25 years of the NEM and responding to the challenges ahead
I would like to begin by acknowledging the Gadigal people of the Eora Nation, the traditional custodians of this land on which we meet today.
I pay my respects to the Elders both past and present, and to all First Nations people with us today.
As you know, next week Australia faces a choice in the Voice. I'd like to acknowledge the real impact of this conversation on First Nations communities. And I welcome the fact people across Australia are talking about reconciliation and the future of our country.
As our nation transitions towards its net zero future, we want First Nations peoples to have equitable access to energy and mutually benefit from the changes that are happening – socially, economically and culturally.
Clearly today’s events are overshadowed by what has happened in Israel in recent days. Like so many people, I found the images heart wrenching. From so far away, all we can do hope and pray for a speedy and peaceful resolution.
So, thank you for the warm introduction and it’s wonderful to see you all here today.
Thank you also for inviting me to speak at this hallmark event, the AFR Energy and Climate Summit for 2023.
It’s an important year, because it marks 25 years since Australia took a bold step into the future and introduced a National Electricity Market to serve the east coast of Australia.
Yes, on December 13, 1998, the states of NSW, ACT, Victoria and South Australia started operating as one interconnected, unified, energy market – buying and selling energy across state borders.
Queensland joined the NEM in 1999 as separate regional wholesale market until interconnection with NSW in 2001, and Tasmania joined in 2005.
It was a bold step that itself was almost a decade in the making.
It came at a time when governments had introduced significant economic reforms: Australia had been progressively lowering tariff barriers to trade and floated the Aussie dollar.
The time had come for Australia to make its next economic step-change and expose sheltered industries, those such as state monopolies, to the rigours of the free market and the development of Fred Hilmer’s competition policy.
Energy was one such industry.
For most of the past century, each state ran their own energy system.
They were state-owned electricity and gas commissions, built up over time thanks to the Australian Constitution, which allocates energy as primarily a state responsibility.
Those state energy commissions were typically vertically integrated public utilities that comprised power generation, transmission, distribution and retailing.
The 1990s reforms would see this vertical integration dismantled and the commissions –to a greater or lesser extent – corporatised, with their business divisions subjected to competition, and large parts of the energy system privatised.
The point about the reforms was this: it was done to maximise the efficiency of existing infrastructure.
And the National Electricity Market delivered for consumers, particularly over its first decade, thanks to quality generation and network assets, and excess capacity.
It’s a matter of history that for most of its first decade in operation, the National Electricity Market traded with wholesale energy prices typically in the range of $40 to $60/MWh, inflation adjusted.
But all things change over time, and the National Electricity Market is no different.
And this is what I want to talk to you today about.
The NEM was a new market developed for existing infrastructure; now we need new infrastructure for our evolving market.
You see, the very system that provides the electricity to Australian homes and businesses is fundamentally changing.
Traditionally, it was a one-way flow of electricity from generators to consumers via transmission, distribution and retail operators.
The system of today is very different. Increasingly, it is a two-way flow of power between smart homes and their own energy management, generation and storage systems…
…and a much larger and much more complex array of industry participants with roles in all aspects of the power system.
The fact is that the historic mainstay of the power system – coal-fired generation – is on the way out.
It is reaching the end of its service life. Asset owners have already told us about a fifth of today’s older coal and gas fired generators will be retired by 2033. But our own modelling suggests almost two-thirds of existing coal generation will be gone in that timeframe.
That’s a big deal, given that coal counts for 62 per cent of today’s electricity fuel mix.
So there’s an urgent need for replacement generation. That’s the first challenge.
Second, as firmed renewables are the cheapest form of replacement energy, they are, understandably, built in places where wind, solar and hydro resources are strong.
And that’s often in dispersed locations and at the electrical fringes of the grid.
So that’s the second challenge – building transmission lines to these new areas of generation and firming to maximise the clean and low-cost power that can flow into the grid.
And thirdly, we need to make sure that Australian’s love of rooftop solar can continue to flourish, but in a way that works in the best interests of all Australians.
And that extends to home batteries, electric cars, and other home energy management systems collectively known as Consumer Energy Resources.
Let me talk to each of these in turn.
Demand for electricity is growing, driven by a combination of factors including population growth and the electrification of parts of our economy that previously were dependent on fossil fuels, like transport and some industry processes.
There is no doubt renewable solar and wind generation are the cheapest replacement technology for those retiring coal power stations, even taking into account firming and integration costs.
The GenCost report that is produced jointly with the CSIRO shows it to be the case. And it’s a similar story from other respected international research bodies, including from the International Energy Agency.
The real time data that flows into our control rooms consistently shows it to be the case, too.
And our Integrated System Plan, a whole-of-system plan that is a work of wide and deep collaboration with industry, also shows that the lowest cost pathway for Australians to continue to have access to reliable electricity…
… is to replace our retiring coal-fired power stations with renewable energy, storage of all shapes and sizes, flexible gas generation and connected with new transmission.
And our annual reliability outlook clearly shows that urgent and sustained investment in this replacement generation and firming technology is required.
