The Energy Security Board (ESB) has released its Post-2025 Market Design Directions Paper and its Health of the NEM assessment report, highlighting the need for a secure National Electricity Market (NEM).  

The ESB’s reports mark a significant milestone in the market reform underway across the NEM. 

The post-2025 market design is the most critical energy reform governments have been tasked to deliver by the National Cabinet. 

The paper sets out the direction of market reforms the ESB will pursue through its post-2025 work. 

Importantly, the Post-2025 Market Design Directions Paper includes an increased focus on addressing the risks to reliability, security and affordability of a sudden and unexpected exit of a thermal generator.

The 2020 Health of the NEM assessment report  finds that real progress has been made with improved generation capacity (reliability), emission reduction, competition and network investment. But system stability (security) and investor confidence remain critical.

Falling wholesale and retail prices have improved affordability for most, but bill-shock is still a critical issue for consumers experiencing vulnerability including those who have been impacted by the economic downturn associated with COVID-19.

Health of the NEM – an overview

This is the fourth annual report on the health of the NEM produced by the Energy Security Board (ESB).

It measures progress against six objectives established by the former COAG Energy Council in the wake of the 2017 Finkel Review. These are whether or not the NEM has:

  1. Affordable energy and satisfied consumers
  • Affordability is improving for most, but remains critical for vulnerable consumers
  • Outlook is mixed as investment is needed in transmission and dispatchable generation to integrate more renewables
  • These issues are being addressed through the actionable integrated system plan (ISP) and renewable energy zone (REZ) initiatives, alongside transmission access reforms being developed through the post-2025 process

2. A secure electricity and gas system

  • The most critical issue in the NEM because preventing blackouts is made more difficult as cheaper, variable renewables displace dispatchable thermal generation at great speed
  • Outlook is moderate to critical as low wholesale prices make coal more likely to exit
  • ESB post-2025 market design work is addressing longer-term system security issues by valuing and procuring missing system services

3. Reliable and low emissions electricity and gas supply

  • There are no immediate reliability concerns with measures recently put in place to manage unforeseen events
  • Emissions in the NEM are 25 per cent below 2005 levels and are expected to be 50 per cent down by 2030
  • Outlook is moderate with some concerns in NSW around 2023-24 as the Liddell Power Station closes, balanced by progress on transmission links and increasing renewables

4. An effective development of open and competitive markets

  • Competition in wholesale markets is delivering good outcomes for consumers with spot prices at their lowest level in five years
  • Retail competition is stable despite COVID-19 impacts and retailers following new requirements to manage customer debts and hardship
  • Competition is underpinning a boon in innovation with capital technology costs expected to fall significantly in coming decades

5. Efficient and timely investment in networks

  • Improving with critical investments on track, interim rules concerning planning for REZ developments are under consideration, and a workplan for DER integration is underway
  • Outlook remains at moderate rating as challenges emerge in building the expanded transmission network in time to connect renewable generation
  • Significant distribution network investment is needed as DER integrates further into the system

6. Strong but agile governance

  • Current status and the future outlook for governance has improved and remains vital to manage the pace of change in the NEM

Table 1:  Current 2020 status and forward outlook for the NEM

The national electricity market covers Queensland, New South Wales, Australian Capital Territory, Victoria, Tasmania and South Australia.

Post 2025 Market Design Directions paper – an overview

The December 2020 discussion paper sets out the reforms to be pursued to the next stage of Australia’s NEM redesign project.

Detailed designs for each of the reforms will be developed for further consultation in March, before final recommendations are made to the government in mid-2021.

Four consolidated reform directions will be pursued over the next three months to deliver the post-2025 project:

  1. Resource adequacy through the transition – ensuring reliable and affordable energy as the system continues its transition to lower emissions and new technologies.
  • Developing an operating reserve (to ensure flexible, dispatchable resources are valued so they are available when they are needed)
  • Exploring new options to enhance the retailer reliability obligation (RRO) and address concerns about its complexity, effectiveness and compliance burden
  • Investigating a potential NEM-wide, common approach to integrating jurisdictional underwriting or investment schemes
  • Establishing ways to ensure the orderly exit of thermal plants as they retire from the power system

2. Essential system services, and scheduling and ahead mechanisms – building a stronger power system that can keep the lights on as change happens is the most critical issue.

