Delivering affordability and flexibility to support Australia’s energy transition

On 30 April 2021, the Energy Security Board (ESB) released its Post-2025 Market Design Options Paper, a copy of which is available here.

The Post 2025 Market Design project provides a critical opportunity to assess and update the design of the National Electricity Market (NEM), to ensure it is fit for purpose to meet the challenges of the important energy transition that is underway.

AGL understands the importance of the energy sector to Australia’s broader economy and the need to decarbonise the energy sector and reduce Australia’s emissions.

The COVID pandemic has disrupted the Australian economy like no event before, and it is vital to ensure energy remains affordable to allow Australia’s economy recover as speedily as possible. At the same time, Australians are increasingly concerned about the impacts of climate change, and policy action to reflect this growing concern will likely accelerate the energy transition.

The acceleration of the energy transition will continue to be guided by evolving trends in customer needs, community expectations, and emerging technologies. While these evolving trends present enormous opportunities to benefit consumers and reduce emissions, the changing energy mix will require complementary adjustments to maintain grid reliability and stability, as well as a clear direction for the deployment of hundreds of billions of dollars of private capital over coming decades.

To maximise the benefits of the energy transition, the right balance needs to be struck between developing incentives to support new investment while rewarding the ongoing value that can be derived from existing energy infrastructure and aging assets to achieve the best outcomes for energy customers.

Reforms to guide and accelerate the energy transition should therefore maximise shared value between businesses and customers, leverage private sector investment, and support Australia’s economy by minimising household energy expenses and long-term fiscal exposures of Governments. While reforms should incentivise investment in new energy resources, they must also retain value in existing assets to deliver the best outcomes for energy customers and Australia’s economy.

Principles for reform

Reforms to achieve these objectives would be well guided by adherence to some fundamental principles, many of which have been well considered in the ESB’s Options Paper:

• Focussing on meeting the needs of energy consumers including their need for reliable and secure energy supply at an affordable price but also growing desire to participate directly in the energy transition.
• Driving reforms that support the energy transition by strengthening signals for private sector capital to meet emissions reduction targets and ensuring the security and reliability of the grid at the lowest price.
• Developing a consistent whole of market solution (i.e., across all States and jurisdictions) to improve market efficiency, provide greater certainty for private sector investment, and deliver overall lower costs for customers.
• Avoiding continued fragmentation of the market by enabling jurisdictional policies to be met by a nationally consistent market structure.
• Establishing clear signals for new investment to enable further deployment of private sector investment to enable the energy transition and minimise risks to taxpayers and energy customers.
• Structuring reforms and incentives to retain the value of existing generation and energy infrastructure to the overall system.
• Meeting security and reliability objectives at lowest cost by utilising the broadest range of assets.
• Supporting an orderly transition while recognising the policy imperatives associated with the closure of thermal plant.
• Implementing reforms on an appropriate timeframe that is commensurate with the scale and importance of the reform, which could range from immediate action up to a number of years in the future.

Practical steps to minimise the costs of the energy transition and maximise shared value between businesses and customers

Key to the development of a coherent and achievable reform program are proposals that ensure affordable and reliable power during Australia’s energy transition. This requires not only adequate supply in the short-term, but robust structures to maintain reliability and security and clear guideposts for the very substantial private sector investment that is required within Australia’s energy sector over the next few decades.

This can be achieved with a package centred around the following priorities:

1. Flexible approaches to retaining value from aging thermal plants by not restricting options for plant operation prior to exit.
2. Development of a dynamic operating reserve to provide additional incentives for dispatchable power and certainty about system reliability.
3. New competitive market frameworks for distributed energy resources (DER) to maximise customer participation in the energy transition and drive private investment in energy infrastructure that provides shared value to businesses, DER owners, and the broader community.
4. Development of new markets for essential security services to maintain the security of the grid with a changing generation mix.
5. Efficient build and use of transmission infrastructure to enable new Renewable Energy Zones (REZ) at minimal cost to customers.

A copy of AGL’s submission to the Consultation Paper, which elaborates on these priorities and a number of other issues raised in the ESB’s Options Paper, is available here.