Australia does have a substantial pipeline of proposed generation projects for the NEM, around 250GW, but the critical thing is to get these projects from spreadsheets and analyses, through investment committees, and turned into real assets that generate, store and transmit electricity to Australian homes and businesses.
I know that’s not always easy.
The first hurdle is getting business cases over the line.
I’ve been a developer and I know how hard it can be to get sufficient revenue certainty for a project to stack up. And if more uncertainty that exists on forward revenue streams, hurdle rates can increase and make investment decisions even more challenging.
Progressing projects through FID is critical. If investors can't see a path forward with existing market mechanisms, then look to current and upcoming schemes like Long-Term Energy Service Agreements (LTESA's), the capacity investment scheme, renewable energy target schemes and others to improve revenue confidence.
Second, projects are facing increasing costs across the board.
Australia is of course among many nations around the world that are navigating this energy transition, so we are competing not only for material and labour in Australia, but in global markets and through global supply chains.
And in our various roles at AEMO, we’re seeing these increased costs, together with the impact of various planning approvals, playing through into both the costs and timelines of getting energy infrastructure built.
And the third hurdle is the constraint on skilled labour broadly, and specifically Australia’s engineering workforce.
Australia has a limited pool of skilled labour for the enormous task ahead. Like all big challenges the solutions will be varied, from incentivising greater female participation in STEM careers and thereby growing the talent pool, to enhanced university offerings and skilled migration.
At AEMO we are leveraging our international relationships with other system and market operators and leading research institutions, to actively share learnings from the cutting edge of energy transitions that are happening around the world.
Australia stands to benefit from these close and ongoing exchanges.
To the second of those major challenges that I identified earlier: Transmission.
We absolutely need to make the transmission layout fit for the 21st century.
Australia’s existing transmission network was laid out to convey the huge outputs of coal fired generators located centrally in the places like the Hunter and Latrobe valleys.
Now of course the new sources of generation are located in geographically dispersed locations of strong wind and solar resources, often at the electrically weak fringes of the grid.
Around 10,000km of new transmission is needed to connect these areas to demand centres, and to ease congestion on existing transmission lines, which are increasingly operating at the outer limits of capacity and, at times, effectively gridlocked.
In practice, it means using the breadth of Australia’s geography to lower energy prices for Australian consumers: just this past week we’ve seen that it can be cold and windy in Victoria, but sunny and warm in NSW.
An upgraded transmission network allows for the lowest-cost electrons to flow across geographies to meet demand.
And that’s exactly what was envisaged by the introduction of the NEM 25 years ago.
But rolling out new transmission, something not done at scale in Australia for decades, needs government and community support.
We know there are sections of communities in the proposed path of overhead transmission lines that are worried about the effect on their lives and livelihoods, especially among farming communities where the same farms have been worked for generations.
In AEMO’s role as Victoria’s transmission planner, we are providing as much clarity as we can, as early as we can, to narrow the proposed routes of new transmission lines.We’re doing this as quickly as we are able, to alleviate community uncertainty.
For example, in the case of VNI West in western Victoria, we have been providing information and talking to landholders with property located in the narrowed draft corridor since late August.
That’s around 500 properties in a 2 kilometre wide area.
We have sent letters and information packs to all landholders in the draft corridor and in addition we have contacted about 40% of these people.
Our Community Reference Group has provided constructive and challenging questions for the project team to consider.
There are more community meetings coming, starting tomorrow [Tue 10 Oct], and these are an opportunity for landholders and community members to ask further questions and find out more about the project.
And in the months ahead, we will work closely with communities in the draft corridor to find the best location for the easement, which will be significantly narrowed, to a range of 70 to 120 metres wide.
I know it’s not easy for everyone to accept, but transmission lines are a core part of the national energy upgrade, to deliver energy reliably and at the lowest possible cost to all of us, wherever we live.
The process of building trust is not quick, but happens through listening, dialogue, providing quality information, running a fair process that considers all the facts, and providing fair compensation to those affected.
But in light of the massive transmission task ahead, it is beyond the scope of a single market operator, or a single transmission company, to fully build the required social licence.
Securing social licence is a whole-of-government and whole-of-industry effort, reliant on community involvement.
And that’s where industry and developer collaboration with governments is crucial.
The Federal Government, for example, is providing leadership through the Rewiring the Nation policy, providing low-cost financing for new transmission projects, and a Capacity investment Scheme to encourage investment in firming technology.
The Queensland Government has its Energy and Jobs Plan and projects, the NSW Government has its Electricity Infrastructure Roadmap and the Victorian Government has its Renewable Energy Target Auction 2 tender and a raft of renewable energy projects, as well as plans to recreate the State Electricity Commission.
South Australia, the ACT, Tasmania, and Western Australia have their programs too.
And to investors, the clear ask is to do everything you can to expedite your projects, bringing the relevant communities together with you. Governments are providing direction and incentives, and at AEMO we are 100% committed to enabling your investment wherever we can.
I know from my discussions with industry and governments that there is strong alignment on what needs to get done, and a clear focus to removing barriers.
So whether it’s input into specific measures like the Capacity Investment Scheme or Renewable Energy Zones … or working through issues more broadly … please keep the dialogue going and importantly, projects developing.
