The Australian Energy Market Operator is not the right organisation to be conducting the dramatic overhaul required for the economy, writes Zacharias Szumer.
The alphabet soup of agencies tasked with managing Australia’s National Electricity Market (NEM) were initially intended to be apolitical, technocratic institutions. However, the urgent task of decarbonisation is straining their initial mandate and raising questions about whether the current structures are fit for purpose.
That’s the opinion of Dylan McConnell, an energy system researcher and one of the media’s go-to people to explain what is happening in the NEM. Historically, the role of the NEM agencies “was boring techno-economic regulation,” McConnell says. “We had a basic understanding that this is what the system looks like. We’ll put these techno-economic regulators in charge of optimising it and slowly developing it over time.”
Now, he says, we’re facing “a wholesale reconstruction of the entire sector, which has obvious social implications, whether that’s coal plants being shut down or social licence issues around building new transmission mega-projects…. You have all these overlays, such that the historical techno-economic regulation approach isn’t fit for purpose any more.”
Planning the entire economy
The limitations of the “boring techno-economic regulation” approach may come to the fore with Minister for Climate Change and Energy Chris Bowen’s plan for a “Supercharged ISP”, which was announced at a June meeting of energy ministers in Canberra. The ISP – or Integrated System Plan – is a biennially released planning document that projects future developments in the electricity grid, with a focus on transmission infrastructure. It is compiled by the Australian Energy Market Operator (AEMO), the body that oversees the day-to-day operation of the NEM.
According to Bowen’s June press release, this expanded ISP would address “the entire gamut of the transformation which is underway” and “all the things necessary for this transition”. McConnell says this would mean a significant expansion of the ISP’s traditional remit. Although the details of who would be compiling the “Supercharged ISP” are still unclear, McConnell has his doubts about AEMO taking on a larger set of duties:
“If you’re doing this big system-wide planning, you’re essentially planning the entire economy. You’re not just optimising an electricity system based on various projections of the future. You’re also looking at vehicle electrification, development of hydrogen industries, or export industries like green steel. You’re basically becoming an economy planner. That’s not a bad thing in and of itself, but AEMO is currently not an appropriate organisation to be conducting this work. The legal basis and governance arrangements are not set up for planning the transition of the entire economy.”
For starters, AEMO is not a government agency. It’s a non-profit corporation 60% owned by the states and 40% by companies that participate in the electricity market. Origin, AGL, Energy Australia, gas companies like Santos and many smaller wind and solar companies are all financial stakeholders of AEMO. According to McConnell this ownership structure creates problems when AEMO is also acting as a system planner.
“Market participants are potentially being commercially undermined in the plans being developed by AEMO, and they are probably pretty unhappy to be paying fees in order to support that work,” McConnell says. “There should probably be more government money funding for this type of work, because it’s in the government’s interest and it’s essentially government work.”
McConnell mentions that the UK has recently announced plans to return its equivalent of AEMO to public hands. It has been operated by National Grid, a publicly listed company, since 1995, but the Government believes that public ownership will better support the dual goals of decarbonisation and keeping household energy bills under control.
If AEMO is to take on more responsibility for transition planning, McConnell also sees problems with the body’s lack of connection to communities affected by new infrastructure. Resolving complicated social license issues around planned renewable energy and transmission projects requires serious and lengthy consultation with landowners and other affected parties. In recent years, local opposition to such projects has been brewing in many regional areas. In mid-July, hundreds of tractors and trucks drove through the streets of Ballarat to protest against the Western Renewables Link, which will run from renewable energy sites north-west of Ballarat through to Melbourne.
According to McConnell, AEMO’s planning style is partly responsible for the protests. “Essentially, [the Western Renewables Link] was just a line on a map drawn by AEMO a couple of years ago,” McConnell says,
“…and that particular process is probably a gold-class case study in what not to do, in terms of developing transmission
Who counts carbon?
At the energy ministers’ meeting in June, it was also announced that lowering emissions would be added to the National Electricity Objectives (NEO), the goals that guide electricity system planning. It’s the first time in 15 years that there have been any changes to the NEO principles of price, quality, safety and reliability, and security of supply. An emissions component was intended to be included when the market rules were being settled in the late 1990s, but it was dropped at the last minute by the Howard government.
McConnell welcomes the inclusion of emissions into the NEO but is concerned about thorny governance issues that may arise. “The NEM institutions will most likely be uncomfortable with the idea, because it implicitly requires them to make a call on the social cost of carbon,” he said.
To illustrate with a non-hypothetical example, imagine that a transmission company wants to make a regulated investment into new firming capacity to back up renewables: would two diesel-powered generators or batteries be a better choice? Price, quality, safety and all the other objectives are still factored into the decision, but now they have to be balanced with the emissions objective. Quantifying the relative weight of the emissions objective, so it can be balanced against the other objectives, means calculating a social cost of carbon.
Should the AEMC – the NEM’s rule-making body – be responsible for this? McConnell doesn’t think so:
Should an economic regulator of electricity markets be making what is obviously a political judgement? I don’t think so. That’s not really something that they are currently well suited for. There are other organisations or institutions that could do that: maybe the Climate Change Authority, maybe even the energy ministers themselves