Independent Review into the Future Security of the National Electricity Market Blueprint for the Future, Jun 2017

7.1 Clear strategic direction and shared accountability

Best practice governance is required to facilitate well-functioning energy markets and public confidence in the NEM. Strong governance arrangements provide clarity about strategic direction, roles and responsibilities and accountability for outcomes. They also ensure that the right institutions are doing the right work.

The current NEM governance arrangements have a number of strengths. The framework manages to balance complex federal responsibilities with strong market institutions. It has delivered sound and predictable outcomes. Despite this, as with the NEM itself, reform is needed to make our governance more resilient, better coordinated and reflective of the pace of change in energy markets. Stakeholders identified governance as one of their most common concerns during the Panel’s consultation process.

Australia’s energy market bodies have a leading role to play in helping steer the NEM through the energy transition. They can be better supported in this role by clear strategic direction from governments on the integration of energy and emissions reduction policy. Stakeholders have expressed concern about the absence of policy leadership from the COAG Energy Council (the Energy Council). Implementation of the orderly transition plan outlined in this report is important in this regard. Governments can further strengthen these arrangements by recommitting to the principles that underpin the NEM.

A new Energy Security Board (ESB) should drive implementation of this report, as agreed by governments. This will enable the Energy Council – the NEM’s peak governance body – to focus on matters of national strategic importance. The ESB will draw on the expertise of market bodies and coordinate how they exercise their separate accountabilities to keep pace with the rate of change.

Present arrangements complicate the question of accountability for system outcomes in the NEM, largely because of our federal arrangements and allocation of regulatory and operational responsibilities. When high-profile events occur in the NEM and amid the intense debates that follow, it is difficult for the community to understand who is responsible and accountable.

While not a conventional board in every sense, the ESB would bring the energy market bodies and regulators together to take a whole-of-system view. It will help them speak to governments with one voice and governments speak to them collectively about the NEM. It integrates interlocking responsibilities for overall national energy security. Finally, in implementing the blueprint, it will facilitate better planning, coordination, and action between governments, the Energy Council, and market bodies and regulators. It will lead to clearer reporting and accountability on whole-of-system outcomes. Governments, industry and consumers will all benefit from better and more transparent data about system performance, investment and resource opportunities.

The essential elements of good governance

The term ‘energy governance’ applies to both the energy system as a whole and its overarching policy and legal framework, as well as the individual institutions within it and how they function. The necessary elements of better regulatory outcomes are described in Figure 7.1.

Figure 7.1: Elements of good governance³⁴²

Appropriate institutional frameworks and related governance arrangements are an important focus of this Review. In this context, principles of good governance that the Panel considers relevant for the NEM include:

clarity of purpose and functions

accountability and transparency

well-designed rules

maintaining trust and independence

appropriately skilled board and staff

effective information management.³⁴³

Given these principles, the Review has identified that the following issues require particular attention:

coordination between the market bodies, and between market bodies and the Energy Council

clarity about accountabilities for energy system outcomes

timing of the rule change process.

Current NEM governance arrangements

Energy market governance occurs within the context of Australia’s federal system of government. Currently, states and territories have primary responsibility for energy policy. The Commonwealth has primary responsibility for emissions reduction policy (based on its constitutional responsibility for external affairs, including meeting Australia’s obligations under international agreements such as the United Nations Framework Convention on Climate Change).³⁴⁴

The Australian Energy Market Agreement (AEMA) was created to provide a framework for cooperation between the Commonwealth, State and Territory Governments. Through the AEMA, governments agreed to implement a national legislative framework for the energy market. This national legislative framework is contained in the National Electricity Law (NEL) and the National Electricity Rules (the Rules).

The Energy Council sits at the peak of energy system governance. The AEMA provides that the Energy Council is “the national policy and governance body for the Australian energy market including for electricity and gas”.³⁴⁵ The responsibilities of the Energy Council include policy oversight of, and future strategic direction for, the NEM, but do not extend to direct engagement in the day-to-day operation of the NEM.³⁴⁶ The Energy Council is supported by a Senior Committee of Officials comprised of representatives from portfolio agencies in each jurisdiction.

Responsibilities for rule-making, market operation and market regulation functions are divided between three energy market bodies – the AEMC, AEMO, and the AER respectively. Each body is constituted and funded differently, and subject to different legislative arrangements. The independence of market bodies from governments is intended to provide confidence that the market will not be subject to political interference. There is also an efficiency dimension. Appointing the AEMC as the independent rule maker prevents the delays and costs that would occur if every state and territory was required to deliberate on and implement rule changes. These arrangements are illustrated in Figure 7.2. They are explained in more detail in Box 7.1.

Figure 7.2: NEM governance framework

Several other agencies have been established with functions that affect the NEM. These include:

The Clean Energy Regulator, which is responsible for administering the Renewable Energy Target and other national schemes to measure and manage greenhouse gas emissions.