Because as we made clear from our recent reliability outlook, the need for investment into NEM infrastructure is urgent and sustained, to ensure Australian homes and businesses have access to reliable and low cost energy when they need it.
So to the third challenge I mentioned, inspired by Australia’s love of rooftop solar.
25 years ago, policy makers had the courage and vision to make the most of the generation and transmission infrastructure that had been built.
And today, we face a similar opportunity, to maximise the benefit of Consumer Energy Resources for all Australian consumers, not just a few.
As you know, Australians are continuing to invest in rooftop solar systems, and increasingly in electric vehicles, battery storage systems and other home energy management solutions.
Some homes and businesses have chosen to install batteries to manage their energy consumption, and electric vehicles are obviously batteries on wheels. With each EV having the capacity of five or six home batteries, they represent a real opportunity to help create the lowest cost energy system for everyone.
In fact, Australia has about 3.5 million solar systems installed, and this represents around 20GW of potential output.
That’s more than seven Eraring power stations at full output, and capable of meeting almost half [48%] of our energy demand when the sun is shining at its brightest.
As summer edges closer, data coming in to our control rooms show new records being set for both peaks of renewable generation and for record low demand as power from our solar rooftops edges out traditional sources of generation.
In late September, the National Electricity Market hit a record 70% for renewable penetration over a half-hour period.
And around that time, potential renewable penetration was close to 100%.
This means there was enough “potential” wind, solar and hydro resources that if it were dispatched, nearly 100% of demand in the NEM would have been met by renewables.
At AEMO we are working hard on our plans to be able to manage power systems at up to 100% renewable energy, if and when the market dispatches it.
In that same week in September, the National Electricity Market set a record low demand of 11,393 MW at 12.30pm, a fall of more than 4% from the previous record set last spring (Nov 2022). At the time, rooftop and grid-scale solar contributd 57% of total electricity supply in the NEM.
But the market can’t dispatch power from solar rooftops like utility-scale solar and wind. And having so much generation that doesn’t respond to market signals or operational signals, can sometimes be a challenge.
In November last year, AEMO got an unexpected taste of running an ultra-high-renewables grid when a storm disconnected South Australia’s AC connection from the rest of the NEM for a week.
And through this experience, we learned some valuable lessons:
Firstly, an oversupply of energy from solar rooftops – when supply of electricity becomes greater than demand – can cause the grid to lose balance and lead to serious consequences. That’s why an emergency solar curtailment mechanism is needed across the NEM.
Second, consumers expect our power system must be resilient. The power system has small disturbances all the time, from lightning strikes to small faults that propagate through the system. If our rooftop solar systems can’t ride through these disturbances like other generators do, and instead disconnect en-masse, this can also cause significant issues. That’s why appropriate standards and compliance for these systems is important.
And finally, while small trials have successfully shown that actively managing these consumer energy resources brings down the cost of the energy system for everyone, the uptake of these “virtual power plants”, as they’re called, is disappointingly low.
But virtual power plants are an area of development and opportunity, and I hope this will be a significant area of growth in the years ahead.
Properly harnessing the value in Consumer Energy Resources requires focus and attention, and will help lower the cost of the energy transition for everyone.
Just like the NEM architects from 25 years ago, Australians need an energy system that is fit for the times.
And in the near term, that means doing what we can to prepare for the weather challenges that come with every change of season.
Today we see more extreme weather events…last week, Gippsland in Victoria saw raging bushfires followed immediately by a deluge of rain and damaging floods.
The Bureau of Meteorology has now declared both an El Nino event and a positive Indian Ocean Dipole…which means the summer is forecast to be hotter and drier than average, right across Australia.
This will be particularly different to the past few summers, particularly on the east coast where it has been cooler and wetter than average.
As you would expect, we at AEMO, together with industry and governments, have been busy implementing our summer preparedness plan.
For our part, we have been co-ordinating with generators about their summer readiness programs which ensure that their plant is fit and ready for periods of high demand and hot temperatures. Ensuring maintenance has been completed or scheduled, fuel supplies are reliable, and any limitations are identified early.
Networks have been clearing vegetation away from power lines to minimise the impact of bushfires, and ensuring maintenance works are completed to make sure energy can flow through the grid with minimum constraints.
We have been ensuring new generators are connected to the grid as quickly as possible, procuring emergency reserves which could be called on if there is insufficient generation in the market at critical times, and ensuring our own incident escalation and response procedures are well practised.
These preparations are well advanced, but we have warned that some risk remains.
Summer readiness plans, and, indeed, the quest to navigate Australia’s energy transition, are motivated by the same principles that inspired the creation of the NEM 25 years ago.
And these principles also underpin the fundamental expectation of Australians for their energy supply:
One that is safe.
One that is reliable.
One that is affordable.
So while a new market was the answer to the needs of 25 years ago, today’s need is about new infrastructure.
All of us are judged by history – of the things we did, and the things we did not do.
When the next generation looks back in 25 years’ time, I hope they’ll see we collectively rose to the challenge and created an energy system fit for Australia’s net-zero future.