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Someone needs to judge the performance of the AEMC

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According to a news release by the Australian Energy Market Commission last week (April 19), the COAG Energy Council has asked the AEMC to directly inform the energy ministers’ own priorities and work program.

This new process – agreed to in the tax deal with the Nick Xenophon Party – will replace the AEMC’s previous biennial strategic priority reviews. The advice will include a high level analysis of major challenges, risks and opportunities. The scope covers issues arising in all parts of the energy sector, including matters relating to electricity, gas and energy retailing.

The AEMC states that effective and active leadership by COAG is critical to:

aemcWe think that the first piece of advice that the AEMC should provide COAG is that the AEMC itself is in dire need of some better KPIs [key performance indicators].

If the AEMC is the chief advisor to COAG, we need some metrics to define the success or failure of that advice. Those KPIs won’t be found in whether individual rule changes are subject to judicial review, or even whether they are started and completed in a timely fashion.

No, the test is much stronger than that.

The actual KPIs for the AEMC are found in the 2016 Annual Report and we note that:

  • 70 per cent of stakeholders rated performance at 7 or more out of 10 in 2016 compared to 61% in 2013.
  • 68 per cent of rule changes were completed without time extension. Or to put it another way, one-third of rule changes couldn’t be completed within the initial time budget
  • 53 per cent of rule changes required more than four months to initiate an improvement on 17% started within four months in 2015.

So your author seems to be in the 30 per cent of its own stakeholders who find the AEMC’s performance on the less satisfactory side – and I wasn’t even surveyed. The fundamental problem can be found in the Chairman John Pierce’s message in the 2016 annual report.

aemc comment

But this is not the mission that the AEMC sets for itself with the advice it provides to COAG. More importantly, we don’t think that the AEMC really takes to heart what stakeholders want.

Our view is that recent events have provided evidence that suggests management and governance of the NEM is poor. There is faction ridden governance, but little management.

There is not much of a market: 50 per cent of the electricity price is driven by monopoly wires and poles regulation, where a price determination for NSW started in 2014 has still not concluded. The other 50 per cent is driven by a vertically integrated oligopoly. Measures of market concentration are increasing. It’s the same in gas.

So, if a KPI for the AEMC was “timely rule making”, “proactive rather than reactive rule making”, “providing an adequate, open source, model of the NEM that incorporates distributed electricity”, “providing big picture analysis of the effectiveness of the structure of the system;” we would suggest there is quite a lot of evidence of failure on the part of the AEMC.

It’s one thing to be a critic, and it’s another to have a go and let others make their own criticism. In that spirit we offer up some KPIs that might serve as a starting point for the AEMC to measure its performance by.

Top 10 in Energy Trilemma Global Index as a KPI

The Finkel draft report has popularised the phrase “Energy Trilemma” in Australia as a way of expressing the energy system’s three goals of “energy security”, “energy equity” and “environmental sustainability”.

The Finkel report is following on from international work that has been building since at least 2013 and is most notably carried forward by the “World Energy Council [WEC]. The WEC is an organisation started in 1923 which, according to its own website, has evolved into “one of the world’s most influential energy organisations”.

If we compare the energy trilemma with the AEMC’s view of COAG’s mission – as expressed in Fig 1 – we can see that the AEMC has “energy security” and “energy equity” in its sights, but completely ignores “environmental sustainability”.

We argue that this fundamental blind spot is the absolute essence of why the AEMC is providing poor advice to COAG and why the system is failing.

That’s because much of the change in the NEM is being driven by environmental considerations. Blind Freddy can see that, even if Tony Abbott can’t. The AEMC may be full of lawyers, but even they can’t be totally ignorant of what’s actually happening. What’s driving all this technological change? It’s climate policy.

The WEC, in partnership with Oliver Wyman (part of the Marsh & McLennan Group), ranks 130 countries on their Energy Trilemma relative scores.

In 2016, Australia ranked 31 with a BBC rating (B for price, B for security and C for the environment). We ranked below New Zealand, Canada and the USA and even Japan.

We rated 95 out of 130 countries on sustainability, we rated 33 on energy security and 39 on energy price. ITK expects our ranking to drop materially in 2017 based on the reduction in energy security and increases in electricity and gas prices.

We think an appropriate KPI for the AEMC and COAG to measure itself on is to achieve a top 10 ranking in this WEC Energy Trilemma Index.

This is a reasonably evidence-based, relative measure. Similar style scores are used across a wide range of industries in the private and public sector to provide evidence based relative performance.

Building a vision and a framework for the next 50 years

If a failing of the AEMC and COAG is the inability to develop an acceptable view of the future, then perhaps a KPI might be based around those lines.

For instance, a survey question might be:

“How satisfied are you with the structure of the NEM at present?”

“How satisfied are you with the way that distributed generation and micro grids are modelled and incentivised?”

“How satisfied are you with regulation as a way of setting prices for the distribution sector?”

