Chapter 1Introduction
1.1Worldwide trade competitiveness, appetite for lower costs, innovation, new technology, decarbonisation targets and consumers’ expectations are driving the current profound transformation of the energy system. Similarly, Australia’s energy market is undergoing a historic transformation.
1.2The institutional and regulatory frameworks must be efficient and fit-for- purpose to adapt and meet the challenges and opportunities of this new era and the decarbonisation objectives set by governments. The need to accelerate and increase investments and projects requires, more than ever, sound and credible planning to enable the delivery of reliable and affordable electricity to consumers. However, various stakeholders have been critical of Australia’s energy system and have raised issues in relation to the regulatory frameworks, governance arrangements of the market bodies, planning methodology, and choices of energy sources.
1.3Australia’s commitment to reducing emissions is critical not just for addressing climate change but for securing a sustainable and resilient energy future.
1.4As we approach key milestones under the Paris Agreement, it is clear that meeting these targets requires a combination of innovation, robust governance and decisive action. This is especially important considering Australia’s targets of reducing emissions by 43 per cent below 2005 levels by 2030, and achieving net zero emissions by 2050. It is crucial to meet these targets through a whole of system approach to ensure that the interests of consumers are being met, to decrease emissions and to ensure economic growth.
1.5To aid in this transition, the Australian Government has pledged an 82 per cent renewables energy mix by 2030 and billions of spending on various green energy projects. However, merely setting an 82 per cent renewables target does not mean that we will achieve a 43 per cent reduction in emissions by 2030. We cannot assume that the current strategy will work to its intended effect.
1.6Successfully transitioning Australia’s energy grid requires a bold reconsideration of all available pathways. A failure to do so would risk an abdication of our commitments under the Paris Agreement. The establishment of this select committee offers an opportunity to assess the effectiveness of our energy system’s planning and governance. It will enable us to gauge whether the market bodies, Australia’s energy structures, governance, regulations, functions and operations are appropriate and ready for meeting emission target reductions whilst ensuring the reliability of the system and a prosperous economy for our future.
1.7This report explores the structural challenges within the National Electricity Market (NEM) and highlights the need for significant reforms to facilitate the energy transition. While some progress has already been made, with electricity emissions 30 per cent lower than in 2015 due to renewables adoption, there are various shortcomings and inefficiencies with our current approach which must be rectified if we are to successfully transition our energy system into one that is emissions-free, yet also affordable and reliable.
Committee establishment
1.8On 16 September 2024, the Senate established a select committee, to be known as the Select Committee on Energy Planning and Regulation in Australia, to inquire into and report on the institutional structures, governance, regulation, functions, and operations of the Australian energy market, with particular reference to:
(a)the three overarching laws within which energy markets are governed:
(i)National Electricity Law,
(ii)National Gas Law, and
(iii)National Energy Retail Law;
(b)the role and function of the Australian Energy Regulator;
(c)the role and function of the Australian Energy Market Operator (AEMO), including its development of the Integrated System Plan in accordance with the National Electricity Objectives;
(d)the role and function of the Australian Energy Market Commission;
(e)the role and function of Energy Consumers Australia;
(f)the role and function of state energy regulators;
(g)the statutory framework which supports consideration of stakeholder views and the public interest; and
(h)any other related matters.
1.9The committee is required to report to the Senate by 20 December 2024.
Conduct of the inquiry
1.10Details of the committee’s establishment and its inquiry were published on the committee’s website and the committee invited a number of organisations and individuals to lodge submissions. The committee received 87 submissions, which are listed at Appendix 1.
1.11The committee also held five public hearings in Canberra:
23 October 2024;
29 October 2024;
30 October 2024;
31 October 2024; and
5 December 2024.
1.12A list of witnesses who gave evidence at public hearings is available at Appendix 2.
1.13In this report, references to Committee Hansard are to both proof and official transcripts. Page numbers may vary between proof and official transcripts.
Structure of this report
1.14This report consists of five chapters. This chapter sets out general information outlining the establishment of the committee and conduct of the inquiry. It also provides background information relating to Australia’s energy market, energy laws, market bodies, the path to decarbonising Australia’s energy systems, and energy market reviews to date.
1.15Chapter 2 discusses Australia’s energy governance arrangements and laws. It discusses the high levels of energy regulation, amendments and state derogations and examines the effectiveness of the three market bodies: Australian Energy Market Operator (AEMO), Australian Energy Regulator (AER) and Australian Energy Market Commission (AEMC).
1.16Chapter 3 focusses on the Integrated System Plan (ISP) planning, methodology, modelling and performance, as well as alternative modelling considerations.
