Turning over a new NEM leaf

AEMO VNI West, transmission, NEM, VNI West

By Jill Cainey, General Manager Networks, Energy Networks Australia

Christmas has been and gone and minds are turning to New Year resolutions… After all the excitement of the end of year celebrations, it seems state governments are considering giving up the shared national arrangements set out in the Australian Energy Market Agreement (AEMA) and the National Electricity Market (NEM) itself and going their own ways.

In the past

Before the NEM, electricity generation, network operation and retail were entirely the responsibility of each state or local government bodies.

Each state operated its own regulatory, market and settlement processes and ensured their electricity system remained stable.

There was limited interconnection between jurisdictions, with each state operating as an island.

Eventually, the Snowy Hydro Scheme drove interconnection between New South Wales and Victoria, and with the completion of the South Australian Heywood interconnector- by 1990 south east Australia was interconnected electrically.

Shortly following this, concerns had been raised that the state-based monopoly electricity companies were inefficient and charging too much for electricity. This prompted the development of the NEM, which commenced in 1998.

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The NEM today

The AEMA was signed in 2004 and applies to all Australia’s states and territories. In particular, the objectives of the AEMA included strengthening the quality and ‘national character’ of energy market governance to improve the climate for investment.

Interconnection allows electricity to travel through the NEM, ensuring generation in one state can support another and enabling customers to have reliable and secure electricity at lowest cost.

The wholesale cost of electricity, while varying over the past 10 years, has remained largely flat at $60/ MWh. Electricity retail prices, however, have increased throughout the life of the NEM.

With the changes in generation and the lack of a federal emissions target, state governments are becoming increasingly keen to ensure they have access to reliable and secure generation on an individual state basis, while also meeting their specific climate change mitigation goals.

It also appears the Australian Energy Market Operator (AEMO) has, in spite of the Integrated System Plan (ISP), contributed to the desire to go it alone by raising concerns with each state government on the risk of regional failures, such as those caused by minimum demand.

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The NEM in the future

There have been several calls to renegotiate the AEMA, the most recent from the Chair of the Energy Security Board (ESB), suggesting in late November 2020 that now would be a good time for a review.

Outside of the AEMA, each state could “secede” from the NEM, returning to state-based system operation. Conceivably each transmission network services provider (TNSP) could take its existing control room and morph into the transmission system operator (TSO).

The market would likely need to be operated by the TSO, taking bids, scheduling, dispatching and settling generators to maintain their system’s stability.

Interconnectors would be vehicles to trade electricity with neighbouring states, buying at times of need and selling at times of surplus, but always meeting the aims of the local population and government first.

There would be no need for a national market and no need for a national market operator. Retail would remain much as it is now, and regulations would still be set nationally but be increasingly prey to state-by-state adjustment.

The future may look a lot like the past. The greater level of state control would mean governments directing investment to ensure emissions come down and the lights stay on.

But just as before the NEM when states were accused of being inefficient and charging too much for electricity, it’s hard to see how shifting generation risk onto governments, paid for by electricity customers, will deliver least cost outcomes.

As the NEM and AEMA look increasingly fragile, it’s difficult to see how the future might unfold. In this environment, we risk leaving customers and investors alike facing uncertainty, which will further hamper the delivery of the future low carbon system.

Like many good things, perhaps the NEM must come to an end. Perhaps the states need to remember that you can go your own way, but it might be another lonely day. And perhaps, like Fleetwood Mac, the NEM is destined for a nasty breakup?