Rethinking Australia's energy transition: Six institutional reforms

Australia's current regulatory landscape is ill-equipped to facilitate the rapid transition of the national energy system. Today’s institutional arrangements were put in place 20-30 years ago to manage very different set of challenges. The urgency of the energy transition requires rethinking the roles played by markets, regulators and governments.

Current challenges in Australia's energy transition

The existing regulatory framework in the Australian energy sector is struggling to satisfy the demands of the energy transition. Emissions reduction targets are not being met at the required pace, inadequate investment is jeopardizing system reliability, and price relief for consumers is nowhere in sight. Transition focussed reforms require:

1. laser-like focus on addressing coordination risks
2. rethinking who is rewarded for producing what value
3. adopting realistic expectations about consumer conduct, and
4. eliminating ambiguity from current governance arrangements.

Reforms to address shortcomings of the current system

Six institutional reforms are proposed in response to these four priorities. The are:

“Trade-offs between timeliness and efficiency will be required.”

• Promoting urgency over efficiency
  The National Electricity Objective (NEO) focuses exclusively on promoting efficient investment and operations in the energy market. While self-evidently worthwhile, this narrow focus no longer aligns with the urgency of the energy transition. A timely transition must now be recognised as a central policy and regulatory objective within the relevant laws and rules. Trade-offs between timeliness and efficiency will be required. This will necessitate transferring certain decision-making responsibilities from regulators to policy-makers.
• Investing in long-term system planning
  Given the constraints on resources and budgets, and the importance of maintaining ongoing community confidence in the energy transition, long-term system planning is essential. Maximising the use of existing assets and minimising the demands on private and environmental resources are critical considerations. Public investment in long-term planning is necessary to address critical path-dependencies in network investment.
• Good governance requires leadership by state governments
  State governments are reasserting their constitutional responsibilities for securing reliable, low-emissions energy for their communities. The National Energy Law has always provided the opportunity for individual states to derogate from the national framework. Greater and more systematic use must now be made of these derogation powers to avoid the current confusion of accountabilities for the energy transition.
• Reorganising the market to internalise coordination problems
  The current market structure, defined by a four-way linear structural separation of the energy system, does not align with the coordination challenges of the energy transition. This mismatch is driving the rapid growth in the volume and complexity of the rules and processes governing the energy market as regulators struggle to accommodate new technologies and business models. Reorganising the market around a Bulk Supply Provider (BSP) transacting with a Net Demand Purchaser (NDP), would internalise many coordination challenges and reduce the need for ever more rules and regulatory processes.

“The consumer facing energy market must be designed in ways that do not punish consumers who do not act like sophisticated market traders.”

• Realistic expectations of consumer behaviours
  While demand-side participation has gained great prominence in recent times, the increasing complexity of market contracts poses significant risks for consumers. If these risks are allowed to materialise, they will undermine consumers’ confidence in, and support for, the energy transition. The consumer facing energy market must be designed in ways that do not punish consumers who do not act like sophisticated market traders.
• Mobilising technical expertise
  Technology gaps in the emerging energy grid will inevitably arise. They must be addressed urgently to facilitate the energy transition. Public funding is required to support rapid deployment teams of technical experts to solve knowledge gaps as they emerge.
  
  

A call for bold institutional reforms

“Continuously tinkering with the status quo is not a viable option.”

The current market, regulatory and governance landscape in Australia's energy sector is ill-suited to the urgency of the energy transition. The proposed institutional reforms presented in this article offer a roadmap for tackling these challenges and accelerating the transition to a sustainable energy future. While the path forward requires a significant realignment of roles and responsibilities, continuously tinkering with the status quo is not a viable option. Policy makers must come together to quickly implement the institutional reforms required for a successful energy transition in Australia.

Footnote: This article is a summary of two papers by Ron Ben David: "Rethinking Markets, Regulation, and Governance for an Energy Transition" and “Six institutional reforms for a timely energy transition”.