Australian Energy Market Commission MAKING MARKET TRANSFORMATION WORK OVERVIEW 2016-2017 Australian Energy Market Commission MAKING MARKET TRANSFORMATION WORK OVERVIEW 2016-2017

Building a better energy system The changing mix in generation sources means we have to manage the power system differently and evolve the market. There is no silver bullet. There are many options we could take. But we need to understand how different solutions would interact with the rest of the system, affecting JOHN PIERCE CHAIRMAN prices, reliability and security. Decisions made today will affect national economic development for decades to come. The AEMC is changing the energy market design so it can deliver more reliable, secure capacity and help keep bills affordable.

Transformation of the energy sector is being driven of what’s needed to fill capacity gaps, and encourage by consumer choices made possible by smarter the hedging contract market to underpin necessary technologies, micro generation, rooftop solar, storage, investment. and the move to large-scale renewables. Emerging We are working with the COAG Energy Council, consumer benefits from this energy revolution are very the Energy Security Board, the Australian Energy real – but at risk – because of cost pressures coming Market Operator and the Australian Energy Regulator from the wholesale generation sector. on implementing recommendations made by the Older -fired generators are retiring and more Independent Review into the Future Security of the large-scale renewable generators have connected. National Electricity Market. We have an extensive work This changing generation mix impacts the price and program underway which is consistent with the Finkel availability of electricity. While investments under the blueprint. Target have increased the level of Our work program is focused on four key areas: to installed megawatts, there are times when the overall promote system security and reliability, provide analysis mix cannot deliver enough hours of electricity, or enough on integrating government emissions reduction and security services, at the right time to meet consumer , reform market arrangements so gas can demand. Meeting consumer demand with a new mix be bought and sold more efficiently, and develop the of technologies requires price signals to guide private new competitive energy services market with demand sector investment. In the national electricity market, these management opportunities to expand consumer choices price signals come from the spot price and the forward and help manage energy bills. contract price. These signals, if allowed to function, ANNE PEARSON will deliver commercial investment in a combination of We are working more closely with stakeholders and CHIEF EXECUTIVE technologies that can deliver secure, reliable and low other market bodies to evolve the Commission’s way of emissions power to consumers at the lowest price. working in more timely ways. Over the past year we have operated differently to increase collaboration, combining In these circumstances it’s critical that there are work on related reviews and rules, and involving more emissions reduction mechanisms in place that allow price stakeholder working groups to help inform our thinking. signals to work within the national electricity market. This means putting all technologies on a level playing field and letting prices do two things – inform investors Above all we want a secure and reliable A range of options are available to provide KEEPING THE energy system that keeps prices as low as the additional services required to strengthen possible for consumers. The way electricity the system. The AEMC is establishing new supply and demand interacts is changing approaches to keeping frequency within the LIGHTS ON because the technical features of new secure band – to enable more inertia services, generation technologies like wind and solar smarter emergency control schemes and are different. The Commission is working new standards for minimum network system with AEMO and the AER to build a stronger strength. power system. Synchronous generators like Our security and reliability work is developing coal, , gas and hydro operate with new frameworks to keep the power system large spinning turbines that maintain constant as strong as possible as it transforms. frequency and voltage, keeping the system Many technical options are emerging in stable. They inherently produce inertia, the today’s electricity sector and we want to energy momentum that lets the system ride encourage further innovation – rewarding through sudden disturbances. Currently, the most efficient technologies over time. non-synchronous generators like wind or Energy markets are not static and there will solar have no or low inertia. Power systems be different challenges in different places with lots of non-synchronous generation are tomorrow. The changes that need to be weak. They have less time to recover from made centre on the physics of , sudden equipment failures before frequency transmission and meeting consumer demand. Changing the collapses and widespread blackouts happen. energy market design An effective emissions reduction policy that flexible enough to adapt to whatever supply supports contract market liquidity is vital for a and demand conditions the future might bring; vibrant, innovative retail energy sector which designed to be sustainable so investors in all can deliver benefits to consumers. kinds of generation are confident that policy objectives can be met. Energy and emissions reduction policies have different objectives and need to be developed The contract market is the direct link between so efficiency trade-offs and costs are well matching the financial incentives for generation understood. Environmental policies that are assets investment with the physical needs of appropriately designed and integrated can the system. Any mechanism for emissions achieve their objectives while minimising costs reduction must enhance the role of the faced by consumers in energy markets. contract market to maintain reliability and security in the power system. A well-integrated emissions reduction policy is: technology neutral to allow for the greatest number of technology options in the market INTEGRATING to increase competition between generation EMISSIONS POLICY sources and minimise costs; Gas market challenges make it more important help lower transaction costs, improve market BUILDING BETTER than ever for the COAG Energy Council to transparency and support greater competition in achieve its vision of a liquid wholesale gas the Victorian market. We have recommended a market, with an efficient and transparent staged approach to reforming the Victorian gas GAS MARKETS reference price for gas. In 2016 the energy market. The first stage announced in July will go ministers agreed to our proposals that will a long way to achieving a more liquid gas market concentrate wholesale gas trading at two key and harmonisation with other gas markets hubs, make unused pipeline capacity readily across the east coast of Australia. In time, more available across the entire east coast, and substantial reforms could be implemented to provide more information about prices and allow for continuous trading of gas and explicit, gas availability. These reforms are now being tradable capacity rights. implemented. We have answered Victoria’s Implemented in full the reforms have the potential request for advice on next steps to reform the to increase Australia’s GDP by $8.7 billion in net east coast market with recommendations to present value terms by 2040 through improved make it easier to buy and sell gas in Victoria viability of gas-using industries and flow-on and to trade gas between states. This should benefits to employment and tax revenues. Changing the energy market design Our power of choice reforms are focused changes in price signals. Distributed energy on consumer information and cost-reflective resources are becoming smarter and cheaper prices so consumers can choose products and we expect to see uptake accelerate. and services that are right for them facilitating That’s why we need to put consumers in innovation so the market can open up to new charge of their own decisions, giving them metering and technology options; and poles the means to optimise the value of household and wires reform so the way we pay for power or business energy investments. This work can keep pace with modern lifestyles. These will help consumers reduce electricity bills, three areas of change are key as distribution help electricity networks manage peaks in network services are transformed by demand, increase competition in the wholesale consumers who are buying and selling power. electricity market by exporting locally produced We also have a vision for a new competitive power and also provide services like frequency distribution market which enables consumers control that help keep the system secure. to get the most value out of their rooftop solar panels, batteries, electric vehicles and smart household appliances like refrigerators and GIVING CONSUMERS dishwashers, which can respond to short-term MORE CHOICES RULE CHANGES, REVIES AND ADVICE STARTED AND COMPLETED C C C

