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

INTRODUCTION

Australia has a once-in-a-generation opportunity to reshape our electricity system for the future. A wave of technological change is sweeping across us. The key driver – innovation – cannot be reversed. Taking advantage of these technological changes requires a culture of proactively developing new approaches, and ways of thinking to facilitate the next wave of development rather than hold it back.

The Council of Australian Governments (COAG) Energy Council (the Energy Council) must take stock of the current state of security, reliability and governance of our electricity systems to develop a strategic energy plan for coordinated national reform. Clear strategic direction and shared accountability for outcomes will ensure that our electricity sector, now and into the future, will:

Provide a secure, reliable and affordable electricity supply.

Support investor confidence.

Contribute to reducing emissions.

Be innovative and responsive to change.

Though this Review is specific to the National Electricity Market (NEM) – Queensland, New South Wales, the Australian Capital Territory, Victoria, South Australia and Tasmania – where applicable, the Western Australian and Northern Territory governments should consider adopting the Panel’s recommendations for their individual electricity systems.

Increased opportunities for the NEM

The NEM is being transformed from a 20^th century grid dominated by large-scale, fossil fuel-fired synchronous generators into a 21^st century grid. New and emerging generation, storage and demand management technologies are being connected into a system that was not designed for them. Older generators are reaching the end of their life, becoming less reliable and closing. These changes are placing pressure on the NEM, as demonstrated by the 28 September 2016 state-wide blackout in South Australia and the load shedding during the February 2017 heatwave in South Australia and New South Wales.

A range of policy and market factors are influencing the operation and development of the NEM. There is significant uncertainty about the future direction of energy and emissions reduction policies and how these will be integrated. There is also a high degree of uncertainty about when Australia’s ageing fleet of coal-fired generators will be retired, what will replace them and where they will be located.

Energy efficiency improvements are already changing the pattern of electricity consumption. Future demand will also be impacted by the possible shifts from petrol and diesel-powered vehicles to electric vehicles and from natural gas space heating to electric space heating.

This broad-based transition presents a range of opportunities and challenges for the NEM and for the institutional and regulatory framework in which it operates. At present, there is no overarching strategic plan for addressing these challenges and capturing these opportunities. This creates significant difficulties for future investment decisions. Without urgent attention to the need for better planning and policy, the benefits to Australia delivered by the creation of the NEM will deteriorate.

The nature of the future grid

It is not possible to predict exactly what the NEM will look like in the future. Based on current technology trends and investments, some of the key features are likely to include:

Declining coal-fired generation over the next three decades. Australia’s coal fleet is old and coming towards the end of its design life. Investors have signalled that they are unlikely to invest in new coal-fired generation.

Reduced emissions as ageing coal-fired generation retires and is replaced by lower emissions forms of generation.

Declining demand due to distributed generation (such as rooftop solar photovoltaic) and increased energy efficiency, countered by increasing demand for electricity in transport and space heating.

Increased investment in large, medium and small-scale variable renewable electricity (VRE) generation capacity and microgrids.¹

Increased investment in dispatchable generation and storage at grid-scale in response to high levels of VRE penetration. The backup and storage technologies deployed will include gas-fired generation, batteries and pumped hydro.

An ongoing role for networks, including between resource-rich areas (solar, wind, pumped hydro) and load centres, and between NEM regions.

Big data and the internet-of-things will drive innovation and create new business opportunities that transform residential, commercial and industrial energy use.

Governments need to take decisive action to ensure that the transition to the future grid, whatever it looks like, is smooth and that the electricity system continues to serve the interests of all consumers.

Transforming Australia’s electricity generation is not a matter of choosing just one technology over another. It is using a combination of existing and emerging technologies in a structural policy environment consistent with emissions reductions and meeting the demand for electricity while providing a stable environment for investors. A secure energy future will be reliant on these policy approaches being successfully deployed.²

Engineers Australia

The policy challenge

The Australian Government has committed, through the Paris Agreement,³ to reduce Australia’s greenhouse gas emissions by 26 to 28 per cent on 2005 levels by 2030. There is a widespread expectation, from the electricity sector and the public at-large, that Australia will meet its target. Electricity generation is a major source of emissions, accounting for around 35 per cent of Australia’s national emissions in 2016.⁴ Any effort to significantly reduce Australia’s emissions will require a reduction in emissions from the electricity sector. Investors require clarity regarding the future of Australia’s emissions reduction policy in order to bring forward the investments that will deliver a secure, reliable, affordable and low emissions electricity supply.

There is strong stakeholder support for reform to achieve these outcomes. Discussions with stakeholders and submissions to the Panel reveal a desire to see the NEM deliver for all Australians. The submissions from large and small companies, representative organisations and individuals to this Review evidence the widespread interest in this subject. They are united by a common sense that we can and must do better in energy policy. Groups representing generators, networks, consumers, business and industry, unions, social services and environmental groups, issued a joint statement calling for:⁵

Reform of Australia’s energy systems and markets to ensure reliability and affordability as we decarbonise the energy system.

The status quo of policy uncertainty, lack of coordination and unreformed markets is increasing costs, undermining investment and worsening reliability risks.

Delivering a secure and reliable electricity supply is the highest priority. Low emissions and affordable supply must be delivered through a power system that is secure and reliable. While delivering 100 per cent reliability would be prohibitively expensive, it is also clear that there is no public appetite for a reduction in delivered levels of reliability. The level of reliability in the system needs to closely align with the willingness of consumers to pay for it.

The guiding objective for the work of the Review, and in turn the NEM, is to ensure a secure and reliable electricity supply that meets our emissions reduction targets at the lowest cost.