1.17Chapter 4 explores the uptake of consumer energy resources; costs to consumers and the community; and suggestions for improvement.
1.18Chapter 5 is the concluding chapter with the committee’s final observations and recommendations.
Acknowledgements
1.19The committee thanks all those who contributed to the inquiry by making submissions, providing additional information, and appearing at public hearings.
Australia’s energy market
1.20Australia’s national energy market began operating in 1998. The existing governance structure, which includes three market bodies, was created by the Energy National Cabinet Reform Committee to oversee the nation’s energy market. An overview of the laws, market bodies, and the role of the states in Australia’s energy market is provided below.
Energy market laws
1.21The Department of Climate Change, Energy, the Environment and Water (the Department) outlined that there are three overarching laws relevant to the governance of Australian energy markets, with South Australia as the lead legislator: the National Electricity Law (NEL), National Gas Law (NGL), and National Energy Retail Law (NERL).
1.22The AEMC explained that in order to implement a national energy framework, an applied law scheme was adopted, where South Australia is the lead legislator, and each participating jurisdiction adopts legislation through application acts.
1.23AEMO noted that ‘no one government alone can deliver on energy outcomes for Australian consumers’ and observed that ‘energy planning and regulation is one of Australia’s most significant, and most complex, examples of co-operative federalism’.
National Electricity Law
1.24The NEL is set out in a schedule to the National Electricity (South Australia) Act 1996. It establishes obligations in the National Electricity Market (NEM) and for electricity networks.
1.25The NEM is comprised of five physically connected regions on Australia’s east coast: Queensland, New South Wales (including the Australian Capital Territory), Victoria, Tasmania and South Australia. Each participating NEM state and territory, and the Commonwealth, has its own legislation applying the South Australian energy laws. Western Australia and the Northern Territory have their own electricity systems and regulatory arrangements and, as such, are not connected to the NEM.
National Electricity Rules
1.26The Department explained that the NEL is supported by the National Electricity Rules (NER) and the National Electricity (South Australia) Regulations. The NER govern the day-to-day operation of the NEM and the regulation of network infrastructure.
1.27The NER are made and amended under the NEL by the AEMC, or by the South Australian Energy Minister if consistent with a head of power in the NEL.
1.28In making the rules the AEMC is required to apply the National Electricity Objective. The rules govern the wholesale electricity market, the economic regulation of the services provided by monopoly transmission and distribution networks, and govern the way in which the AEMO manages power system security.
1.29Running to 1860 pages, the NER have evolved over time, through 217 versions to date, to address changes in the electricity sector.
Northern Territory electricity legislation
1.30As mentioned above, the Northern Territory has its own electricity law and rules which are different to those that apply to the NEM states.
1.31In 2015, the Northern Territory passed the National Electricity (Northern Territory) (National Uniform Legislation) Act 2015 (NT Electricity Act). The AEMC explained that the NT Electricity Act adopts a modified version of the NEL known as the National Electricity (NT) Law.
1.32Under the National Electricity (NT) Law, the AEMC may make a uniform rule or a differential rule with respect to the Northern Territory. A uniform rule is a rule that applies in the same way in all participating jurisdictions, including the Northern Territory. A differential rule is a rule that differs in how it applies to the Northern Territory and to the national electricity system in other participating jurisdictions.
1.33The AEMC also clarified that the NER applying in the Northern Territory is the current version of the NER as amended by the National Electricity (Northern Territory) (National Uniform Legislation) (Modification) Regulations 2016 made under section 13(2)(c) of the NT Electricity Act. Under the regulations, the AEMC must publish and maintain on its website an up-to-date copy of the NT version of the NER as in force from time to time.
Western Australian electricity legislation
1.34Western Australia’s Wholesale Electricity Market (WEM) commenced in 2006 and is established under the Electricity Industry (Wholesale Electricity Market) Regulations 2004. It is governed by the Wholesale Electricity Market Rules.
1.35The WEM Rules detail the roles and functions of AEMO and other governance bodies and guide the operation of the market including the trading and dispatch of energy, the Reserve Capacity Mechanism and settlement.
1.36AEMO functions relating to the WEM are discussed further below in terms of its energy markets and energy systems functions.
National Gas Law
1.37The NGL is established under the National Gas (South Australia) Act 2008 and provides the governance framework, key obligations for access gas pipelines, and broader elements of the natural gas markets.
1.38The NGL is supported by the National Gas Regulations and the National Gas Rules.
1.39The NGL is applied across all Australian states and territories. However, Western Australia implements a modified version that focusses primarily on pipeline regulation to cater for specific market conditions in the region.
