A couple of weeks ago the International Energy Agency (IEA) released a lengthy report (250 pages) on their review of energy policy in Australia – The International Energy Agency Review (http://www.iea.org/publications/freepublications/publication/EnergyPoliciesofIEACountriesAustralia2018Review.pdf).

International Energy Agency Review


Photo by Jeremy Bishop on Unsplash

By Dr Drew Donnelly, Compliance Quarter. 

The scope of this review, set by the Commonwealth Government, was to analyse the lessons that Australia can learn from other countries’ experiences in transiting to a low-carbon energy market. The Commonwealth Government mandated two special focus areas:
• the growing role of Variable Renewable Energy (VRE) in the Australian energy market;
• the role that natural gas can play in the transition to a low-emissions environment.

Today’s article is a deep dive into the recommendations contained in this report (the International Energy Agency Review) and our assessment of it.

A. Overview of The International Energy Agency Review

As indicated in the quote heading this article (p194, the Review), the overriding theme of the report is that there is a lack of coherent medium and long-term strategy in the energy market. This results in uncertainty which undermines confidence in the market, the development of low-emissions supply and ends up with high consumer prices.

The IEA recommends (pp 21 and 22, the Review):
• Design of an energy and climate policy framework for 2030 and development of a mid-century low emission development strategy;
• Improved governance through enhanced collaboration and clarified roles with states
and territories through the Council of Australian Governments (COAG) Energy Council and the market bodies of the National Electricity Market (NEM);
• Guide the energy transition through an emissions reduction goal for the power sector;
• Continue to foster well-functioning wholesale and retail electricity markets through
the COAG Energy Council via:

o Review and adaptation of technical generation standards and the supporting market framework
o Ensuring that low-emission technology support is market-based and guided by
locational signals;
o Adapting distribution network regulation through harmonised technical
and consistent economic regulation.

• Development of competitive and liquid domestic gas supplies through completing gas market reforms;
• Supporting the sustainable development of domestic oil/gas reserves by addressing community concerns;
• Regularly updating the National Energy Security Assessment, in order to identify
energy security risks across the system;
• Fostering data reporting and monitoring across all energy sectors.

B. Focus area 1: System Integration of Variable Renewable Energy

The IEA makes a number of recommendations with respect to system integration of Variable Renewable Energy (VRE) in Australia. We consider each recommendation in turn.

1. Review and reform the technical standards for generators in light of VRE

Arguably, one contributor to the blackout event in South Australia in September 2016 was the state’s reliance on a generation system with operating specifications that were no longer fit-for-purpose (p150, the Review). The technical standards for generators are set under the National Electricity Rules which have not been updated to recognise the growing proportion of energy sourced in VRA.

Any such review would need to recognise the standards that should apply to rooftop solar photovoltaic and the implications of distributed battery systems.

2. Review NEM mechanisms to better reflect VRE

In the wholesale NEM, generation is dispatched in quasi-real time (five minutes before actual generation). However, much wind and solar generation must account for variability and uncertainty in supply a few hours ahead. This raises the question whether the temporal responsiveness of the market system needs to change.

But its not just centralised aspects of the market system that need to evolve, the IEA suggests (pp159-162, the Review). The rise of solar PV, for example, means generation investment that does not need to end up in customer bills. Furthermore, tariffs for grid use could change to recognise not the number of kilowatt-hours a that a customer draws from the grid, but the costs that they cause the grid. This might include, for example, pricing that means consumption during peak demand needs to be more costly than when there is extra capacity.

3. Enhance AEMO powers

The IEA suggests providing the Australian Energy Market Operator (AEMO) with the appropriate powers to intervene in the market in a more timely manner to ensure system security (pp161-163, the Review).

4. Better co-ordination between transmission and distribution systems

IEA emphasises that the there is no nationally integrated planning of the transmission network in Australia other than the economic regulation of individual transmission investments by the market regulator. This, the IEA suggests, is bound to lead to system-wide suboptimal outcomes and increase overall cost to consumers.

A strategy for the system as a whole should include consistent expansion of generation capacity as well as increased uptake of innovative flexibility options such as demand-side response and energy storage (pp 161-163, the Review).

C. Focus Area 2: Strengthened Gas markets

The IEA contends that gas trading markets are poorly developed, with most gas sold through long-term bi-lateral supply contracts (pp85-86, the Review). This raises a range of difficulties including:

• Long-term contracts locking in supply that would otherwise be available for short-term trading;
• Contracts that can be locked in at an artificially high price;
• A lack of price and contract transparency;
• Market players having difficulty in hedging their exposure, due to limited liquidity in the gas futures market.

In light of this, the IEA advocates that the Government continue to strengthen transparency, liquidity and competition in the gas market to optimise pipeline capacity and support a more competitive gas market. Other recommendations include (p88, the Review):

• Ensuring effective control of market power in the gas market through further regulation of gas pipeline activities;
• Establishing regular monitoring and publication of gas prices in both wholesale
and retail markets to permit assessment of price and cost trends;
• Strengthening the risk assessments in the east-coast gas market by collecting and developing robust gas data;
• Using export restrictions in the gas security mechanism only as a last resort to avoid
reducing the incentives for investments in new gas production. Market-based solutions should first be tried first to ensure security of supply.

D. Commentary

The assessments of the Australian energy sector, and the recommendations contained in this report, are not radical. They echo many of the recommendations contained in the Review of Governance Arrangements for Australian Energy Markets (the “Vertigan Review”) (Vertigan, 2015) and the Independent Review into the Future Security of the NEM (the “Finkel Review”, 2017).

Furthermore, the key theme of improving medium and long-term strategy and market co-ordination across state lines is a key theme of the National Energy Guarantee with its reliability and emissions obligations which is currently in development.

To some extent, the coordination problems for policy in the energy sector identified by the IEA are inevitable in a country with significant state/territory autonomy which means international comparisons can be unhelpful.

In the gas sector, there are already a bunch of reforms underway following the release of inquiries by the Australian Competition and Consumer Commission (ACCC) and the AEMC, including the establishment of a Gas Market Reform Group (GMRG) and the Australian Domestic Gas Security Mechanism (ADGSM) launched in mid-2017 aimed at addressing potential gas shortages.

The most likely reform for the gas market coming out of this review, in our estimation, is the facilitation of better access to gas market hedging products.

We look forward to the Commonwealth Government’s response.

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