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The Energy Security Board’s (ESB) final advice for a post-2025 market design for the National Electricity Market (NEM) has been released, a significant market reform aiming to ensure Australian households, businesses and industry have affordable and reliable electricity into the future.

In recognition of the significant changes unfolding across Australia’s energy sector, Energy Ministers tasked the ESB with providing advice on a long-term, fit-for-purpose national electricity market design.  

After two years of widespread consultation and in-depth analysis, the ESB delivered its final advice to Energy Ministers. The advice includes recommendations across four reform pathways that seek to: 

  • Strengthen signals for investment in dispatchable generation capacity and retain existing generation for as long as it is needed to keep the system reliable, affordable and secure
  • Deliver essential system services
  • Improve transmission and access arrangements to ensure consumers are the beneficiaries
  • Better enable demand side participation and the integration of distributed energy resources like rooftop solar

The post-2025 reforms recommended by the ESB will support the continued delivery of affordable and reliable power, supported by the right mix of technologies and value-for-money transmission, where it is needed.  

Minister for Energy and Emissions Reduction, Angus Taylor, said, “The Government has a clear priority to deliver reliable, secure and affordable power and we remain focused on ensuring the electricity market delivers for Australian consumers..

“While we have seen record levels of investment in renewable capacity, with 7,000MW added in 2020, we have not seen investment in the dispatchable capacity needed to support renewables and ensure a reliable and affordable grid.” 

Mr Taylor said this is a significant concern, with large-scale replacement of thermal generators needed over the next decade and beyond as older power stations leave the market.

“To address this, one of the ESB’s most important recommendations is for detailed design work on a capacity mechanism to create a clear, long-term signal to invest in dispatchable generation in the future.

“A capacity mechanism can help keep dispatchable generators from shutting down too early, so that consumers don’t face price spikes like we saw when Hazelwood closed in 2017.” 

Industry bodies respond

Energy Networks Australia (ENA) has welcomed the ESB’s report, and ENA CEO, Andrew Dillon, said while there had been a lot of media attention paid to the proposed capacity mechanism, there were many other important reform proposals in the report.

“It’s noteworthy the Essential System Services work is non-controversial, it’s really positive there’s such strong and broad support for how we keep the grid stable as we transition to a renewables-based system,” Mr Dillon said.

“We also know there’s no renewable energy transition without transmission, and we look forward to working with regulatory bodies to progress key transmission reforms.”

The Australian Energy Council (AEC) has welcomed the release of the ESB’s advice to Energy Ministers, in particular its call for coordination and a common approach by jurisdictions, but notes there is still much work to be done on the details.

The AEC’s Chief Executive, Sarah McNamara, said the development of a capacity mechanism for agreement by Energy Ministers in mid-2023 needed to be approached carefully.

“We have consistently said that Ministers need to take time to ensure any capacity mechanism brought forward is fit for purpose and does not lead to unintended consequences,” Ms McNamara said.

“With the dramatic shifts under way in the electricity sector it is critical any reforms focus on security of supply, avoid disorderly closure of existing capacity and, at the same time, do not impede the energy market’s transition to lower emissions generation.”

Leading energy innovators unite against proposed change 

In an open letter to state and federal ministers and the ESB, leading innovative energy companies have expressed their opposition to a key recommendation from the ESB to create a new market for ‘physical reliability’ that would subsidise loss-making coal power stations.

The open letter signatories include Tesla Energy, industrial and commercial retailer Flow Power, Australia’s only co-operative energy retailer Enova Community Power, residential battery innovator Reposit and Amber Electric.

The open letter states, “Unfortunately, the ESB has proposed a new reliability mechanism that would prop up unprofitable coal generators, increasing costs and delaying the clean energy transition. 

“Aging coal power stations are becoming less reliable as shown by recent events in Queensland.

“A new ‘Physical Retailer Reliability Obligation’ (PRRO) would force retailers to buy new certificates from existing coal and gas generators; effectively a subsidy from consumers to generators. This risks significantly increasing energy bills without improving reliability.”

Dan Cass, Energy and Regulatory Lead at the Australia Institute Climate and Energy Program, said, “The proposed PRRO would reduce competition in the NEM, lock in high-emissions coal and increase prices for consumers.

“Such an intervention has been widely opposed by industry and consumer groups, including global investors such as Ibedrola and Neoen and government owned generators Stanwell and Snowy Hydro.”

The Clean Energy Council (CEC) has expressed their concern about a number of the reforms proposed by the ESB, stating that they risk further undermining confidence in future investments in clean energy generation.

CEC Chief Executive, Kane Thornton, said, “The clean energy industry is particularly concerned about proposals to introduce a capacity market and change access arrangements, both of which create further risk for clean energy investors.

“A capacity market could fundamentally change and distort the energy market and price signals for new investment. 

“This would be further compounded should such a scheme ultimately subsidise existing coal plants and unnecessarily prolong the life of fossil fuel generation that is both high emitting and increasingly unreliable.”

The second proposal of concern to the clean energy industry is the Congestion Management Model (CMM).

“The proposal for a capacity market and CMM will make it extremely difficult, if not impossible, to achieve the investment in new generation and energy storage necessary to deliver a low-cost, zero emissions and reliable supply of electricity for customers,” Mr Thornton said.

Energy Ministers will meet in September 2021 to agree on the final package of reforms which will be provided to National Cabinet for consideration in October.

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