1.40The Department explained that the NGL establishes several market and regulatory functions, such as:
Economic Regulation of Gas Pipelines: The NGL facilitates access to gas pipelines on reasonable terms across the East Coast, Northern Territory, and Western Australia.
Facilitated Trading Markets: Specifically on the East Coast, the NGL establishes several trading mechanisms, including the Short-Term Trading Markets, Declared Wholesale Gas Market, Gas Supply Hub, Capacity Trading Platform, and Day Ahead Auction. These markets enhance liquidity and promote the efficient allocation of gas and pipeline services.
Transparency: The NGL establishes various transparency measures, such as the Bulletin Board, Gas Statement of Opportunities (GSOO), and the Victorian Gas Planning Report, along with gas price reporting which supports informed decision-making by market participants.
National Energy Retail Law
1.41The National Energy Retail Law (NERL) is the law set out in a schedule to the National Energy Retail Law (South Australia) Act 2011, which regulates supply and sale of energy to retail customers in New South Wales, South Australia, Tasmania, Queensland, and the Australian Capital Territory.
1.42The NERL is supported by the National Energy Retail Rules (NERR) and National Energy Retail Regulations. According to the Department, more detailed obligations are provided in the NERR, including consumer protection measures and basic terms and conditions for standard and market retail contracts. These contracts govern the relationships between customers, retailers and distributors. Consumer protections provided by the NERL include the following:
Requirements that retailers must meet before disconnecting a consumer’s premises.
Requirements to provide support and assistance to customers experiencing payment difficulty and financial hardship.
Protections for customers requiring life support equipment.
1.43The NERL also provides mechanisms that customers can use to resolve complaints and disputes, where retailers and distributors must also have their own standard complaint and dispute resolution procedure, and must be a member of an energy ombudsman scheme.
1.44Further, the NERL sets out provisions for a Retailer of Last Resort scheme for participating jurisdictions and seeks to ensure continuity of supply to consumers in the event of retailer failure.
National energy objectives
1.45The Department explained that the national energy objectives guide energy market bodies in the decisions they make under energy law. The impact of the objectives on the market bodies are discussed in their respective sections later in the chapter.
1.46The AER noted that in 2023, the Federal Minister for Climate Change and Energy, and the State and Territory Energy Ministers (together, the Energy Ministers) amended the energy laws to introduce an emissions reduction element into the national energy objectives.
1.47The energy objectives are as follows:
The National Electricity Objective, as set out in the NEL:
… to promote efficient investment in, and efficient operation and use of, electricity services for the long term interests of consumers of electricity with respect to—
(a)price, quality, safety, reliability and security of supply of electricity; and
(b)the reliability, safety and security of the national electricity system; and
(c)the achievement of targets set by a participating jurisdiction—
(i)for reducing Australia's greenhouse gas emissions; or
(ii)that are likely to contribute to reducing Australia's greenhouse gas emissions.
The National Gas Objective, as set out in the NGL:
… to promote efficient investment in, and efficient operation and use of, covered gas services for the long term interests of consumers of covered gas with respect to—
(a)price, quality, safety, reliability and security of supply of covered gas; and
(b)the achievement of targets set by a participating jurisdiction—
(i)for reducing Australia's greenhouse gas emissions; or
(ii)that are likely to contribute to reducing Australia's greenhouse gas emissions.
The National Energy Retail Objective, as set out in the NERL:
…to promote efficient investment in, and efficient operation and use of, energy services for the long term interests of consumers of energy with respect to—
(a)price, quality, safety, reliability and security of supply of energy; and
(b)the achievement of targets set by a participating jurisdiction—
(i)for reducing Australia's greenhouse gas emissions; or
(ii)that are likely to contribute to reducing Australia's greenhouse gas emissions.
Role and functions of the market bodies
1.48The Department noted that Australia’s energy industry is governed by a framework known as the Australian Energy Market Agreement (AEMA), which is an intergovernmental agreement between the Commonwealth, states and territories.
1.49The Department further explained that the AEMA provides for three national energy market institutions that sit under the umbrella of the Energy and Climate Change Ministerial Council (ECMC). The Department submitted that the structure of the market bodies ‘is designed to provide for institutional separation of powers and responsibilities’.
1.50The below diagram provides an overview of Australia’s national energy market system:
Figure 1.1National energy market governance
Source: Australian Energy Regulator, Our role.
Energy and Climate Change Ministerial Council
1.51The ECMC, originally known as the Ministerial Council on Energy, was established in 2001. The current iteration, the ECMC, was established as a Committee of National Cabinet in September 2022.
1.52The ECMC is a forum for the Commonwealth, Australian states and territories, and New Zealand to work together on priority issues of national significance and key reforms in the energy and climate change sectors.
