Australia can have a net-zero electricity system that is affordable and reliable. Yet we are on a path to a less reliable and less affordable alternative.

A change in direction is needed. Governments must take stock now and begin designing a new National Electricity Market (NEM) for when coal generation is no more.

Carbon emissions from electricity generation have been generally falling for almost 10 years as coal has been closing and renewables’ share of the system has been rising.

More recently, mild weather and better availability of ageing coal generators have contributed to acceptable reliability, and consumer prices have steadied after a couple of years of nasty increases.

Yet, more supply that is intermittent and widely distributed doesn’t only bring lower emissions, it also means the basic nature of the market is changing.

There are increasing concerns that the current market design may not deliver enough new investment in generation, transmission, and storage to deal with this changing reality.

The challenges are the emerging risks to the effectiveness of the market, how Australia should navigate the era of coal closures and prepare for what comes next.

For most of the NEM’s 25-year life, it has been an effective and low-cost way to match supply with demand every hour of every day of the year. Growing demand led to higher prices, which led to more investment, and so on.

More recently, coal closure and its replacement with solar and wind have been driven by federal and state renewable energy policies.

That was fine while the existing transmission system had capacity to accommodate the connection of new generators and to shift supply between states to meet imbalances due to weather variations.

But as these conditions fell away, coal closures continued, and some were brought forward.

Ministers and the market bodies introduced a succession of policy and rule changes to deal with threats to resource adequacy.

Policies such as the Retailer Reliability Obligation were introduced to try to bolster resource adequacy, while the state renewable policies and the more recent federal Capacity Investment Scheme are intended to drive more renewables.

State governments made commercial deals with generators as insurance to manage coal closure.

The result has been a plethora of narrow policies and changes to market rules, while the Energy Security Board (ESB), created to improve the security of the power system, failed to achieve major market reforms.

Governments have lost faith in the market being able to deliver enough electricity to the right places at the right time, consumers remain concerned about the cost of living, and investors have been spooked by the frequent and unpredictable government interventions.

We may be able to muddle through the next few years with the current messy mix of ad hoc and un-coordinated policies, but Australians will not forgive our political leaders if they mess up the post-coal era and fail to deliver the trifecta of clean, affordable, and reliable energy.

There are three priorities for planning Australia’s net-zero energy system:

  1. Design a market structure that will help ensure adequate energy resources in a high-renewables system.
  2. Signal the introduction of an enduring carbon price, explicit or implicit, for the energy sector, to guide future investments and gas plant closures.
  3. Integrate and co-ordinate so-called distributed energy resources such as wind and solar farms, rooftop solar, and batteries.

There are two alternative approaches to implementing this plan.

The plan we have described could be led by governments with a real commitment to working together for its delivery under a revised Australian Energy Market Agreement.

Industry should be engaged through the process. The market agencies should be also engaged and will have the responsibility for technical design advice and implementation. But they should not lead. This was tried before through the ESB, and it failed.

Alternatively, individual jurisdictions could decide that they cannot work together on a common market platform. They will invest in the energy infrastructure (basically generation, transmission, and storage) that meets their individual economic and political priorities.

The result would be effective renationalisation of the energy system, with higher costs and greater risks to reliability than the first choice.

Today it seems we have superficial commitment to the integrated NEM but with divergences when and wherever problems arise or political priorities change.

The benefits of the first choice are clear, but we are heading towards the second. It may be that this is an unstoppable consequence of our federal system. But surely, we can do better.

An integrated net-zero energy system depends on governments restoring faith in the market delivering enough electricity to the right places at the right time.

Tony Wood

Energy and Climate Change Program Director
Tony has been Director of the Energy Program since 2011 after 14 years working at Origin Energy in senior executive roles. From 2009 to 2014 he was also Program Director of Clean Energy Projects at the Clinton Foundation, advising governments in the Asia-Pacific region on effective deployment of large-scale, low-emission energy technologies.