Electricity market reform needs a coordinated approach

The electricity landscape in Australia is changing rapidly, as generation from renewable energy sources continues to grow and consumers become more active participants in the market. In response, there has been a growing increase in the number of proposed market reforms to deal with a myriad of issues, including system security, reliability, transparency, flexibility, and most notably, price. Currently, there are around 40 changes to the National Electricity Rules proposed by various parties all either pending evaluation, under evaluation, or awaiting implementation.

Previously, market arrangements were dealt with solely by the Australian Electricity Market Commission (AEMC). However, this responsibility has become increasingly shared amongst other parties, including the Energy Security Board (ESB), AEMO, AER and state and federal governments.

This sharing of responsibility is creating a growing challenge in coordinating simultaneous changes and ensuring that they work together harmoniously. With the rapid speed of change, there is a risk reforms are not being considered holistically and consistently between different parties, leading to over-corrections which can have large unintended impacts on other parts of the market.

A recent report by KPMG for the Australian Energy Council designed an assessment framework to analyse how well various reforms in the market work together and interact with each other. The framework is aimed at regulatory bodies, governments or stakeholders, and can be used to assess the alignment and congruency of policy decisions. This framework cannot answer all questions, but provides a starting point to guide policy reform.

Through this process, KPMG has identified some key lessons for regulatory bodies and governments to ensure electricity market reforms remain congruent and work well together in the future:

  1. There should be a great deal of caution taken when trying to solve a problem which may be already addressed by another reform underway. Otherwise, there is a risk introducing redundant or conflicting reforms into the market.
  2. Every component of the electricity market, from contracting to network operation, is intrinsically linked, and it is inadequate to only consider the first-order impacts of a given reform. Holistic analysis using tools such as this framework will help to identify the full costs and benefits.
  3. Factors such as government generation initiatives, gas policy, changes to the transmission grid, and retail markets all have a large impact on the electricity market. As a result, all parties need to be aware of the effect policy changes have on the electricity market and consider the flow-on consequences.
  4. There need to be clear lines of accountability and responsibility for making significant changes to the electricity market. Multiple parties evaluating the same issue from different perspectives and forming different conclusions creates uncertainty for industry.

It is more important than ever to ensure that energy policy changes are made with consumers at front of mind. Any inconsistency or under-appreciation in how the regulatory bodies and governments introduce policies and reforms will ultimately lead to extra costs and risks for industry and customers.

A jointly issued annual statement by energy market institutions on how current reforms work together would help to provide confidence to the market in the direction the electricity market is taking as well as the overall costs to consumers and industry as a result of these changes.

KPMG’s framework and our assessment of the current electricity market are set out in our report, Coordinating electricity market reform, published on the Australian Energy Council’s website.

Additional Report Author: Eamonn Corrigan, Head of Utility Policy & Regulation

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