National Electricity Market ‘not in the best of health’: Energy Security Board

Author: Australian Financial Review Date Posted:27 December 2017

The nation's top energy body has called on federal, state and territory governments to push through the National Energy Guarantee to fix the National Electricity Market, saying high electricity prices for business and households were unsustainable.

In its first report on the health of the NEM, the Energy Security Board, created after the landmark Finkel Review, said the decade of inaction on climate policy to bring down Australia's carbon emissions had to end, saying politicians had to deliver the NEG early next year.

"The policy uncertainty of the last decade has not only delivered insufficient electricity sector emissions reductions, but it has also increased costs in the industry," the new report released on Wednesday said.

"This has led to less than optimal outcomes. A workable policy mechanism is an urgent matter for both delivering on emissions reduction targets and for wider industry concerns relating to affordability and reliability. The health of emissions reduction policy mechanisms in the NEM must at present be rated as critical."

The report by the ESB - chaired by respected businesswoman Kerry Schott - also took aim the key energy bodies running the NEM saying current governance of the energy network was playing "catch-up".

The report also found a doubling or tripling of electricity prices over the past two years was a major anchor on economic activity.

It follows a report released by the Turnbull government this week which showed Australia's greenhouse gas emissions have increased 5 per cent in the past two years, leaving a huge task for the proposed National Energy Guarantee to meet Paris climate commitments.

National greenhouse emissions were 554 million tonnes of carbon dioxide this year, up from 527 million tonnes in 2015, the last year for which the government reported.

The ESB - which also has the key energy market regulators including Australian Energy Market Operator chief executive Audrey Zibelman, Australian Energy Market Commission chairman John Pierce and Australian Energy Regulator chairwoman Paula Conboy on its board - has been tasked with overseeing the reform of the energy market following the Finkel Review.

The NEG was put forward by the Turnbull government after it baulked at the Clean Energy Target proposed by the Finkel Review.

The ESB report paints a grim outlook for the NEM saying it was "not in the best of health".

"The immediate symptoms are a power system where reliability risks are increasing, electricity bills are not affordable, and future carbon emissions policy is uncertain," it warned.

It said the NEG, which will be discussed at the Council of Australian Governments energy council meeting in April, could help get the energy market off life support.

"If this policy is adopted during 2018 it will integrate an emissions reduction mechanism with the NEM and provide incentives for investment to underpin reliability," the ESB said.

"It should also improve liquidity in the wholesale contract market which will place downward pressure on prices."

The ESB report noted the exit of 5200 megawatts of coal-fired generation from the NEM over the last decade, saying only 2000 megawatts of generation capacity had been added over the past five years - 80 per cent had been wind generation and 12 per cent under solar under the federal government's Renewable Energy Target.

The energy body said there had been insufficient market signals to ensure investment in new dispatchable power, with added pressure of boosting reliability in the system following the introduction of non-synchronous generation such as wind and solar.

It said there had been an unprecedented increase in the number of "lack of reserve notices" issued by AEMO in 2016-17, mostly due to the tight supply-demand balance in South Australia.

The ESB report noted it did not expect to be needed to be in operation longer than its initial three-year term, provided there was cooperation across the sector to deliver reforms to overhaul the NEM.

It said all three major energy bodies - AEMO (which runs the electricity and gas markets), AEMC (which sets the rules) and AER (which enforces the rules) - needed to evolve to adapt to the rapidly changing NEM.

"Given the difficulties facing the NEM there is a clear need to improve governance," it said.

"Between the COAG energy council, the market bodies, and now the ESB, the current governance arrangements are in catch-up mode."

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