1.53It is chaired by the Energy Ministers, who are collectively responsible for the legislative architecture that establishes and governs the energy system.
1.54In addition to its role as a policy maker, the ECMC also has oversight of the energy market bodies that are responsible for the operation of the national energy markets. These bodies are the AEMC, AEMO and AER. The ECMC has oversight of the Energy Advisory Panel (EAP), which is discussed below.
Australian Energy Market Commission
1.55The AEMC was established by the Parliament of South Australia and is an independent statutory body with responsibilities across Australia. It has reporting and governance requirements under certain South Australian legislation, as well as the South Australian Treasurer’s instructions.
1.56The AEMC identified its core functions as making and amending rules under national energy legislation, conducting reviews and providing advice to energy ministers, including market development advice to governments.
Rule-making and market development functions
1.57The AEMC explained that it has rule-making and market development functions under the national energy laws (the NEL, the NGL and the NERL). It noted that the rules it makes have the force of law under the national energy laws, and are amended either by the AEMC itself, or in special and limited circumstances where a head of power has been included under the energy laws, by the South Australian Minister for Energy and Mining.
1.58The AEMC noted that its decision-making is guided by the national energy objectives, in which it seeks to:
…promote efficient investment in and efficient use of energy services for the long-term interest of energy consumers with respect to safety, security, reliability, quality, price and the achievement of emission reduction targets.
1.59The AEMC clarified the rule-making process by explaining that stakeholders can ‘shape the design and regulation of the market’ through participating in the rule change process, including by submitting rule change requests.
1.60The AEMC noted a unique aspect of its role in which any party, except for the AEMC itself, can propose a change to the rules. The AEMC explained that it is only permitted to propose minor changes, such as corrections, to rules.
1.61The AEMC outlined that the rule change process begins by submitting a written request to the AEMC for a rule change, to which the AEMC will then initiate a rule change process where it seeks to engage with relevant stakeholders to encourage their participation and input. The outcome of a rule change project is contained in the AEMC’s final rule determination.
1.62The AEMC explained that it can only make a rule change if it is satisfied that the rule will, or is likely to, contribute to the relevant national energy objectives – focusing on the long-term interest of consumers.
Australian Energy Market Operator
1.63AEMO is Australia’s energy system and market operator, whose functions are prescribed in the law, rules and regulations that govern the energy sector.
1.64AEMO was established in 2009 by the then Council of Australian Governments and is registered under the Corporations Act 2001 as a member-based not-for-profit company limited by guarantee. AEMO explained that its membership is shared between federal and state governments (60 per cent) and industry (40 per cent).
1.65According to AEMO, its purpose is to ensure ‘secure, reliable, and affordable energy and to enable the energy transition for the benefit of all Australians’. Its accountability and governance framework is ‘underpinned’ by the national energy objective of ‘acting in the long-term interests of consumers’. AEMO’s governance arrangements are further discussed in Chapter 2.
1.66AEMO’s prescribed functions can be categorised into three groups:
operating energy systems (electricity and gas);
operating energy markets (electricity and gas); and
planning and enabling the future energy system.
Operating energy systems (electricity and gas)
1.67AEMO operates Australia’s electricity systems by managing the operations of the NEM and the WEM to meet prescribed standards of security and reliability.
1.68AEMO must maintain electricity system security and reliability for the NEM and WEM through ‘effective operational planning and forecasting, congestion and grid modelling, management of power system conditions, and seasonal analysis and preparation’.
1.69AEMO also operates gas systems by managing the operations of the Victorian Gas Declared Transmission System and the Victoria Declared Wholesale Gas Market to maintain gas supply in Victoria. This includes ‘demand forecasting, system security, safety and emergency response, gas quality, wholesale metering and gas supply adequacy’.
1.70AEMO also has powers and functions pertaining to the reliability and supply adequacy for the east coast gas systems.
Operating energy markets (electricity and gas)
1.71AEMO explained that it manages the wholesale electricity market operation functions for the NEM and the WEM, which includes settlement, billing, prudential, metering and retail market operations.
1.72AEMO also manages and monitors the wholesale, retail and secondary trading gas markets across the east coast.
Planning and enabling the future energy system
1.73AEMO produces the biennial ISP, which it explains is produced after ‘extensive consultation with industry, government and consumer advocates under national energy legislation’.
1.74According to AEMO, the ISP identifies ‘an optimal development path of generation, storage and transmission investments’ that are necessary to meet the energy needs of home and businesses throughout Australia’s transition to net zero by 2050. The ISP is further discussed in Chapter 3.
