AEMO CEO, Daniel Westerman, speaks at the Clean Energy Summit

5 min

Thank you for inviting me to speak today at this Clean Energy Summit.

It certainly has been busy and interesting times in Australia’s energy markets.

Today I wanted to share three things.

  • First, a few insights on events over the last month or so, including the NEM market suspension.
  • Second, some thoughts on the near term energy outlook, because some of these recent challenges are likely to persist.
  • And third, I’d like to refocus on the long term pathway to clean, reliable and affordable energy for Australian homes and businesses.

Before I dive into the recent events, I think it’s important to acknowledge that we are still in difficult and challenging times, right across the energy sector.

At the forefront of my mind is the impost and impact on consumers. Young families on a budget. Our elderly relatives and neighbours. Students working casual jobs while putting themselves through education.

Our common goal in this industry is to ensure Australian homes and businesses have access to reliable and affordable energy, and have confidence that it will be there when they need it.

But recent increases in prices, both gas and electricity, and the market volatility, put this at risk.

In fact, a recent survey from the Energy Consumers Association found that trust in our energy sector is low.

The quarterly average spot price in the NEM was $264 per megawatt-hour in the last quarter. That’s three times higher than the same time last year. And prices are still very high, with the average spot price in the NEM this month being $424 per megawatt-hour.

Across the east coast gas markets, spot prices averaged $28 per gigajoule, again over three times higher than a year ago. And similarly, gas prices still very high, at an average of over $40 for July so far.

So we’re not out of the woods. We issued a second Threat to System Security market notice yesterday and depending on the industry response, we’ll decide what further steps we might need to take.

I know that many businesses in the energy industry itself are facing a variety of challenges.

We’ve seen energy retail businesses cease trading, and others advising customers to look elsewhere.

On the generation side, operators of the coal and gas plants that are still the workhorses of the NEM today, are working with ageing equipment that is less and less reliable, and battling issues with fuel supply due to the recent weather events and global commodity prices.

International supply chain issues have pushed up prices for developers, and the important projects that will build the new fleet of solar, wind, battery and other firming generation that Australia needs.

So these difficult and challenging times face us all.

At AEMO, I feel like we’ve been standing in the eye of the storm recently. Our staff have felt constant stress as we work to keep the lights on and the gas flowing around the country and around the clock.

And all of this focuses my mind even more intently on what needs to happen going forward.

But first, what has actually happened over the past two months that led to an unprecedented action of suspending the National Electricity Market?

Well, it began in the gas market.

A cold snap in NSW and Victoria in late May and early June brought a sharp increase in demand.

East coast gas supply and pricing was already under pressure: peaking at $55 / GJ in mid-May in Victoria, up from the first quarter east coast average of $10.

More LNG was being exported from Queensland, which meant lower flows to southern states, and therefore greater flows north out of Victoria.

Gas storage was already rapidly depleting, before winter started.

On 30 May, such extreme gas prices triggered the cumulative price threshold, and an automatic price cap of $40/GJ in Victoria.  And the collapse of Weston Energy triggered price caps in Sydney and Brisbane.

And this is when we saw the tight gas supply situation start to impact the National Electricity Market.

On June 1, AEMO triggered the Gas Supply Guarantee for the first time due after participants advised us that they were unable to source sufficient gas to supply gas-fired power stations. Several of whom were burning diesel as a substitute.

We saw a positive response from gas producers in Queensland, with south bound flows increasing over the subsequent days.

But in the electricity market, a perfect storm was brewing.

Several generation units and a few transmission lines were out of action for planned maintenance, and that’s a pretty typical situation for the shoulder seasons.

But the cold snap was early, and coincided with a period of low wind and solar output.

Critically, around 3,000 MW of coal fired generation was out of action through unplanned events, leaving a tight balance between supply and demand.

Through June 12 and 13, the NEM’s cumulative price threshold was breached in Queensland, and then NSW, Victoria and South Australia, triggering an administered price cap of $300/MWh.

The next level of operational complexity began when roughly one quarter of the mainland NEM’s generation fleet bid themselves unavailable, forcing AEMO to intervene and direct generators to provide electricity.  

Over the coming days, the volume of AEMO’s manual directions became too much for AEMO’s automated dispatch engine.

Pricing couldn’t be computed in an increasing number of our 5-minute dispatch intervals.

And no matter how much human effort we threw at the problem, ultimately the level of intervention made the ongoing operation of the wholesale market impossible.
So on the afternoon June 15, we took the unprecedented step of suspending the national electricity market in all jurisdictions, and imposing administered pricing in accordance with the National Electricity Rules.

In all my public comments I said that we would not keep the market suspended for any longer than we had to.

And on June 22, we were able to announce a staged approach to lifting the suspension of the NEM, which we completed on the afternoon of June 24.