C C WORK PROGRAM 2016-2017 C Making market transformation work for Rule changes initiated consumers is about two things. Keeping the Rule changes completed lights on and gas flowing, and delivering Reviews and advice started necessary market changes at least cost to Reviews and advice completed consumers. e are focused on creating mechanisms to encourage sound investment decisions, and allow consumers, big and small, to see the costs and benefits of various energy choices. OVERALL RATINGS O AEMCS APPROACH TO CONSULTATION Poor 0-4 5-6 7 8 9 10 Excellent C 14

2016-2017 C 16 C C 2015-2016 C KEEPING THE LIGHTS ON AS THE SECTOR TRANSFORMS

Our power system security Emergency frequency control We are reviewing options to New forms of frequency Review of the reliability Expanding as review developed a reform schemes are being delivered to support reliability in the control to stabilise the system standard is conducted every a tool to boost power security is package to guard against manage the power system as new-look power system which are being considered by this four years. The AEMC Reliability an outcome of this new rule technical failures that lead to non-synchronous generation like has more variable, intermittent review, including how to integrate Panel reviews the national electricity which created a new category of cascading blackouts. It started in wind and solar replaces old generation and growing faster frequency control services market’s reliability standard and market participant who can July 2016 before South synchronous power stations demand-side innovation. offered by new technologies into settings which are an important negotiate and aggregate with Australia’s system black event: which are due to close in the Reliability is about having enough regulatory and market signal for investment. Under this energy users to increase System security market years ahead: New rules for energy and network capacity to arrangements: Frequency review the Panel takes changes in competition for ancillary services: frameworks review Jun 17 emergency frequency control meet consumer demand: frameworks review underway market arrangements into account Demand response mechanism schemes Mar 17; Managing rate Reliability frameworks review to ensure the standard and settings and ancillary services unbundling of change of frequency Sep 17; underway continue to meet the requirements Nov 16 Managing fault levels Sep 17 of market participants and customers: Reliability standard and settings review 2018 underway

Making it easier for generators Raising the bar for generator to connect to the grid is a key performance. Generators are focus of our work program. About long lived assets and new assets 30 to 50 large-scale generators connecting today have to meet POWER SYSTEM may seek to connect to the the power system’s needs in the network by 2020. We have future. Work has started on SECURITY established a comprehensive proposed new rules aimed at transmission connection and raising the bar for the planning framework which could performance of new generators to AND RELIABILITY lead to savings of $100 million in help keep the system safe and the next three years. New rules secure. This work was provide more choice, control and recommended by the Finkel certainty for connecting parties: Review and consultation will be Transmission connection and conducted throughout late 2017: planning arrangements May 17 Generator technical performance standards underway PROVIDING INDEPENDENT ANALYSIS OF POLICY OPTIONS