1.75Other planning responsibilities include AEMO’s development of planning documents, including, for example, the annual publication of technical and market data through the Electricity Statement of Opportunities and Gas Statement of Opportunities.
1.76Additionally, AEMO delivers reforms to the NEM wholesale and retail markets, as well as the WEM and east coast gas markets. It also undertakes participant registration and national grid connect processes to ‘progress the connection of new generation assets to the NEM’.
1.77AEMO also has declared shared network (DSN) functions in Victoria. For example, it undertakes annual planning reviews, considers augmentations to the transmission network via the Regulatory Investment Test for Transmission (RIT-T) process, and procures transmission augmentations.
Australian Energy Regulator
1.78The AER is an independent Commonwealth statutory entity and decision-making body that regulates wholesale energy markets, retail energy markets and energy networks under national energy legislation and rules.
1.79However, the AER noted that for the purposes of the Public Governance, Performance and Accountability Act 2013, it is a combined entity with the Australian Competition and Consumer Commission (ACCC).
1.80As such, the Chair of the ACCC is the accountable authority for the purposes of the Public Governance, Performance and Accountability Act 2013, and is also the head of the AER for the purposes of the Public Service Act 1999.The AER explained that this means that the ACCC Chair is ultimately responsible for the financial performance of the AER.
1.81The AER advised that following agreement by the Australian Government and the Energy Ministers in 2023, the AER is preparing for full legal separation for the ACCC to become a separate non-corporate Commonwealth entity in 2025. This means the AER Board will become the accountable authority and the AER Chair will become the head of the agency.
1.82The AER’s operations include regulating gas and electricity markets and/or networks in all states and territories, except for Western Australia. It focuses on ensuring a ‘secure, reliable and affordable energy future for Australia’ as it transitions to net zero emissions.
1.83The AER identified its core purpose as to ‘ensure energy consumers are better off, now and in the future’. It has a range of roles and key activities, which are explored below.
Compliance and enforcement
1.84Through its compliance and enforcement activities, the AER has jurisdiction over:
The relationships energy retailers, distributors and exempt suppliers have with their customers in retail markets.
Network planning and the provision of monopoly transmission and distribution network services to customers and other market participants.
Participation in wholesale markets for electricity and gas and the day-to-day operations of those markets.
1.85The AER noted that its approach to compliance and enforcement aims to foster compliance and address non-compliance, with a focus on preventing harm. The AER also clarified that is has discretion over how it approaches compliance and enforcement, in which it uses ‘a combination of tools’ that it considers will ‘deliver the best outcomes for consumers and the market’.
Performance monitoring and reporting
1.86The AER also monitors and reports on the performance of energy wholesale and retail markets, as well as network businesses.
1.87The AER explained that in wholesale electricity and gas markets, it monitors participant bidding and rebidding, market dispatch and prices, network constraints and outages, demand forecasts and forecasts of production and capacity.
1.88The AER also reports on wholesale market activity and the performance of retail energy markets and energy businesses. Further, the AER monitors network performance through various reports, such as its network performance and benchmarking reports.
Energy network regulation
1.89The AER noted that it is responsible for the economic regulation of over $115billion worth of electricity transmission, distribution networks, gas transmission and distribution pipelines in all states and territories, except for Western Australia.
1.90The AER explained that it sets the maximum revenue amount that price regulated energy networks can earn, as well as the price it can charge consumers for regulated services annually.
1.91Further, price regulated network businesses submit revenue proposals to the AEMC approximately every five years, referred to as the ‘reset process’. The AEMC reviews the proposals and makes decisions through this process by considering various factors, including the services proposed to be regulated and the quality of engagement with customers.
1.92The AER also publishes the Rate of Return Instrument, which sets the amount of revenue that electricity and gas network businesses can earn on the capital value of their network investments.
1.93There are three core incentive schemes that the AER must apply in regulating monopoly electricity and gas networks, which are the:
Efficiency benefit sharing scheme (EBSS) - provides networks with additional financial incentives to undertake efficient operating expenditure over time.
Capital expenditure sharing scheme (CESS) - provides networks with additional financial incentives to undertake efficient capital expenditure over time, to ensure that only efficient capital expenditure is added to the regulated asset bases.
Service target performance incentive scheme (STPIS) - provides electricity network service providers with additional financial incentives for maintaining and improving network performance, to the extent that consumers are willing to pay for such improvements.
Consumers
1.94The AER underlines that ‘consumers are at the heart of everything’ that it does. It noted that it works to ensure energy consumers have access to a reliable and secure market, where they pay no more than necessary for energy to their homes and businesses.
