Governing Australia's energy system

Energy Security Board chair Kerry Schott AO has high hopes for improving Australia's energy market.

When we switch on the lights, the jug or the air conditioning, most of us don’t give thought to the complex market system that works 24/7 across daily and seasonal demand peaks and troughs to keep Australia functioning.

The Energy Security Board (ESB) was established by the COAG Energy Council in 2017 to coordinate the implementation of the reform blueprint produced by the Independent Review into the Future Security of the National Electricity Market (NEM) headed by Chief Scientist Dr Alan Finkel AO.

The review identified the challenges facing the electricity market and a transition path forward with the objectives of security, reliability, emissions reduction and rewarding customers. It noted that delivering on these goals was reliant on strengthened governance, better system planning and an orderly transition.

The complexity of the national electricity market

ESB chair Dr Kerry Schott AO explains that the national electricity market is a complex beast, which essentially consists of a territory/state-based wholesale market where energy generators generate power — from coal, gas, wind, sun, hydro and battery. They bid every five minutes into the Australian Energy Market Operator (AEMO), which dispatches supply in order of least cost. Behind that stands the state transmission grid, and poles and wire distributors — which are overseen by the Australian Energy Regulator (AER) and have reliability obligations. The wholesale market underpins a retail market and a structure of financial instruments and contracts to manage risks.

AEMO recently released a plan flagging issues the transmission grid further needs to address to be reliable and stable through to 2022 and out to 2040. It will be updated every two years.

The ESB board includes deputy chair Clare Savage, Paula Conboy (chair of the AER), John Pierce AO (chair of the Australian Energy Market Commission) and Audrey Zibelman (CEO of AEMO).

The organisation annually monitors how the NEM is functioning and identifies areas requiring improvement. Its 2018 report said the market is transforming at a rapid rate but noted improvements in the status and outlook for most of the six areas of the NEM. “It is moving toward a system that requires the integration of more variable and distributed energy resources and both chemical and hydro storage,” says Schott.

Shift towards diversity in energy resources

The shift toward more diverse energy resources has been driven by government policies, significant reductions in technology costs and changing consumer preferences.

“This transformation will continue with the addition of embedded micro-systems, peer-to-peer trading through blockchain capability and, over time, electrification of the transport sector,” says Schott. “With these changes, traditional concepts of the way in which the system is managed, how investment should be rewarded and the role played by supply, storage, networks and consumers must be revisited.”

Australia’s need for power security, reliability and emissions reductions has been the target of intense political focus in a rapidly transforming market. However, after more than a decade of upheaval, Schott is optimistic about the progress made, but says the cost of technology, consumer preferences and business models are undergoing one of the most dramatic disruptions we’ve seen.

“We’re on the road to fixing it,” she says. “We’ve got to link emissions reduction in with the energy system. The technology is changing very quickly — it’s an industry going through huge disruption, a bit like the start of the internet. We’ve got to recognise there’s a technology change going on that’s not trivial — and that the way that we used to run the system doesn’t work anymore.

“It’s a big adjustment process and we have to try to manage it in the most cost-effective way for consumers — who, at the end of the day, just want to be able to switch the light on and not get bowled over by the size of their electricity bill.”