National Electricity Market structure review

Introduction

The Federal Government has commenced an expert panel-led review of market settings in the National Electricity Market (NEM). The proposed review is intended to be a wholesale review of the NEM to ensure it is fit for purpose in the context of the energy transition and evolving generation mixes.

The NEM was first established as a wholesale electricity market in December 1998, when coal-fired power stations were the dominant source of electricity generation. Since then, while renewable generation has continued to come online, and coal-fired power stations have begun to close, there has been no corresponding reform to the design of the NEM or the laws and rules governing it.

With the Australian Energy Market Operator (AEMO) now expecting 90% of the NEM’s coal fleet to retire by 2035, and the government’s revenue underwriting for new energy generation projects (the Capacity Investment Scheme (CIS)) to end by 2027, many believe that the structure of the power system needs to change.

If adequately reformed, the new market settings in the NEM could spur continued investment in, and integration of, renewable generation in Australia and define our role in a decarbonised global economy, all while lowering energy bills for Australian consumers.

This article summarises the scope of the proposed review, the role of the CIS and the history of previous reviews of the NEM.

Background and scope of the review

An expert panel, led by Associate Professor Tim Nelson and including Paula Conboy, Ava Hancock and Philip Hirschhorn, has been tasked with undertaking the proposed review of the NEM.

The Terms of Reference set out that this expert panel will make actionable recommendations on future market settings to promote investment in firmed renewable generation and storage capacity in the NEM wholesale market. In making these recommendations, the expert panel will consider:

• Interactions with the NEM reliability framework.
• Interactions with renewable targets and policies in promoting investment.
• The importance of decarbonising Australia’s electricity system (for achieving the Government’s target of a 43% reduction in emissions on 2005 levels by 2030 and net zero emissions by 2050).
• The pathway for implementation of the reforms.
• The work of the former Energy Security Board and AEMO’s integrated System Plan. 
• Feedback from industry following consultation with state and territory governments, AEMO, the Australian Energy Market Commission (AEMC), the Australian Energy Regulator, the Australian Competition and Consumer Commission, the Clean Energy Regulator and Clean Energy Finance Corporation, industry participants, unions, and consumer representatives.

The expert panel will also prepare a roadmap of the timelines and responsible parties for implementing its recommendations.

The Federal Government’s intent is that the recommended market settings will deliver clearer signals to investors, ensuring the optimal mix of energy is provided in the NEM. This is all with a view to supporting Australia’s clean energy transition and meeting future electricity demand, ensuring resource adequacy, and maintaining reliability in the NEM, while minimising costs for customers.

The current capacity investment scheme

The CIS was first announced following the Energy Ministers’ Meeting on 8 December 2022. It was forecast to unlock $10 billion of new investment and add 6GW of capacity in renewable power by 2030. It is the key driver for the government to achieve its goal of 82% renewables by 2030.

AEMO conducted open tenders to determine which projects gained CIS support. Under CIS underwriting agreements, an agreed floor and ceiling revenue for each project is set to ensure that costs from the CIS are borne by the Commonwealth rather than consumers. The agreed floor covered project operating costs and debt, with the Commonwealth paying the difference when revenues fell short and receiving a share of profits when revenues exceeded the agreed ceiling.

The first of the CIS tenders received more than 40 GW of proposals.

On 23 November 2023, the government announced an expansion of the CIS to a total of 32 GW nationally. The expanded CIS will be rolled out from 2024 to 2027 and regular competitive tenders will be held approximately every six months, from May 2024 onwards.

14 GW of the CIS will be rolled out through a guaranteed national tender and the remaining 18 GW will be delivered through Renewable Energy Transformation Agreements.

The DCCEEW stated that the CIS tenders will be conducted until 2027 for projects that are generating electricity on-grid by 2030.

Previous reviews of the NEM

Since its establishment, the NEM has been reviewed, in a material way, on two previous occasions.

In 2017, the COAG Energy Council agreed to an independent review of the NEM to examine its security and reliability. This review was led by the Chief Scientist, Dr Alan Finkel AO (the ‘Finkel Review’) and produced the Blueprint for the Future report.

The report set out four key outcomes in its vision for the future of the NEM: increased security, future reliability, rewarding consumers and lower emissions. As the name suggests, it provided a blueprint for reform, designed to ‘restore certainty and facilitate a smooth transition to a lower emissions future’.

The Finkel Review resulted in the AEMC implementing several of its recommendations, including:

1. Providing consumers with clearer information on prices, contracts, and energy use.
2. Strengthening protections for consumers.
3. Increasing consumer participation in the electricity market.
4. Implementing programs (such as the Five Minute Settlement program) that incentivise investments according to the needs of the system.
5. Increasing the security of the system.

In 2019, the Energy Security Board (ESB) was asked to review the NEM and report on what it should look like beyond 2025. In response, the ESB produced the ‘Post 2025 Market Design Directions Paper’, which proposed the following four reform pathways:

1. Strengthening investment signals.
2. Delivering essential system services.
3. Improving transmission and energy accessibility.
4. Enabling better participation and integration of side resources.

However, it proved difficult for the ESB to achieve material reform in practice. The ESB was then disbanded in May 2023, and effectively replaced with the Energy Advisory Panel.

What is next?

The timing of consultation have yet to be released. Initial recommendations for consideration by the Energy and Climate Change Ministerial Council are expected by late 2025. Contributions from all quarters will be important and we will be working with stakeholders as the consultation progresses.

Please contact us should you have any queries or require assistance.