The policy landscape for electricity market reform is complex, with many different proposals spread across state governments, the federal government and energy market institutions. Currently there are a total of 46 policies or initiatives being considered, with 16 focused on reliability, 8 on security, 16 on emissions reduction and 6 on affordability.
Policy design and reform for the wholesale electricity market needs to support a sustainable energy future and incorporate mechanisms to improve reliability and security for the market. A recent report by KPMG for the Australian Energy Council advised on the principles for successful market design and investigated policy options to sustain Australia’s future energy needs.
Our report sets out the key characteristics of an effective market design. The principles developed allow for a robust assessment of market design changes currently under consideration, such as the National Energy Guarantee, markets where trading and pricing are settled a day ahead of delivery, and strategic reserve.
As the electricity system incorporates new technologies with different physical and technical properties, the market design needs to evolve to deliver the investment required as well as affordable prices for customers. In addition the Australian Government is progressing legislation to implement an emissions reduction policy to deliver its international commitments and the electricity sector will have a key role in meeting those commitments.
It is expected that around $23 billion of capital expenditure in generation resources alone over the period to 2030 is needed in the east coast National Electricity Market. Investors require confidence in the electricity market regulatory framework to underpin their decisions. Without this, higher returns will be required or the capital will not be readily available to invest to support the transition to reduced emissions.
Importantly, the principles identified should endure through time and guide market development as the electricity sector evolves.
Principles are one aspect to a market design process – how the principles are applied is equally important. Fundamental electricity market reform requires an integrated and well-structured policy development process, which includes:
- Defining the problem, materiality and whether it’s likely to persist;
- Exploring potential solutions;
- Undertaking an assessment and identifying a preferred approach; and
- Confirming whether the preferred approach would solve the problem and meet the National Electricity Objective.
Electricity is a vital input to the Australian economy. Electricity market design can have a material impact on the cost of the electricity sector given they are the ‘goal-posts’ within which market participants make investment and operational decisions.
We’ve found that the National Energy Guarantee, if designed appropriately, can provide an effective pathway for industry transformation. However other policies focusing on system resilience and affordability are required if it is to be truly successful.
All key stakeholders need to work together to provide a coherent and consistent market reform pathway so that costs for consumers are minimised, and public trust and investor confidence in the sector is restored.
KPMG’s recommended market design principles are set out in our report, published on the Australian Energy Council’s website.