The Australian Renewable Energy Agency, which funds innovation and shares knowledge to accelerate the shift to renewable energy.

The Clean Energy Finance Corporation, which provides finance for clean energy projects.

Separately, Energy Consumers Australia has been established by government as an organisation to help understand and represent the interests of all consumers to government. The institutions involved in NEM governance need to be able to respond and adapt in a timely way to rapid changes in energy markets in order to ensure a secure and reliable supply of electricity. For this to occur there needs to be coordination between all elements of the governance arrangements and shared accountability for system outcomes. It is for this reason the Panel considered the need for a coordination mechanism through the ESB. The ESB will need to maintain a working relationship with all of these agencies to ensure it has a full picture of any emerging issues.

Box 7.1 – NEM Governance

The Australian Energy Market Commission (AEMC) is responsible for rule-making and energy market development at a national level. If requested, the AEMC may make rules in relation to the operation of the NEM and national electricity system. The AEMC may conduct a review at the request of the Energy Council or by self-initiation. A review may be conducted in such manner as the AEMC considers appropriate. The AEMC cannot be directed in the performance of its functions and the rules it makes cannot be disallowed by parliament. The Energy Council may issue a Statement of Policy principles to guide the AEMC’s rule-making power; though this power has only been used once. AEMC commissioners are appointed by the South Australian Governor in accordance with a resolution of the Energy Council.³⁴⁷

The Reliability Panel is part of the AEMC’s institutional arrangements to monitor, review and report on the safety, security and reliability of the NEM. Its responsibilities are set out in the NEL and its work program is prescribed by the Rules. It may request rule changes relating to its functions. The Panel has an ongoing obligation to review market parameters regarding power system security and reliability and also provides advice at the request of the AEMC. It determines standards and guidelines which are part of the framework for maintaining a secure and reliable power system, such as connection and performance standards.

The Australian Energy Regulator (AER) is responsible for regulation and compliance at a national level, including in respect of the NEL and the Rules. The AER operates under the Competition and Consumer Act 2010 (Cth). The AER has an independent board made up of one Commonwealth member and two state or territory members. It shares staff, resources and facilities with the Australian Competition and Consumer Commission and is funded by the Commonwealth.

The Australian Energy Market Operator (AEMO) is responsible for the day-to-day operation

and administration of both the power system and electricity wholesale spot market in the NEM. AEMO's electricity functions are set out in the NEL. It is incorporated as a company limited by guarantee under the Corporations Act 2001 (Cth). It recovers operating costs through fees paid by market participants. Members are made up of Australian governments (60 per cent) and industry participants (40 per cent). The AEMO board is appointed by the Energy Council based on a Board Selection Panel Report that has been approved by members.

The National Electricity Law (NEL) is contained as a schedule to the National Electricity (South Australia) Act 1996 and applied in other jurisdictions through legislation agreeing that the NEL and the Rules operate in that jurisdiction. Any changes to the NEL must be agreed by all jurisdictions through the Energy Council and are then subject to the South Australian legislative process. This kind of cooperative federal scheme operates in other fields of regulation such as competition law. States have ultimate responsibility for a matter but they delegate it to a lead legislator to ensure national consistency. The NEL establishes a National Electricity Objective (NEO), which guides the market bodies in executing their respective responsibilities.

Any person – apart from the AEMC – can propose a change to the National Electricity Rules. But the AEMC has the power to make a preferable rule, different to the one initially proposed, if it will (or is likely to) better contribute to the achievement of the NEO.³⁴⁸

Previous reviews of NEM governance arrangements

NEM governance arrangements have been reviewed on several occasions. The findings of the Productivity Commission’s 2013 review of electricity network regulation and the 2015 Review of Governance Arrangements for Australian Energy Markets (the “Vertigan Review”) are of most significance to this Review.

The Productivity Commission observed that:

Reform appears to have been frustrated by complex processes, constant and overlapping reviews, and a lack of agreement by relevant governments about either the reforms themselves or the need for more timely progress to a genuinely NEM-wide approach to energy regulation. ³⁴⁹

It described the situation as sometimes descending into “paralysis by analysis” ³⁵⁰ and urged the Energy Council to change its processes to accelerate reform.

The Vertigan Review found that the structure and division of market responsibilities in the NEM was “fundamentally sound” and that “Australian energy market governance is amongst best practice internationally.”³⁵¹ Nevertheless, it made a range of recommendations to improve NEM governance. A number of these have not yet been implemented, including:

the appointment of additional AEMC and AER commissioners

expedited rule change processes

a comprehensive review of the Rules

structural separation of AER from the ACCC

a new Statement of Role for AEMO.

Recent events have highlighted that in addition to implementing these recommendations, action is required to further strengthen NEM governance.