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Energy market reform in Australia

The draft report titled,the Independent Review of Energy Market Direction: Towards a Truly National and Efficient Energy Market, has implications for governments, business and household gas and electricity users, as well as future industry investors in the country.

The report notes the importance of competitively priced energy in the Australian economy, and suggests that while the reforms of the last decade have been beneficial, serious deficiencies remain. Several proposals have been tabled.

  • A National Energy Regulator should be estab- lished to replace the energy regulation roles of the ACCC, the state regulators, the National Electricity Code Administrator (NECA) and the National Competition Council (NCC).

  • The Ministerial Council on Energy should be the sole ministerial level decision-making body. Ministers should have no role in the code change processes for electricity or gas, and should not be able to ‘direct’ the bodies charged with managing the codes and operating the markets.

  • Electricity transmission planning and regulation should be significantly overhauled to better serve the needs of the market.

  • Responsibility for leading and managing the electricity code change process should be placed with the National Electricity Market Management Company (NEMMCO). NEMMCO should estab- lish working groups comprised of participants and users to develop code change proposals. These working groups should be supported by NEMMCO resources and would be responsible for undertaking the consultative phase before submitting the proposals to the NEMMCO board for consideration. The NEMMCO board would then forward the code change proposal with their assessment to the NER for decision.

  • The NSW government should withdraw the Electricity Tariff Equalization Fund and restructure its generation sector to provide genuine competi- tion in New South Wales and across the NEM.

  • All states and territories should enable customer choice of energy supplier, remove retail price caps and mandate the installation of interval (or smart) meters.

  • NEMMCO should introduce a ‘paid-as-bid’ mechanism for load reduction into despatch and pool price setting, to encourage demand side involvement in the NEM.

  • A new Gas Advisory and Code Change Commit- tee should be established to manage gas pipeline access code changes and advise ministers on gas policy matters.

  • New natural gas transmission pipelines should be able to opt for a 15 year economic regulation free period, subject to conditions.

  • Other natural gas pipelines covered by the gas pipeline access code should be provided with much greater certainty on regulatory treatment.

  • The various greenhouse gas emission abatement measures should be abolished and replaced with a single national emissions trading regime.

The review found that while electricity and gas markets are developing, they face substantial impediments to achieving maturity. These findings, coupled with flawed regulatory arrangements for new investment in the electricity transmission networks and regulatory uncertainty surrounding new gas pipelines, are hindering efficient market outcomes and the delivery of effective, reliable and efficient energy supply at least cost.

A fundamental issue for the panel in framing the recommendations is the need to achieve competitive national, rather than state-based, markets that are transparent in their operation and provide efficient price signals for suppliers, consumers and investors alike, said Parer.

The panel found that the demand side is quite active in some areas. There is a great deal of effort applied to energy efficiency and building standards matters, but little demand side activity in the wholesale trading activity of the NEM. While retailers enter into interruptible load arrangements with users to enable a physical response at times of high prices, these demand responses are not explicitly exposed in the market. Signals for much of the demand side to become more responsive to the market are absent. In the light of this, the panel recommended that full retail contestability be introduced into all regions, accompanied by a mandatory roll-out of interval meters. The removal of price caps and a new pay-as-bid demand reduction mechanism in the NEM systems, to enable the demand side to compete directly with generators in the market and despatch algorithms, was also proposed.

The draft report is available at www.energymarketreview.org