Australia needs a better energy system plan
by Tony Wood
The Australian energy system is in an era of unprecedented change. The electricity and gas systems, more than 100 and 200 years old respectively, are being completely reinvented with the imperative to address climate change. The global evidence of climate change makes it starkly clear that this objective is not negotiable. Yet Australia is struggling to manage the change without a clear plan.
The Integrated System Plan (ISP) was introduced in 2018 as a whole-of-system blueprint by the Australian Energy Market Operator (AEMO) for the National Electricity Market (NEM). It followed the 2017 Finkel Review that had been initiated to review the security, reliability, and affordability of the NEM after the statewide blackout in South Australia the previous year.
The ISP outlines an optimal development pathway for the development of network, generation, and storage investments in the NEM to meet consumer needs and government policies at least cost to 2050. A central output of the optimal development pathway is the identification of highest priority transmission infrastructure projects that will deliver net market benefits. Once such a project is identified, the relevant transmission company is obliged to initiate a formal regulatory investment test prior to regulatory approval to proceed.
The ISP sits, sometimes uncomfortably, at the interface between regulated monopoly network infrastructure and unregulated generation and storage investments. If the transmission infrastructure is then built, investment in generation and storage is expected to follow, driven by market supply and demand and other policies and regulations that underpin the operation of the NEM.
Since 2018, AEMO has been undertaking biennial updates of the ISP. In addition, the Australian Energy Market Commission is conducting a second comprehensive review of the ISP framework to evaluate and update the plan to ensure it remains fit for its purpose. That review is to be completed by 1 July 2027.
Despite these reviews, the ISP has recently been criticised on several bases:
- It falls short of being a plan to be implemented.
- The requirement that all government policies and commitments be included in the plan leaves it open to accusations of political bias.
- While the plan identifies infrastructure projects that should be built, there is no process that drives that result, allocates responsibility for costs, and coordinates regulated and unregulated investments.
The result is that the purpose of the ISP has become increasingly unclear and its results misunderstood or misused. The current review is the perfect opportunity to address these fundamental strategic issues.
Concurrent with this review, the ministers of the Energy and Climate Change Ministerial Council commissioned a review to update and strengthen the governance of AEMO as its role has been expanding during the national energy transition. In August, Nigel Ray delivered his report from that review, recommending significant governance changes, including making AEMO more directly accountable and responsible to the ministers in it planning role. The results of these reviews are shaping up to be complementary and should be considered and implemented as a package.
The ISP should be the central, whole-of-system plan for the east-coast energy system to get to net-zero emissions at lowest cost while remaining reliable and secure.
The ISP should be ‘owned’ by the ministers of the Energy and Climate Change Ministerial Council, and it should be reformed in the following ways:
- Energy ministers should decide on a set of high-level assumptions and policy constraints that feed into the full set of assumptions on which AEMO bases its modelling. The ISP cannot solve for increasingly disparate approaches to policies and their implementation across the federal and state governments, most notably in setting and delivering emissions-reduction targets. The ministers should reconcile jurisdictional differences to ensure AEMO can discharge its role in facilitating the implementation of government policy. The challenge in achieving this outcome should not be underestimated.
- The scope of the ISP should be extended to cover distribution assets and the whole energy system, both electricity and gas. While investment in unregulated assets should rest with market participants, gas generation and storage should be integrated into AEMO’s analysis.
- Scenario analysis should be used to assess how the ISP will perform under a range of plausible risks, and how the consequences should be managed if those risks manifest. Such risks include changes in technology costs, financial market developments, and major delivery delays.
- Where requested by ministers, individual jurisdictional policies or derogations should be modelled as sensitivities against the base case for their impact on reliability, costs, and emissions.
- To improve delivery against the ISP, the ministers should be responsible for decisions on projects identified as actionable in the optimal development pathway, and delivery performance for connection of new generation and storage should be publicly reported.
This is an urgent and non-trivial task. The result should be an Integrated System Plan that supports policy makers and the industry in delivering a secure, reliable, and affordable energy system with low emissions and at lowest cost.