1.95Through its retail energy market regulation function, the AER also:
Sets the Default Market Offer to ‘protect consumers from unjustifiably high prices’, which is a price cap on standing energy contracts. The AER also provides a price comparison website, ‘Energy Made Easy’, to assist consumers in finding ‘the best energy contract for them’;
Approves customer hardship policies that are required by energy retailers;
Administers a retailer of last resort scheme in the case where an energy retailer fails;
Monitors and enforces compliance with energy retail law and rules;
Approves retailer authorisations and exemptions; and
Administers the retailer reliability obligation.
Energy Advisory Panel
1.96The EAP was established in 2023 by the Energy Ministers after the disbandment of the Energy Security Board (discussed further below). The EAP is a regular meeting of the three market bodies (AEMC, AEMO and the AER), as well as the ACCC and senior official observers from jurisdictions, in which matters relating to key energy market issues are discussed.
1.97According to the AER, the EAP provides ‘whole of system oversight throughout the transition to net zero emissions and enables the three market bodies to provide co-ordinated advice to governments on issues relating to the security, reliability, and affordability of Australia’s east coast energy system’.
Energy Consumers Australia
1.98Energy Consumers Australia (ECA) is a not-for-profit company limited by guarantee. It was established by the Council of Energy Ministers (an earlier iteration of the ECMC) in 2015 to ‘promote the long-term interests of Australian consumers to decision makers and industry’.
1.99The South Australian Energy Minister is the only member of the ECA and engages with the Energy Ministers on governance arrangements.
1.100ECA explained that it promotes the long-term interest of households and small businesses through the following activities:
Researching consumer expectations, values and needs for the energy market;
Engaging in energy sector processes;
Funding work by other organisations that provide evidence for system changes that will benefit households and small businesses;
Working with other organisations to promote consumer needs; and
Helping to build the capacity of other organisations to be able to advocate on behalf of consumer groups.
1.101ECA is funded by the levies that consumers in NEM states pay on their energy bills, which is recovered by AEMO in line with the NER and NGR. The ECA noted that this equates to approximately 0.03 per cent of an average household electricity bill.
1.102The ECA’s grants program funds ‘high quality, innovative research and advocacy initiatives that have the potential to deliver outcomes that will benefit the long-term interests of energy consumers in the National Energy Market’.
1.103The ECA noted that the projects that it funds also informs the advocacy work that it conducts on behalf of households and small businesses.
State energy regulators
1.104The Department noted that state energy regulators also play a role in the economic regulation of energy within Australia. It explained that because the AER does not regulate energy within Western Australia, the Economic Regulation Authority regulates the wholesale and retail energy markets and networks in the state.
1.105The Department also noted that the retail energy sector and consumer protections in the Northern Territory and Victoria are regulated by each jurisdictions’ respective regulator through licence schemes.
1.106In Victoria, the Essential Services Commission Victoria regulates the retail energy section under the Victorian Energy Retail Code. In the Northern Territory, the Utilities Commission of the Northern Territory regulates the retail sector under the Electricity Reform Act 2000.
1.107The Department also pointed to state planners, such as VicGrid in Victoria and EnergyCo in New South Wales, as groups that play critical roles in each jurisdiction.
Decarbonising Australia’s energy systems
1.108The Department explained that under the Paris Agreement, a legally binding international treaty on climate change, Australia has committed to the ‘global goal of holding the increase in global average temperatures to well below 2degrees Celsius of warming and pursuing efforts to keep warming to less than 1.5 degrees Celsius’.
1.109In line with these commitments, Australia enshrined its greenhouse gas emissions reduction targets in the Climate Change Act 2022 (Cth). Under section10, Australia’s targets are reducing Australia’s net greenhouse gas emissions to 43 per cent below 2005 levels by 2030, and reducing Australia’s net greenhouse gas emissions to zero by 2050.
1.110As such, the Australian Government is developing the ‘Net Zero Plan’ to guide the transition to these legislated targets. The Department noted that the plan will ‘cover all major parts of the economy’ and ‘articulate Australia’s transition to net zero’.
1.111Alongside the Net Zero Plan, the government will also ‘set an ambitious and achievable 2035 emissions reduction target’. Further, the Department also recognised ‘the source and nature of emissions varies across and within sectors’ and so too do the ‘challenges and opportunities of reducing those emissions’.
1.112As such, six sectoral emissions reduction plans will support the Net Zero Plan. The six sectors that will have plans are:
electricity and energy;
transport;
industry;
agriculture and land;
resources; and
the built environment.