  • Pursuing short-term structured procurement approaches through AEMC rule change processes which are already underway
  • Developing a spot market approach for valuing and procuring inertia
  • Progressing development of the unit commitment for security (UCS) through the operational timeframe rule changes on synchronous services (proposed by Delta and Hydro Tasmania)
  • Defining new system services markets through the rule change process (including system strength, FFR, operating reserves)
  • Assessing the potential size of additional resources that could be brought into the market and then proceeding with more detailed design work of voluntary ahead scheduling of energy and services

3. Demand-side participation – unlocking opportunities for consumers to use their energy consumption to increase competition and deliver real benefits.

  • Working with jurisdictional governments to increase integration of customer-side behind-the-meter resources (e.g. hot water, smart air conditioning, solar, storage and electric vehicles) to enable a more efficient, active grid
  • Looking at ways to support the increasing shift towards active solar PV based on state needs
  • Examining options to modify existing mechanisms to support the ‘turn-up’ or ‘time shifting’ of load to better utilise and balance the system
  • Considering approaches to reduce the barriers to participation in the real-time energy market and allowing the entry of innovative products and services
  • Quantifying the potential increase in consumer participation, together with ARENA, consumer groups and other industry stakeholders
  • Further developing participation models to enable flexible trading arrangements that would enable innovative products such as bundling energy with consumer appliances
  • Evaluating options for supporting and augmenting the existing tariff reform agenda with more flexible, locational price signals
  • Defining roles and responsibilities required to support an effective two-sided market through a Maturity Plan to be published for consultation in early 2021
  • Working to progress the development of a consumer protection framework alongside consumer groups by June 2021

4. Access and transmission – providing networks to meet future needs including connection of renewables, at the lowest possible cost.

  • Continuing to action changes to the planning framework to action the integrated system plan (ISP) via AER guidelines
  • Developing a REZ framework as a stepping stone towards the long-term goal of locational marginal pricing and financial transmission rights. The ESB has already progressed planning arrangements for REZs through stage 1 of its REZ work program, and is now considering connection, access and pricing frameworks for REZs. The accompanying consultation paper sets out issues associated with REZs, in particular how to coordinate and collaborate with state-based REZ plans
  • Improving market information and visibility about where congestion exists, and what is forecast in future to reduce transitional risks from uncertainty in moving to the enduring locational marginal pricing and financial transmission rights framework

A word from the ESB

ESB Independent Chair, Dr Kerry Schott AO, said there are ways to address the issues laid out in the reports by redesigning the market, but the speed of change means reform is increasingly urgent.

“The Health of the NEM clearly shows the repercussions of rapid change in our electricity system and highlights the absolute urgency of addressing them,” Dr Schott said.

“We are concerned about security constraints in some parts of the NEM and the increasing pressure on distribution networks from growing rooftop solar penetration.

“This, combined with growing large-scale renewable generation and low wholesale prices, means it is vital that post 2025 reforms are put in place that can work alongside government policy schemes.

“We’re moving in the right direction, but major changes are needed to unlock value to customers and ensure capital investments are made in an efficient and timely manner to deliver the affordable, reliable and secure electricity consumers need.”

The ESB’s report consolidates its previous seven market design initiatives (MDIs) into four directions which respond to stakeholder feedback and rapidly changing government policies and incentives.

The scope of reform has been narrowed, including removal of proposed measures to deal with the exit of aging thermal generation which will instead be addressed through other resource adequacy mechanisms.

Similarly, the focus on integrating distributed energy resources (like the exponential growth of rooftop solar) becomes a key part of the pathway towards developing a two-sided market in the long term.

“We are focused on modernising the market, unlocking value for consumers and boosting consumer protection, removing red tape and making it easier for businesses to get in and offer the services customers may want to buy,” Dr Schott said.

