Australia’s electricity market needs a whole-of-system plan to get to net zero

The ISP – a road map created by the Australian Energy Market Operator to guide development of the NEM – provides valuable information and analysis for governments to frame policy and industry to make investment decisions.

But after a succession of changes since it was created about eight years ago, the ISP’s role and even its purpose have become increasingly unclear, and its results misunderstood or misused. This must change.

The Australian Energy Market Commission is reviewing the ISP framework to ensure it remains fit for purpose. This review, to be completed by July next year, is the opportunity.

The NEM covers Australian states and territories except for WA and the NT. Historically, state governments owned and operated their own electricity systems. In the late 1980s, interstate transmission lines were built to balance the system. Since then, the value of building such transmission steadily increased even as many of the transmission businesses were privatised.

AEMO was created in 2009 and was given the role of national transmission planner. Its job was to identify opportunities for new transmission investment that would bring net benefits to consumers.

The ISP should be a central, whole-of-system plan for the NEM to get to net zero at lowest cost while remaining reliable and secure.

Following the 2016 blackout in SA, the Finkel Review identified the need for more proactive planning to guide and drive investment in the big infrastructure required to replace coal. Since then, the ISP has evolved to be a key support to the energy transition, with its defined purpose as a whole-of-system plan.

But below the headline purpose, incremental changes in the way the ISP is constrained by policies have meant that its analysis and conclusions are poorly understood and frequently misrepresented. This has led to several problems:

• Focusing solely on planning and building transmission on a “build it and they will come” basis is too limited in a world where transmission, generation and storage must be built at the same time.
• Unilateral decisions by jurisdictions about their own transmission infrastructure mean we don’t get the optimal national outcome.
• There is confusing and even misleading communication about what an optimal development path means when state governments choose high-cost routes, such as offshore wind or keeping coal.
• Gas-powered generation is emerging as a critical component in a high-renewables system, yet AEMO doesn’t yet treat electricity and gas as a single energy system.
• The process of updating the ISP every two years uses modelling and scenarios to produce a “most likely” forecast, rather than using plausible scenarios to identify the risks ahead and create appropriate contingency plans.

The ISP should be changed to ensure it is the central, whole-of-system plan for the NEM to get to net zero at the lowest cost while remaining reliable and secure. That central plan should be based on a clear set of physical, financial, and policy assumptions and constraints, so that it becomes a robust and credible optimal development pathway.

Scenario analysis should be used to assess how the ISP will perform under a range of plausible risks and the consequences if those risks manifest. Such risks include changes in technology costs, financial market developments, and major planning delays.

The ISP cannot solve for increasingly contradictory policies across the federal and state governments, most notably in climate change targets. A solution could be for the central plan to be based on a national emissions-reduction scenario, and scenarios could be assessed that include individual jurisdictional policies.

Finally, the ISP should cover the whole energy system, not just electricity, and generation and storage should be integrated into the planning process.

AEMO is not a policy-making body but can and should use the ISP to provide ministers with a better understanding of the material risks to their preferred pathway and design policy to mitigate those risks.

The current review of the ISP seems to be mostly focused on the process of updating the plan when a fundamental change is required. The risk is that we end up building the wrong infrastructure in the wrong places and at the wrong times and are not prepared for the plausible changes ahead.

Australia needs to get to net zero. A reformed Integrated System Plan can help get us there.