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

Independent Review into the
Future Security of the
National Electricity Market

Preliminary Report

December 2016

Dr Alan Finkel AO, Chief Scientist, Chair of the Expert Panel

Ms Karen Moses FAICD | Ms Chloe Munro | Mr Terry Effeney | Professor Mary O’Kane AC

The views and opinions expressed in this publication are those of the authors and do not necessarily reflect those of the Australian Government or the Minister for the Environment and Energy.

While reasonable efforts have been made to ensure that the contents of this publication are factually correct, the Commonwealth does not accept responsibility for the accuracy or completeness of the contents, and shall not be liable for any loss or damage that may be occasioned directly or indirectly through the use of, or reliance on, the contents of this publication.

© Copyright Commonwealth of Australia, 2016.

The Preliminary Report of the Independent Review into the Future Security of the National Electricity Market is licensed by the Commonwealth of Australia for use under a Creative Commons Attribution 4.0 International licence with the exception of the Coat of Arms of the Commonwealth of Australia, the logo of the agency responsible for publishing the report, content supplied by third parties, and any images depicting people. For licence conditions see: https://creativecommons.org/licenses/by/4.0/

This report should be attributed as ‘Preliminary Report of the Independent Review into the Future Security of the National Electricity Market, Commonwealth of Australia 2016’.

The Commonwealth of Australia has made all reasonable efforts to identify content supplied by third parties using the following format

‘© Copyright, [name of third party] ’.

An Independent Review into the Future Security of the National Electricity Market was agreed by the Council of Australian Governments (COAG) Energy Council on 7 October 2016. It is published by the Department of the Environment and Energy.

Contents

Independent Review into the
Future Security of the
National Electricity Market 1

Preliminary Report 1

December 2016 1

Contents 3

Executive Summary 4

Consultation Process 8

Publication of submissions 8

Contacts 9

Introduction 10

A Market Designed In Different Times 11

Recent events highlight the need for action 13

THE NEED FOR SYSTEM INTEGRATION 14

Addressing the ‘Energy Trilemma’ 14

Approach of This PRELIMINARY REPORT 15

Chapter 1: Technology is Transforming the Electricity Sector 17

Low emissions electricity generation 17

Distributed energy resources 18

Responding to change 20

Consultation questions 21

Chapter 2: Consumers are Driving Change 23

Energy productivity and more flexible demand 24

Getting incentives right 25

Affordability and impacts on vulnerable consumers 26

Consultation questions 26

Chapter 3: The Transition to a Low Emissions Economy is Underway 28

The Role of the electricity sector in meeting our emissions reduction targets 28

The importance of predictability and policy stability 32

The importance of integrating energy and Emissions Reduction policies 34

Consultation questions 36

Chapter 4: Integration of Variable Renewable Electricity 37

Decline of traditional generation creates technical challenges 38

Interconnection: getting the balance right 40

Gas has a critical role to play 40

Distributed energy resources 41

Emerging challenges 41

There are technical solutions, which must be expedited 43

Generator connection standards 44

Work underway 44

Case Study: South Australian Blackout 46

A summary of the black system event 47

Consultation questions 49

Chapter 5: Market Design to Support Security and Reliability 50

Wholesale market design 51

Ensuring Reliability Of supply 54

Electricity financial markets 55

Security of supply and the value of ancillary services 56

Capacity markets 57

Table 5.1: Comparison of Energy Market Designs 57

Consultation questions 58

Chapter 6: Prices Have Risen Substantially 60

Wholesale electricity costs and their growing dependence on gas prices 61

Network charges 63

Economic regulation of networks 63

Reliability standards 64

Peak demand and cost reflective pricing 65

Retail 66

Transparency 66

Competition and new technology 67

Consultation Questions 67

Chapter 7: Energy Market Governance is Critical 69

Whole-of-System Perspectives 69

COAG Energy Council 71

Achieving a National Approach 72

Consultation Questions 74

Appendix A: International Energy Agency Country Comparisons 75

Improved system and market operations 78

Ensuring resource adequacy: network investments and capacity mechanisms 79

Coordination of multiple jurisdictions 81

Tapping the potential of new distributed resources: micro generation, demand response, storage, behind the meter 82

Conclusion 83

Appendix B: Terms of Reference 84

BLUEPRINT FOR ENERGY SECURITY IN THE NATIONAL ELECTRICITY MARKET 84

INDEPENDENT REVIEW 84

Appendix C: Current and Recent Reviews and Reforms 86

Open or pending rule changes 89

Appendix D: Estimated Operating Emissions for New Power Stations 90

This Independent Review into the Future Security of the National Electricity Market Preliminary Report identifies the complex forces driving a rapid transition across the electricity sector. It seeks input on key questions to navigate the transition in line with consumer expectations for a secure and reliable service, at an affordable price, that delivers on our national emissions reduction commitments.