Options to reduce emissions Balancing emissions, lower Challenges faced by coal-fired Joint advice with the Climate at lowest cost were provided to prices, and system stability closures were Change Authority was released the COAG Energy Council. We were addressed in our submission explored by another of our at the request of the considered alternative ways to to the Finkel review. International submissions to government this Commonwealth Minister for reduce electricity emissions evidence suggests emissions year. This submission explored Environment and Energy. This including: a market-based reduction policy needs to support the consequences of uncertainty advice was geared towards emissions intensity target effective competition in the power with respect to Commonwealth integration of energy and requiring generators with system. Otherwise consumers and state emissions reduction emissions reduction policies to emissions over a target to buy bear the costs of investment risk policies: Submission to inquiry provide greater investment credits from those below, an and ongoing government into retirement of coal fired certainty and help keep electricity INTEGRATING expanded large-scale renewable intervention: Submission to power stations Nov 16 prices as low as possible while energy target, and independent review on the future enhancing power system security: government-regulated coal power security of the national electricity Towards the next generation ENERGY AND station closure. The emissions market Mar 17 Jun 17 intensity target delivered best EMISSIONS results for consumers on price, security and certainty: Integration of energy and emissions reduction REDUCTION POLICY policy Dec 16 REDESIGNING THE EAST COAST GAS MARKET

MAKING IT EASIER TO BUY AND SELL GAS

Our roadmap to fulfil the Victorian gas market reforms New rules are being made to The review of gas pipeline More information to aid The framework for networks to ministers’ vision for an will make it easier to trade gas integrate east coast markets. regulation is addressing transparency. The gas bulletin provide off-grid alternatives integrated east coast gas between states. Victoria’s Different gas trading areas across concerns that consumers may be board managed by the Australian which might be cheaper for market has been agreed by the southern gas hub is a pivotal the east coast currently operate paying more than necessary for Energy Market Operator provides remote customers is under COAG Energy Council. These wholesale trading centre on the with different gas day start times gas pipeline services. It is also gas system and market consideration. Electricity supplies reforms will help improve access east coast. It was the focus for the as a result of legacy pipeline considering the rules for access information to inform decisions that are not physically connected to gas which is one significant next gas reform step. Our arrangements. These differences negotiation and dispute resolution about trading, investment, and to the national system typically way to help keep electricity prices proposals are to lower barriers to impose a cost on the increasingly between pipeline service use of gas. Our draft rule would include a combination of solar PV, as low as possible for consumers: entry and streamline trading to integrated system and we made a providers and customers: Review increase the amount and and small-scale East coast wholesale gas market support greater competition. This new rule to prepare for the into the scope of economic frequency of data on the board diesel or gas generators: and pipeline frameworks review would add to electricity reliability integrated gas market. It will regulation of covered pipelines along with greater accuracy Alternatives to grid-supplied Jul 16 as gas generators would have harmonise the start of the gas underway requirements and a stronger network services draft better access to supplies across day across the eastern seaboard compliance framework: determination Sep 17 the whole market: Declared from 2021: Gas day Improvements to wholesale gas market review Jul 17 harmonisation Feb 17 bulletin board draft determination Jul 17 PROMOTING COMPETITIVE ENERGY SERVICES

GIVING CONSUMERS MORE WAYS TO CONTROL ENERGY USE

Helping consumers get more The Prime Minister’s direction New deals for embedded Removing barriers to consumer Aligning market dispatch and Using demand response to value from distributed energy for more transparency in retail network customers in private choice. A year ago our report on settlement. As the market produce network savings is resources. The projected uptake controls produced actions electricity systems like shopping integrating energy storage transforms there is an important increasingly important as of rooftop solar, battery storage, including this proposed rule to centres, retirement villages, highlighted the need to review the role for fast response generation technological change makes electric vehicles and other require retailers to notify caravan parks and residential rules so they don’t prevent and services. We are in the final alternatives to traditional technologies within the grid customers before their energy developments are being efficient investment and stage of consultation on changing investments in poles and wires presents great opportunities for discounts end and help families considered in this review. competition in storage services. the electricity spot price from 30 more viable. We made a rule to consumers. Part of the AEMC’s get the best power deal. This rule Embedded networks are using We are now consulting on rule to five minutes to signal the value help providers of non-network technology work program is a is being expedited: Notification of technologies such as distributed requests seeking to redraw the to consumers of fast response solutions including demand distribution market model project end of fixed benefit period due to generation and storage which line between what is economically technologies such as aggregating response to identify investment which explores how consumers be final by Nov 17 bring opportunities for innovation regulated and what’s contestable: distributed storage, and rapid opportunities in the grid by can get more value from and new risks for consumers: Contestability of energy services demand response, which are improving transparency of distributed energy resources like Embedded networks review demand response and network needed to support intermittent retirement and replacement rooftop solar, batteries and energy consultation paper Apr 17 support, draft determination wind and solar generation: decisions by electricity network saving appliances: Distribution Aug 17 Five minute settlement draft service providers: Replacement market model draft report Jun 17 determination Sep 17 expenditure planning arrangements Jul 17 Australian Energy Market Commission www.aemc.gov.au