The End of the National Electricity Market?

Victoria’s move to break away from some aspects of the Australia’s National Electricity Rules revises the age-old debate around subsidiarity. Are decisions about our energy system best made locally or centrally?

The principle of subsidiarity holds that decisions are best made (a) where responsibility for outcomes will occur; and (b) in the closest appropriate proximity to where the actions will be taken that will produce the outcomes[1]. It’s a principle that underpins the Australian constitution, which generally gives States powers for local issues and grants control over national issues, such as defence, to the Commonwealth.

The move to centralised energy policy making

Over the years though we’ve seen the “rolling up” of powers to the federal level. Centralisation of energy policy began with the formation of the NEM in 1997 and culminated in 2005’s signing of the Australian Energy Markets Agreement. Now, decisions are made, implemented and enforced at a national level by the Australian Energy Regulators, the Australian Energy Market Operator and the Australian Energy Markets Commission. Together these three entities are tasked with deftly managing the emergence of climate change policy, renewables, batteries, transition from coal to diversified generation – and with overcoming the greatest regulatory, technical, legal and commercial challenges that the industry has ever seen. Too good to be true?

Victoria’s government seems to think so, introducing a Bill that, if passed in March, would allow the State’s Energy Minister to modify or disapply sections of the National Electricity Law and the National Electricity Rules. Of particular interest is changes that will allow the Minister to bypass the regulatory investment test for transmission (RIT-T), and the competitive tender process around contestable augmentation. The changes will also apply to non-network services.

If passed, the Bill grants the Minister powers that are currently held by a mixture of the AEMC, AEMO and the AER, and crucially, allows the Minister to have regard to local issues in Victoria rather than the national interest in making a decision. This is the most significant threat to the continuation of the national energy regime we have seen since the NEM was formed.

Respecting the right of dissension

The Victorian Bill is hardly unique in its dissension. It makes the simple point that in the matter of some new networks, the principle of subsidiarity should apply. Victorians are unconvinced that the current energy regime is fit for purpose. It serves us all to understand why.  

In my mind, there is no doubt that the current centrally administered regime is the best way of navigating the energy transition. But the lack of coordinated energy policy over the last ten years, and the absence of any clear and articulated blueprint from the Energy Supply Board (ESB) means that one could be forgiven for asking the question. 

Those of us in industry have a clear idea of the energy future. Within generation, we know when coal plants are scheduled to close, and which will likely extend their lives and for how long. We know that capacity and inertia will become valued by the late 2020s and that renewables will be cheaper than both existing and new coal by 2030. We know that batteries work, and that markets will be required to facilitate them and enable their input to be priced and valued. 

At the transmission level, we know we need new ways of planning, funding and coordinating the connection of many small renewable plants in a way that maintains system security. 

At the distribution level, we know the system will become bi-directional, that almost all homes will have a virtual power plant by 2030 and that by 2040, the penetration of new electric vehicles (EVs) will overtake that of new combustion vehicles. 

The energy sector needs a light on the hill

Knowing this isn’t enough – we must see the benefit of the centralist institutions that are empowered to enable it. As an industry and a country, we need a public light on the hill which makes clear, not only is expected, but what will enable the interconnected, carbon-neutral, and data-driven future of tomorrow. Victoria’s concerns around the ability of the national regime to deal with transmission will only increase when more difficult questions provoked by distribution load flows and EVs move onto the agenda. Australia’s states need confidence that the national regime can, and will, provide the answers to the toughest questions of the transition. 

We face policy challenges over the next decade which are increasingly complex. I believe that a shift away from a centrally administered regime would truly disable the way in which we solve this to enable our collective future. The next 10 years will be a game of technological and regulatory snakes and ladders, as utilities try to predict the outcomes of global trends which impact on the scenarios they need to plan for, and regulators and policy makers know they need to resist the urge to act before they need to, and act appropriately when they do. 

The way forward is for the national regime to show the benefits of its structure. The ESB must now release a comprehensive, forward-looking blueprint of the energy market, which has the support of the AEMO, AER and AEMC and acknowledges the realities and the difficulties in front of us. This blueprint must act as a dominant force on rule change decisions and consultations. It must link to networks companies’ decisions around IT investments. It must stimulate Governments, collectively, if they are to intervene on industry policy, to direct activity towards those technologies that enable this view of the future. Most importantly, it must show that it understands the concerns being raised by Victoria and makes clear that moving away from subsidiarity remains the best option given the energy transition. 

Above all, this blueprint for the future must be supported by Governments who acknowledge that, without this collective agreement, we run not only the risk of squandering the opportunities before us, but of creating a market and a system that simply doesn’t work for all. The NEM is only as strong as the State that doesn’t believe in it – and doesn’t believe its concerns are being heard. Now is a time for listening.

 What do you think? Leave your comments below.

[1] https://www.sciencedirect.com/topics/social-sciences/principle-of-subsidiarity