1.113The Department clarified that the Electricity and Energy Sectoral Plan will cover the supply of electricity, liquid fuels and gas and that sectoral plans will also consider key enabling technologies. These technologies will support emissions reduction or removals, which includes technologies like:
carbon capture, use and storage;
electrification and renewable electricity;
energy efficiency; and
gas for firming renewables.
1.114On 14 March 2024, a discussion paper on the Electricity and Energy Sector Plan was released for consultation with stakeholders and members of the community. The feedback received throughout the consultation, which closed on 26 April 2024, will be used to help inform the development of the Electricity and Energy Sector Plan.
1.115The Climate Change Authority (CCA) was also tasked with providing advice to government on the sectoral pathways and the most prospective technologies for cutting emissions in each sector.
1.116In its Sectoral Pathways Review, the CCA’s advice on the Electricity and Energy Sector found that:
Rapid decarbonisation and expansion of the electricity and energy sector is the key to meeting Australia’s economy-wide emissions reduction targets. There is a clear and viable decarbonisation pathway for the sector that relies on known technologies to deliver very large emissions reductions and facilitate reductions in other sectors.
Energy governance reviews
1.117There are several Australian energy governance reviews that have been conducted in recent years that closely relate to this inquiry. A brief overview of three key reviews is provided below.
The Vertigan review
1.118In 2015, Dr Michael Vertigan AC, Professor George Yarrow and Mr Euan Morton (the panel) presented the Final Report of the Review of Governance Arrangements for Australian Energy Markets (the Vertigan Review) to the Council of Australian Governments (COAG) Energy Council (the Energy Council).
1.119The report considered the performance of the Australian energy markets’ governance arrangements. It made recommendations to the Energy Council on potential areas for improvement within the market bodies and the Energy Council’s oversight of these bodies.
1.120The panel concluded that ‘the division of functions established by the current governance arrangements for Australian energy markets is fundamentally sound’ and noted that the governance arrangements are ‘amongst best practice internationally’.
1.121The panel also identified areas for improvement within Australia’s energy market structure to adapt to emerging challenges that were foreshadowed by two themes that emerged through consultations:
the pace of change in the energy sector is arguably unprecedented; and
a ‘strategic policy deficit’ exists which has led to diminished clarity and focus in roles, fragmentation and a diminished sense of common purpose.
1.122The report’s recommendations relating to the three market bodies (AEMC, AER and AEMO) are outlined below.
AEMC
1.123The panel noted that the AEMC’s role as a rule maker and advisor to the Energy Council was increasingly important in ‘the current dynamic environment’ and as such recommended that its role be ‘reinforced through greater reliance on this institution for the development of strategic advice’.
1.124Further, the report recommended that the AEMC should ‘increase the accountability and timeliness of its processes and develop a mechanism to terminate work streams that are no longer appropriate’.
1.125Additionally, the report recommended that the AEMC should publish performance metrics, as well as implementing and publishing best practice guidelines on its processes.
AER
1.126The panel considered that the AER board ‘lacks autonomy over the organisations as it is not in full control of the resources required to achieve its tasks and lacks full independence in decision-making’. It also found that the culture is ‘not conducive to its regulatory role, due to the fact that the culture and skills required to regulate an industry differ from those of a competition law enforcement agency’.
1.127As such, it was recommended that the AER be established as an independent organisation by separating it from the ACCC to strengthen its performance.
1.128As discussed above, the AER is preparing for full legal separation from the ACCC to become a sperate non-corporate Commonwealth entity in 2025.
1.129The panel also believed that ‘periodic external performance reviews of the AER should be initiated’ every three to five years by a panel of experts appointed by the Energy Council.
AEMO
1.130The panel noted that AEMO plays an important and valuable role as the independent system and market operator and considered that AEMO should ‘be more clearly focused on developing procedures for the purposes of market operation within the energy market’.
1.131The panel also considered that AEMO should only undertake tasks outside its core responsibilities ‘where they do not conflict with those responsibilities and are undertaken on a contractual basis’.
1.132The panel recommended that the Energy Council issue a ‘statement of role’ for AEMO, which clearly specifies its core role, including processes for accessing AEMO’s expertise in market and systems operations and the arrangements under which it can undertake other activities.
The Finkel review
1.133In 2016, the Energy Ministers agreed to an independent review of the national electricity market to ‘take stock of its current security and reliability and to provide advice to governments on a coordinated national reform blueprint’.
1.134Dr Alan Finkel AO, Australia’s then Chief Scientist, was the Chair of the expert panel that conducted the review known as the ‘Independent Review into the Future Security of the National Electricity Market’ (the Finkel review). Ms Karen Moses FAICD, Ms Chloe Munro, Mr Terry Effeney and Professor Mary O’Kane AC were members of the expert panel.
