What now for the NEM?

It’s a big call with big consequences.

The NEM emerged in the 1990s from a national review of competition policy. A key proposal was to restructure public sector monopoly businesses to increase competition, and to review all laws which restricted competition or gave government businesses unfair advantages.

The implementation of the review’s proposals coincided with the privatisation of the Victorian energy system by then-premier Jeff Kennett, at a time when that state’s budget needed major repair.

Privatisation across the eastern states proceeded sporadically across Australia. For example, South Australia largely followed Victoria, but Queensland and Tasmania retain ownership of most generators and of the networks.

Over its first decade, the competitive NEM generally delivered reliable power and affordable prices. But markets must be well regulated if they are to serve the public interest, and the regulatory framework must be well maintained, particularly as circumstances change.

Clear decarbonisation direction was collateral damage from Australia’s climate war. A direct consequence of the broader failure was a mix of federal and state government policies to support the growth of renewable energy. Several of these policies involved governments directly intervening in the market through power-purchase agreements.

The litany of interventions included Victoria’s Renewable Energy Target, the NSW government’s electricity infrastructure roadmap to drive investment in renewable electricity and connecting transmission, and Queensland’s Energy Plan for a government-funded expansion of renewable energy infrastructure and closure of coal-fired generation.

These policies contributed to the earlier closure of coal-fired power stations and consistently falling emissions since about 2015.

However, wind and solar generators deliver electricity with very different characteristics from that provided by coal and gas. Major concerns emerged around maintaining a reliable NEM with sufficient investment in dispatchable capacity.

This prompted Commonwealth intervention, through a push for Snowy 2.0 and a proposal to underwrite new generation investment.

Yet more government interventions exacerbated the dearth of private sector investment in the very infrastructure the governments were seeking.

The 2016 statewide blackout in South Australia led to the Finkel Review of electricity security and the establishment of the Energy Security Board (ESB).

Early signs were positive, with the Turnbull government’s proposal for a National Energy Guarantee to coordinate two core aspects of the energy market – reliability and lower emissions. This initiative did not survive the internal politics of the Coalition government.

Last week’s announcements may deliver greater certainty and they do not necessarily mean renationalisation of the electricity sector.

The ESB has spent the past four years trying to develop key reforms to deliver the transmission grid necessary to underpin the transition to a net-zero NEM, create incentives for investment in dispatchable capacity to balance wind and solar generation, and integrate distributed renewable electricity into the grid.

The task has been fundamentally compromised by consistent failure of governments and industry to agree on the definition of the problem, let alone on the solution options developed by the ESB. The succession of government interventions did not help.

The model of a NEM supported by clear, stable policy with strong and consistent regulation has broken. Something had to change, and the change came in the form of last week’s announcement that the federal, Victorian and Tasmanian governments would create a joint-venture company to build the next transmission link between Tasmania and the mainland, and the Victorian government’s proposal to revive the State Electricity Commission to directly invest in renewable energy.

Analysis by Grattan Institute has shown that a NEM with net-zero emissions is achievable while maintaining reliability and affordability. But it will not be simple to deliver against the timescale of Australia’s carbon budget, and it will not be cheap, regardless of government promises of lower power bills.

Last week’s announcements may deliver greater certainty and they do not necessarily mean renationalisation of the electricity sector, despite the surrounding rhetoric. This would not be in the long-term interest of consumers.

The best hope is for the governments to work through the National Energy Transformation Partnership to create a mixed model that works with and supports private sector investment. It will require an unprecedented level of inter-government cooperation and coordination, with definition of the respective roles for government and the private sector. The next year will have a lot to tell us about the prospects of long-term success.