

Our federalist energy governance has struggled to integrate reforms across national markets. We are yet to achieve national consistency in critical areas like consumer protection frameworks, energy pricing or coal seam gas development. Rapid market activity and falling technology costs are outpacing a patch-worked policy and regulatory agenda.

Meanwhile, individual States have pressed ahead with disparate policy initiatives without assessing flow-on impacts in a national energy system.

To their credit, COAG Energy Council Ministers committed to better integration of carbon and energy policy in December last year. While the commitment is welcome, not much has changed yet – Ministers face practical barriers to better integration of carbon and energy policy.

In the new Energy and Environment portfolio, Minister Josh Frydenberg explained the problem (Energy crises ‘were a wake-up call’, July 28):

“The difficult job I have is: how do you co-ordinate a national ­approach when all of these states have their own targets, their own different state-based incentives, and we’ve also got our national target and our national incentives?”

If sufficiently empowered, Australia’s national energy market institutions – the Australian Energy Market Operator (AEMO) and Australian Energy Market Commission (AEMC) – could play a strong role in ensuring coherent policy and anticipating the need for market reforms.  Already, AEMO has actively anticipated potential implications of the changing generation mix for power system security. Last month, the AEMC announced a review of current market framework effectiveness in helping achieve power system security – in partnership with AEMO and industry.

One practical action the COAG Energy Council could take to support integrated carbon and energy policy is to establish a new, institutionalised step to assess energy market interventions. Just as governments already subject new initiatives to a Regulatory Impact Statement, proposed carbon and energy policy initiatives should be independently assessed for their impact on the National Energy Market, network efficiency and the long-term interests of customers.

To ensure assessment is independent of any government or political party, the AEMC should undertake this role. Ministers could be confident that jurisdictional carbon and energy policy measures would interact with national energy policy settings in a coherent and coordinated way, and that their impact on the National Electricity Market is fully assessed upfront.

Australia’s grid can enable a low carbon future without compromising reliability and security, but markets don’t deal well with policy or regulatory risk. The August meeting of energy ministers could focus on the following four priorities:

  1. Better integration of carbon and energy policy across State and Federal borders by agreeing the AEMC will assess Federal, State and Territory carbon and energy policy initiatives that may impact on the National Energy Market or network efficiency;
  2. A constructive, bipartisan agreement on the transition of the Emissions Reduction Fund Safeguard Mechanism to a technology-neutral ‘baseline and credit’ scheme;
  3. The removal of unnecessary roadblocks to timely development of new gas supply sources to reduce price risk for industry, businesses and households; and
  4. Implementing the outstanding energy governance reforms promised in December 2015.

The South Australian ‘crisis’ has highlighted again the need for a planned, long-term transition to Australia’s energy future. This is particularly important given customers will rely increasingly on dynamic competition for efficient and innovative energy services. They cannot rely on heavily administered markets with constant government intervention.