“These reforms address the critical challenges facing the energy sector – affordability for all consumers; reliability and security; renewable energy zones; integrated system plan rule changes; enabling new generators to have adequate access to the grid; and national standards for distributed energy (or behind the meter) resources.

“While many people in the energy sector have different perspectives on the possible solutions or priorities, everyone agrees on the problems we identified earlier in this process. What we have in place now is no longer fit for purpose for the energy transition and beyond.

“The time to tackle these problems is now.

“The market bodies working together have held hundreds of workshops and consultations, spoken to thousands of stakeholders and considered hundreds of thousands of pages of submissions. 

“It’s now time for tough, united, decisions. If we keep kicking this further down the road, it’s going cost us all more for electricity in the future.”

Adaptability is key, Federal Government says

Minister for Energy and Emissions Reduction, Angus Taylor, said the post-2025 work is an important step towards developing a new fit-for-purpose market framework that will empower consumers and support the continued reliability of the interconnected system.

“The NEM is at a turning point, with expanding choices, new technologies and large-scale replacement of thermal generation needed as older power stations leave the market,” Mr Taylor said.  

“Taking action now is critical and will minimise disruptions, and avoid unintended consequences. 

“The record levels of intermittent generation along with major thermal generator closures demands a clear focus on reliability and investment in reliable generation.

“The NEM needs to adapt to address risks to reliability, security and affordability, particularly sudden, unexpected exits of thermal generators. 

“We need long-term signals for private sector investment in reliable generation and storage, to replace existing generators with like-for-like capacity.

“We need a coordinated approach to market design to keep the lights on and costs down. The commitment of all energy Ministers to the post-2025 process recognises the importance of working together.

”I look forward to continuing to work with my state and territory colleagues to progress the post 2025 market design that delivers for Australians.” 

The NEM plays a key role in Australia’s energy system, efficiently delivering electricity to consumers across New South Wales, Victoria, Queensland, South Australia, Tasmania and the ACT. 

As Australia recovers from the impacts of COVID-19, the Federal Government said it is focused on ensuring Australians have access to affordable and reliable energy. 

Industry responds

The Australian Energy Market Commission (AEMC) has responded to the release of the Health of the NEM report, stating that it provides “potent evidence of the ongoing transformation of Australia’s energy supply”. 

The AEMC said that the report’s forecasted drop in emissions is happening because Australia is generating more solar, wind and battery-stored energy, and less coal and gas – a trend that is occurring globally.

The International Energy Agency (IEA), in its World Energy Outlook paper, highlighted the global expectation that renewables will meet 90 per cent of the anticipated growth in electricity demand during the next two decades.

This forecast is particularly relevant in Australia where the declining competitiveness of an aging fleet of coal fired power stations means they will inevitably need to be replaced or refurbished over the next 15-20 years or earlier.

In a statement, the AEMC said, “The technology and renewables-driven transformation of our energy market is no longer an if or when proposition. It is here and now.

“The fact our lights have largely stayed on throughout this transition so far is testament to the efforts of operators, industry, consumers and policymakers alike.  

“Much has already been done to make sure we have enough electricity reserves, driving investment in resources through the recently introduced retailer reliability obligation (RRO), and adopting energy efficiency. 

“The pace of change is accelerating. Band-aid solutions are no longer viable in the crucially important mission to deliver the reliable, affordable and secure energy this country needs to meet the challenges of the next decade and beyond.

“The current set of systems, tools, market arrangements and regulatory frameworks is no longer entirely fit for purpose.

“The longer we resist fundamental market changes, the more difficult or disorderly that change becomes.

“It’s time to calm down and simply get on with it.”

Next steps

The ESB will work with stakeholders to develop the detailed market design ahead of further consultation in March.

Final recommendations on post-2025 market design are expected to be delivered to energy ministers in mid-2021.

The Post-2025 Market Design Directions Paper is available here.

The 2020 Health of the NEM Report is available here.

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