Independent Review into the Future Security of the National Electricity Market Preliminary Report, Dec 2016 (docx 04 mb)

Recent events highlight the need for action

Recent events highlight the opportunities and risks associated with the transition currently underway in Australia’s electricity market:

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  In July and August 2016, South Australia experienced high and volatile prices not experienced in the electricity market since 2009.
  
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  On 28 September 2016, South Australia experienced the first statewide blackout since the NEM began.
  
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  In the first half of 2016 after a record dry spring and extended Basslink cable fault, Hydro Tasmania had to install more than 200 MW of temporary diesel generation to help protect Tasmania’s electricity supply in the event of further contingencies.
  
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  On 3 November 2016, Australia’s most emissions intensive power station, Hazelwood, announced its closure from 31 March 2017.
  

THE NEED FOR SYSTEM INTEGRATION

These events provide a preview of the future if decisive action is not taken to manage the transition effectively. Some regions of the NEM, like South Australia, are already exposed to challenges associated with the transition. If we do not act soon the rest of the NEM will also face security issues related to declining coal generation and limited gas supply. Nothing less than a national commitment to these system integration challenges is required.

The changes to how power is generated and how Australians receive and use it cannot be reversed. If anything, change is likely to accelerate in coming years. One only need look at the number of reviews underway or recently completed into the energy system to get a sense of the range of issues confronting governments, market participants and consumers (see Appendix C). This work requires support and processes for faster implementation so that it can keep up with the rapid rate of change. These issues cannot be resolved independently of each other. A whole of system review is also required to identify where there are gaps or blind spots in the work program, such as the possible underuse of existing technological solutions that can help integrate wind and solar electricity by providing ancillary services that ordinarily would be provided by synchronous generators.

The transition needs to be managed by ensuring that new sources of supply are to all practical extents integrated into the system. Achieving low emissions goals while maintaining appropriate system security will require a more coordinated and planned approach to the adoption and integration of system-wide technology.

Addressing the ‘Energy Trilemma’

The heart of the Review’s task is to find solutions to address the so-called energy trilemma – policies that simultaneously provide a high level of energy security and reliability, universal access to affordable energy services, and reduced emissions. This is easier said than done. There is a tension between these three objectives. For example, a higher level of energy security has cost implications. A careful balancing exercise is required. At the centre of the energy trilemma triangle, and the core of the Review, are consumers and the choices they make.

It is consumers who will pay the price on how the balance is struck between security, affordability and environmental objectives. This is why a focus on good energy and emissions reduction policy governance is critical – it is governments that play a crucial role in getting the balance right between the trilemma objectives, through design of the system and implementation of policy.

The COAG Energy Council has made it clear that the security and reliability of our electricity supply is paramount. Our review of the NEM commences with security and reliability as the fundamental driving considerations. The need to reduce emissions and to keep electricity affordable for consumers, particularly those who are vulnerable, is also front of mind.

This high level problem breaks down into a number of complex regulatory and technical issues. The key question is this – how can we best achieve the required outcomes through the right mix of markets, regulation and standards? This preliminary report outlines the issues and questions for broad public consultation about the future of the NEM and how to achieve the optimum levels of security and reliability.

While the terms ‘security’ and ‘reliability’ have defined meanings in the context of energy system operations, the Review is also taking a broad view of energy security to encompass the full range of market operations, technical responses and policy settings that impact on the energy system’s ability to meet Australian consumers’ expectations. The broader investment environment, market innovations and consumer participation in energy consumption and production must also be considered.

Security and Reliability

A secure power system is one that is able to continue operating within defined technical limits, even in the event of the disconnection of a major power system element such as an interconnector or large generator.

A reliable power system is one in which there is sufficient generation and transmission capacity to meet all grid demand. The National Electricity Rules include mechanisms to ensure reliable supply. These include a reliability standard that requires that no more than 0.002 per cent (11 minutes in a year) of customer demand within a region go unmet.

Approach of This PRELIMINARY REPORT

In the time available to the Panel since our appointment we have held a series of meetings with stakeholders in the sector and market bodies. This has enabled us to make a number of preliminary observations. The structure of this report and its chapters correspond with those observations and the questions that arise from them.

We have endeavoured to write this report for readers who may not have a deep background in the NEM to help fully inform discussions and debate about these issues.

This Preliminary Report begins with a focus on innovation and the consumers in our energy system. In addition to the importance of affordability, the scale of the transition is in large part driven by rapidly evolving technological change and consumer appetite, in particular as residential consumers adopt better ways of managing their household energy needs, and contribute to emissions reduction. How the NEM adjusts to these forces will be critical to our future energy security.