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The Energy Security Board (ESB) has released the Post-2025 Market Design Consultation Paper which outlines its vision for the Australian energy market in 2025 and beyond through a comprehensive redesign that incorporates seven market development initiatives. 

The paper was developed in collaboration with the Australian Energy Market Commission (AEMC) the Australian Energy Market Operator (AEMO) and the Australian Energy Regulator (AER), and is focused on making the National Electricity Market (NEM) fit for purpose. 

The 2025 market design project addresses essential change in a world of expanding consumer choices, new technologies and large-scale capital replacement as old thermal power stations leave the market. 

ESB Independent Chair, Dr Kerry Schott, said the paper looks at how the energy market needs to evolve to keep up with changes in the sector, and provide stability and ideal outcomes for consumers.

“These initiatives consider almost all aspects of how electricity is generated and dispatched, how consumers can access the services they want and how investment can occur in the most efficient way to avoid unnecessary costs,” Dr Schott said. 

“It is clear that the rules and market frameworks need to evolve to keep up with the accelerating pace of change, which is leading to security and reliability challenges and less than ideal outcomes for consumers.” 

The rapid and continued uptake of grid-scale renewables and distributed energy resources (DER) has transformed Australia’s energy system. Today, solar PV is installed on more than 2.2 million households, up from 100,000 ten years ago; and in the last decade, more than 10GW of grid-scale renewables have been connected to the NEM, 5GW in the last three years alone.

Dr Schott said that reforms are critical to ensure the NEM is fit for purpose for the future and can accommodate new and different needs of the electricity system, market participants and consumers. 

“The transformation roadmap released today is open for public review and response,” Dr Schott said. 

“Some changes can be implemented now and others before and after 2025. This major reform is a change journey to and beyond 2025 – it is not a one ‘big bang’ reform process.

“We are working towards delivering the results of this consultation and recommendations to energy ministers at the end of this year. It’s a big agenda, but the scale of the challenges mean it is imperative that this package be considered holistically. No reform will be left behind.” 

The Post-2025 Market Design Consultation Paper follows a request from the (former) COAG Energy Council to develop market reforms to support the transition of the NEM and drive better consumer outcomes. 

These reforms are aimed at systematically modernising the market design and regulatory frameworks to meet the needs of the energy transition and unlock value for consumers from new energy and digital technologies, including from DER. 

“Together with the market bodies, the ESB has completed a significant body of work to develop a range of potential market reforms aimed at supporting the transition currently underway across the NEM. The ESB is looking closely at what measures might be needed to achieve timely and efficient investment – and how we can update the market design and regulation so it works for all consumers,” Dr Schott said.

“This is a substantial package which builds on a great deal of feedback from stakeholders and interested parties over the past six months. We are very interested in feedback from all interest groups on the directions we have set out as we work towards a final set of recommendations.” 

The potential solutions have been set out in the following groups:

  • Resource Adequacy Mechanisms 
  • Aging Thermal Generation Strategy 
  • Essential System Services 
  • Ahead Mechanisms 
  • Two-Sided Markets 
  • DER Integration 
  • Transmission Access and the Coordination of Generation and Transmission 

One of the biggest value adds of the post-2025 reform program is that it provides an opportunity to develop a coherent long-term reform path, and consider how different elements work together as a package of reforms, rather than on an individual basis. 

The Clean Energy Council said it welcomes the ESB’s recognition of the inevitable transition to clean energy and the importance of market reform to ensure this is a managed transition from fossil fuels to renewable energy and energy storage.

“The electricity system is in a state of transition to one characterised by a much higher penetration of renewable energy. It is great that the ESB has acknowledged this new reality and is considering a market framework that will support this transition,” Clean Energy Council Chief Executive, Kane Thornton, said.

“We need a streamlined, integrated market design that delivers the right outcomes for consumers and confidence for investors.

“There is a significant amount of detail to work through in the papers to understand their implications and interactions.

“However, we are particularly excited to see the developments around an aging thermal exit strategy, essential system services, and valuing demand flexibility and integrating DER. Harnessing DER and encouraging private investment in energy storage is crucial to support a reliable and secure energy system.”

As part of the post-2025 review, the Australian Energy Market Commission (AEMC) has also released an associated paper on transmission access reform, formerly referred to as COGATI. 

Since the initiation of this work about 18 months ago, generators, developers and investors have expressed continued concern around the need for such a significant reform, particularly in light of the range of other reforms already underway.  

“Actioning the Integrated System Plan to deliver new transmission investment, renewable energy zone development work being undertaken by the ESB and a number of state governments, and improved market information will go a long way to address the congestion risks facing investors and provide effective locational signals,” Mr Thornton said. 

“Until these are put in place, and we have sufficient experience with these new reforms, it remains unclear if a more fundamental change to access is necessary. We will need to take time to interrogate the detail of this latest iteration of the access reform proposal.”

Energy Networks Australia has also welcomed the release of the ESB Post-2025 Market Design Consultation Paper and the AEMC report on the Coordination of Generation and Transmission Investment, saying they are important inputs to help guide the sector’s transformation.

“The future energy sector will not be able to operate using current rules and frameworks; it is the time to think ahead for change,” Andrew Dillon, Chief Executive Officer at Energy Networks Australia, said.

“The ESB is taking a coordinated look at how the energy market would operate post-2025 when DER and renewable generation will have disrupted traditional wholesale markets.

“Future markets will be built on a transmission superhighway with better connections between and across states, as well as local distribution grids that are fast becoming the platforms to allow greater participation from customers.”

Mr Dillon said smarter pricing signals would be important to ensure higher levels of DER could be integrated into the system while keeping costs as low as possible for all customers.

“Many significant reforms are contemplated in these documents and some – like pricing reforms – should proceed,” he said.

“However, it’s absolutely critical that realistic cost-benefit analyses are undertaken to ensure the reforms that go ahead – and that customers end up paying for – deliver real value.

“In recent times, we have seen examples where either the costs (five-minute settlement) or the benefits (metering competition) have not been good news for customers.

“Governments and regulators also have major roles to play. Avoiding unnecessary interventions and ensuring investible frameworks with reasonable returns are key to unlocking the many billions of dollars of private investment the sector needs over the coming decades.”

Ongoing collaboration across the market bodies is continuing to ensure the reform program remains aligned with broader policy developments, and to reduce duplication where possible. 

Stakeholders can provide feedback by 19 October 2020. 

Final recommendations on all reforms will be made to Ministers by mid-2021.

The Post-2025 Market Design Consultation Paper can be viewed here.

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