ESB charts direction for changes to the NEM

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The Council of Australian Governments (COAG) has provided an update on its post-2025 market design project in an Energy Security Board (ESB) Directions Paper, published in April.

Work on the development of a long-term market framework to support reliability started in March 2019 when the Energy Council requested the ESB to advise on this issue. In November 2019, the Council sought recommendations from the ESB for discussion at its March 2020 meeting. These recommendations have since been integrated into the strategic approach for the post-2025 market design programme.

Phases of programme development and delivery are broken down into short-term, intermediate and longer-term deliverables. Final recommendations on all aspects of the deliverables will be made no later than mid-2021. The development of legislation and rules packages will then follow.
There are seven core market design initiatives being progressed in the post-2025 programme:

  • Investment signals for reliability – evaluating the case for introduction of capacity mechanisms.
  • Aging Thermal Generator Strategy – market arrangements and regulatory approaches to ensure that sufficient replacement capacity is available to replace aging thermal generators.
  • Essential System Services – an enduring regulatory framework that will enable the market operator and participants to meet future system services needs.
  • Ahead Markets – options ranging from smaller changes to strengthen the commitment mechanism for reliability and security, to more extensive changes like cross-market coordination with gas.
  • Two-sided Markets – a model that promotes direct interaction between suppliers and customers, encouraging price responsiveness and demand flexibility. Final recommendations on a market design will be made to Energy Council by the end of this year.
  • Distributed Energy Resource Markets (the scope for this programme is currently being developed).
  • Coordination of Generation and Transmission Investment – to address the challenge of integrating variable renewable energy into the electricity system.

Each of the initiatives will be assessed via a “balanced scorecard” approach, which assesses how each achieves the post-2025 programme vision and objectives. The objectives will build on the strategic priorities identified by the ESB in its Strategic Energy Plan.
A post-2025 programme consultation is planned for August 2020 and market design options are expected to be developed for consultation by end of this year. Recommendations on market design will be provided to the Energy Council in mid-2021. The ESB says it will continue to support the development and delivery of initial design options.

The scope of the post-2025 programme is extensive and will fundamentally alter the operation of the NEM.

Aging generators and investment: while it is not specifically mentioned (possibly due to negative connotations) a ‘capacity market’ is likely to be one of the main options considered to provide confidence for asset replacement. Any evaluation of future capacity has the unenviable job of reviewing the evolving generation and consumption dynamics which by 2030 will be completely different (even if that is just due to demand response participation and EVs).

Ahead Markets: It appears to have already been decided that an ahead-market mechanism will form part of any new market design as the ESB has already outlined that it believes the current dispatch mechanism is no longer sufficient to maintain system security. It only remains for the most beneficial option to be identified.

CoGaTi: Under the program overview the ESB is projected to have draft rules for CoGaTi by the end of 2020, suggesting that the outcomes of the AEMC’s modelling cost and benefits are already a foregone conclusion and that CoGaTi will be progressed in some shape or form.

The DER workstream should also be watched closely as the impact of new markets in this area will flow through to the rest of the wholesale mechanisms. The AER is currently looking into DER valuation mechanisms.