In our opinion, developing a shared vision would start with better modelling. Modelling that is holistic rather than based at the generator level. That is, modelling that incorporates networks, transmission, distributed generation as well as simply choosing between coal and gas generation. Such modelling would be open-source with transparent alogrithms.  

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  • Kevan Daly

    David,

    I haven’t taken much interest in the Council but I will be watching the Operator much more closely after having read the final report on the Black System event in September last year. I was truly surprised to find any bureaucratic organization describing its failures in such detail. AEMO had very little idea how windfarms react to voltage dips at their terminals. That there could be so much variation from farm to farm came as a surprise to them. In my view the only windfarm that responded adequately was Horndale – it was almost as good as a gas turbine. The rest were a dogs breakfast of reducing power by various amounts and then “famously” throwing in the towel after a predefined number of dips. While there is plenty of blame associated with that event (Wetherill/weather, Frydenburg/windfarms), I put the blame on AEMO.

    With more large scale solar and solar/battery combinations connecting to the grid, AEMO needs to be much more proactive in determining how such entities respond to the conditions of the Black System event. I just wonder if the Council with all its lawyers is capable of properly supervising the Operator in this area.

    • Ren Stimpy

      Was that the 3 hour blackout due to tornadoes in SA? You poor poor snookums. Try living here in coal-fired NSW which has had two more-than-week-long blackouts due to storms.

      Come on mate get a grip.

      • Kevan Daly

        You’re being a bit hard, Ren. The whole state of SA went off for varying lengths of time up to a week. The NSW outages you refer to were localized; the whole state didn’t lose power; in fact, I didn’t notice them at all in Sydney. However I have a friend at Copacabana on the NSW Central Coast who lost power for 4 days after one of those storms.

        • Ren Stimpy

          Then we’re kindred spirits.

        • Rod

          Most of SA was back on line within 4 hours.
          The areas that were out the longest were up North and West which were hit hardest and lost transmission. Failed back up diesel generators didn’t help.

  • Malcolm M

    AEMC makes the rules and AEMO implements them. Before criticising AEMO for not knowing about ride-through settings, it would be worthwhile checking whether AEMC had given AEMO the legal responsibility to find them out. It might surprise you how difficult it is for AEMO to get information out of market participants. After the SA black-out it was clear to all that the information was required, but apart from the market data (which is held by AEMO) it still took a long time to get the non-market data such as system frequencies.

    • Kevan Daly

      Malcolm, I think you’re replying to me. I take your point. I thought AEMO was as intrusive as the AER is with the poles and wires companies, querying even the most trivial CAPEX item intended for the Regulated Asset Base. Still, I bet AEMO ask more detailed questions when the large scale PV projects start connecting to the grid in greater numbers.

  • Ren Stimpy

    Having consulted the KPIs they say meh! And to replace the “fossil” commissioner with a younger person, FFS get it done. Times they are a changing, as Bob Dillon said. And if organisations can’t keep up with times then the blame lies on the ageing boards of a thousand bowling clubs and other organisations!

  • Les Johnston

    The implicit KPI of the AMEC is to deliver good news for the Government. The current Federal Government has displayed vigorous avoidance of urgency in action to reduce carbon emissions. The Federal Government has been silent on environmental sustainability and a promoter of fossil fuels as evidenced by fossil fuel and tax relief for fossil fuel extraction. Unfortunately, the silence on environmental sustainability is a consistent element of the Federal Government. Change is long overdue.

  • Energy Governator

    The AEMC could definitely do with better KPIs, and better monitoring of performance against it’s KPIs by the Council, particularly with respect to performance against the existing NEO objectives. Some increased funding from the State governments would probably help too…
    But the failure to effectively address the integration of environmental considerations in NEM development is a consequence of the climate change policy failures of the member governments of the Energy Council, not the AEMC (who did put a EIS before the Council when carbon pricing was ruled out – only to have it ruled out by the Federal government to please Corey Bernardi!?).

    • David leitch

      This is true unless you consider them to be the one body to a greater or lesser extent from a policy formulation perspective. It’s certainly not just to please Mr Bernardi that the EIS was ruled out. There is an entire block in cabinet against any form of carbon constraint. Let’s call it the pro coal lobby.

      Without knowing for certain I’d wager the anti carbon constraint block includes Mr Morrison, Mr Corman Mr Dutton and Mr Brandis at a minimum.

      • Energy Governator

        I do not think the AEMC and Council should be considered to be one policy making body. The only body with the authority to make climate change policy decisions at present is the Council (or its member governments). The AEMC can only advise them – and have called on governments for a policy solution for some time. The Council have just failed comprehensively to deliver one. So public KPIs and reporting for the Energy Council perhaps…?
        And yes, I suspect there is more than a few anti-carbon pricers in Cabinet. I was just using Mr Bernardi as an example of those who spoke out against an EIS.

  • chrgordon27

    If you really want AEMC to do anything about integrating energy policy and climate policy, a then the first thing you need to do is make the COAG council amend the NEO and NGO. Without either of the words ‘climate’, ‘sustainability’ or ‘environment’ in the NEO, the AEMC is powerless to affect change on its own.