That period of time was one of the most complex and challenging periods that AEMO has ever experienced.

As you would expect, we are conducting a detailed post-mortem, but let me share a few insights:

  • Between June 13 and 23, AEMO directed a total of over 10,000 MW of generation to either be made available or generate electricity,
  • and we made over 500 separate manual directions, to maintain sufficient supply.
  • At any one time, there were up to 40 manual directions in effect and up to 5,400 MW of directed capacity.
  • In addition, AEMO activated emergency demand response on three separate occasions through pre-agreed reliability and emergency reserve trader (RERT) contracts.
  • We avoided load shedding, but only just, and at times with no margin for error or unexpected events.

We were successful in keeping the lights on through these unprecedented events, and now, we are working hard to understand the costs.

But let me share a few insights.

  • The wholesale cost of electricity in the NEM in the ten days prior to these events was $2.4 billion
  • The wholesale cost of electricity during the 10-days of administered pricing was $1.6 billion
  • That’s $800m lower during the administered period

During that period, AEMO directed generation units to keep the lights on. And generators are entitled to claim compensation if their costs were higher than the administered price.

Those claims will be assessed by an independent expert.

Since it’s early days in receiving any claims, I couldn’t say what the total cost will be.

But many generators will not have costs that exceeded that administered price, so my best estimate is the total cost will be a fraction of that $800m reduction in wholesale costs.

I think it will be a meaningful fraction, hundreds of millions of dollars, but still a fraction nonetheless.

But I am very aware that despite lower overall costs, the effect on energy retailers and large users will depend heavily on their contracting strategy. And for some, these deferred charges through the compensation mechanisms may cause significant difficulty.

My ask here is that we work collaboratively as a sector to understand fully the situation, and the suite of potential solutions.

Now to the outlook.

The situation in both gas and electricity remains fragile, and many risk factors still persist.

Gas reserves continue to be depleted at a rapid rate, and we are watching this carefully.

In the NEM, more plant has returned to service but issues remain with fuel supply, such as coal, gas and water.

And the reliability of ageing plant will continue to be critical for us over the coming years.

Wholesale electricity prices remain high, and while the AEMC are considering whether the cumulative price threshold and price cap should be modified, it would be unhelpful if this cap were breached again.

Given the fragile nature of the outlook, it is more critical than ever that our energy outlook forecasting is as accurate as possible.

So, I’m asking generators to continue to provide greater detail on any potential limitations to their output, so we have true visibility on how future demand can be met.

But now let’s lift our eyes to the medium and longer term.

Notwithstanding that coal plants in particular, need to work hard to secure their fuel supply and maintain their plant, we know that we’re likely to see 60 per cent of today’s coal generation gone by the end of the decade. 

So in fact, these events have simply underscored the need to accelerate Australia’s transition to the cheapest form of reliable electricity.

And that is firmed renewable energy, connected to Australian homes and businesses through efficiently delivered transmission.

The latest GenCost report, released last week shows that clearly to be the case. Again. By a country mile.

So the sooner our nation can integrate higher levels of firmed renewables into the energy system, the sooner we can decouple domestic energy prices from these international shock, the sooner we can electrify more of the economy, the sooner we can meet our emissions targets, and the sooner we can reduce stress on Australian homes and businesses.

AEMO’s Integrated System Plan, the ISP, which we released three weeks ago, outlines the most cost-effective way to make this transition over next 30 years.

It highlights the need for:

  • Nine times the capacity of grid-scale renewables that we have in the NEM today
  • Four times the current distributed solar capacity, increasingly with batteries
  • Triple the firming capacity that can respond to a dispatch signal
  • And to urgently deliver five new transmission projects to connect low cost renewable generation to our towns and cities.

Those identified transmission projects are forecast to return over twice their upfront cost in net market benefits. 

  • Marinus Link will link more Tassie hydro to the mainland
  • HumeLink and VNI West will connect the Snowy 2.0 project
  • And the Sydney Ring and the New England REZ Transmission Link to cater for the growing needs of Sydney and Newcastle.

But to build this transmission, the whole industry and governments must build the social licence with communities affected.

And that needs: a refreshed approvals process that considers and evaluates their concerns at the start – not the end – of the process; and new ways to better share the benefits of these projects with the communities that they impact.

So let me finish up by saying that we’ve been through a very challenging period for Australia’s energy market.

And as you’ve heard, these challenges are likely to persist in the near term.

But the future of clean, reliable and affordable energy for Australian homes and businesses is crystal clear.

The journey to get there will have some bumps, and in these times more than ever, we need to continue to work together.

Closely, collaboratively, and at pace. Every step of the way.

That is my commitment from AEMO, because we must not let these bumps become roadblocks to delivering the energy future that Australia needs.

Thank you.


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