1.135The expert panel’s final report emphasised that Australia’s electricity system is in transition and that the country is ‘at a critical turning point’. It noted that if managed well ‘Australia will benefit from a secure and reliable energy future’, but if managed poorly, Australia’s ‘energy future will be less secure, more unreliable and potentially very costly’.
1.136As such, the report made recommendations centring around four key outcomes: increased security, future reliability, rewarding consumers, and lower emissions. The report noted that the outcomes are underpinned by three pillars of an orderly transition, better system planning and stronger governance.
1.137Specifically, the report identified three key components of stronger governance:
A new ‘Energy Security Board’ (ESB) to drive the implementation of the report’s vision.
An annual ‘Health of the National Electricity Market’ report by ESB to track the performance of the system, the risks it faces, and opportunities for improvement.
Strengthening, resourcing and making the market bodies more effective through the coordination provided by the ESB.
1.138The ESB was established by the Energy Ministers in August 2017 to coordinate the implementations of the report’s recommendations. However, as mentioned above, it has since been disbanded and replaced by the EAP.
1.139The final report also recommended that better system planning should involve AEMO having a stronger role in planning the future transmission network, including through the development of a NEM-wide integrated grid plan to inform future decisions. This integrated grid plan is the ISP that AEMO now produces.
The Edwards review
1.140In 2017, the former Energy Council accepted the recommendations of the Finkel review, which included the recommendation to establish the ESB. At the time, the Energy Council also agreed that the ESB’s operation would be subject a three-year review.
1.141As such, in June 2020, Mr Rhys Edwards provided his Review of the Energy Security Board (the Edwards Review) to the Energy Ministers.
1.142The report considered the performance of the ESB and recommended that the ESB only remain in place until the end of 2021 to ‘support the transition of Australian energy markets principally through the provision of advice to Energy Ministers on the long term, fit-for-purpose market framework for modifying the NEM post 2025’.
1.143Mr Edwards deemed that this time period would enable the Energy Ministers to make all required decisions in line with the ESB’s project timetable and work program, and also allow for a six-month transition and wind up of the ESB.
1.144In the review, Mr Edwards also noted that the period of time since the ESB’s existence illustrated the desirability for a forum that brings the three market bodies together to:
… help integrate the interlocking responsibilities for overall national energy security and enable a formulation of a single coherent and collaborative approach to strategic policy and market development advice to Ministers.
1.145As such, Mr Edwards suggested that the forum could be reinvigorated with appropriate representation from Senior Energy Officials.
1.146As discussed above, the ESB was subsequently disbanded, and the Energy Advisory Panel was established in 2023 by the Energy Ministers.
Review of the Integrated System Plan
1.147In October 2022, the Energy Ministers agreed to review to the AEMO’s ISP framework. The purpose of the review was to consider whether the scope of the ISP remained appropriate in the context of Australia’s decarbonisation objectives, energy security and the management of energy costs.
1.148The review focussed on the following key themes:
supporting emissions reduction;
integrating gas and electricity planning;
enhancing energy demand considerations;
transformation of Australia’s energy mix; jurisdictional policy interactions; and
the timely delivery of ISP projects.
1.149The review made 15 recommendations and the ECMC provided its response in April 2024. The response outlines the range of actions that Energy Ministers have agreed to take in response to the recommendations of the review, including in relation to integrating gas into the ISP; enhanced demand forecasting; better data on industrial and consumer electrification; coal-fired generation shutdown scenarios; improving locational information, clarifying policy inclusions; and incorporating community sentiment in the development of the next ISP.
1.150The ECMC noted that the ‘implementation of the actions outlined in this report will require changes to the legislative framework that governs the development of the ISP, and establishment of enhanced data and modelling approaches’.
1.151This review was noted in passing by the Department but no other evidence was given, nor was it provided to the committee for its consideration. Given the significance of such a review, in particular as it was conducted instead of the planned AEMC review, the committee is at a loss to understand why it was not raised in evidence. For completeness the Chair tabled it on becoming in possession of the review.
1.152The committee noted that although the Review was complete early 2024 none of the recommendations were incorporated in the 2024 ISP (or its Draft) and that this was a missed opportunity.
National Electricity Market (NEM) wholesale market settings review
1.153In November 2024, the Australian Government announced a review of the NEM wholesale market settings by an independent expert panel supported by the Department.
1.154The objective of the review is to recommend wholesale market settings to promote investment in renewable generation and storage capacity in the NEM following the conclusion of Capacity Investment Scheme tenders in 2027.
1.155The independent expert panel is expected to deliver its final recommendations to government and the ECMC in late 2025.