The next stage of the modernisation of Australia’s main electricity grid could see greater differentiation between jurisdictions if the consultation paper accompanying the proposed reforms is any guide, according to KPMG’s grid specialist, Christiaan Zuur.
The National Electricity Market Wholesale Market Settings Regulatory Reforms paper, released as part of a package by the federal government this week, will likely spark discussion at the first of three public webinars – starting September 24th – on the changes.
The focus will be the design of the Electricity Services Entry Mechanism (ESEM), the core recommendation of the Nelson review into the national electricity market beyond 2030. Governments have granted themselves a tight timetable to finalise the scheme.
Zuur, who is KPMG’s director for energy infrastructure, said the ESEM would continue a “balkanisation” that has been underway between the NEM states for some time.
“Each of the states has their own physical drivers, first and foremost,” Zuur told Renew Economy. That includes different ages of their coal fleets – implying varying levels of operational stress – diverse technologies, and different ownership structures.
Queensland, too, has so far declined to approve ESEM. The state appears five times in the consultation paper, mostly accompanied by an “excluding” or “except” tag.
One notable design feature is the provision that jurisdictions “may nominate which targets will guide procurement of ESEM services, broadened to include reliability targets” as well as carbon emissions ones, the paper stated.
Work on this feature would presumably dovetail with a separate review of the grid’s reliability standard being conducted by the Australian Energy Markets Commission. The AEMC is set to provide energy ministers with final recommendations by the end of 2027, in time for ESEM’s start.
“The potential for different reliability requirements is a really interesting one,” Zuur said, noting there is already some divergence over interim reliability and reliability standards. “Different states might be able to assess their own reliability needs, or consider their own drivers that are going to impact reliability in their jurisdiction.”
“I think that’s going to be one of the drivers of cost of the scheme in the different jurisdictions – just how much reliability do you want to guarantee for?” he said. Other issues include the level of strategic reserves and so-called special purpose procurements such as Victoria’s offshore wind auctions.
“So there’s a lot of unknowns,” Zuur said. He detailed some of these in posts to his LinkedIn account, here and here.
One closely watched area may be how consumer and industry interests are balanced with the role of small consumers in the ESEM design still unclear, he said.
As the consultation paper notes, “[a]s electricity consumers ultimately receive any rebates and/or bear any costs resulting from the ESEM’s activities, risks should be managed in a way that supports the long-term interests of NEM consumers”.
Two new bodies, an ESEM administrator (ESEMA), and a financial management entity (FME) will “have regard to the National Electricity Objective, and promote meeting the entry objective at the lowest cost to consumers.”
Industry, meanwhile, is helping to lead electricity contract designs to close the so-called “tenor gap” that exists between the pace of exiting coal plants and new generation coming online.
Overall, the ESEM intends to build on “existing and proposed state schemes”, including the first Victorian offshore wind auction of 2 gigawatts, existing electricity infrastructure support programs like the Long-Term Energy Service Agreements (LTESA) in NSW, and the South Australian Firm Energy Reliability Mechanism (FERM).
“All costs associated with the roll-in of aspects of or the entirety of state-based schemes will be allocated to the respective state,” the consultation paper said.
The exception to this ESEM integration is the Large-scale Feed-in Tariff (LFiT) scheme in the ACT.
Victoria and NSW, though, hold state elections in November and next March, respectively, potentially altering those states’ plans.
The consultation paper and the coming trio of public seminars, though, should go some way to clarifying and refining many of the issues, Zuur said.
“I think it’s pretty important that it actually gets put in place because the time is frankly running out,” he said. “Those coal assets are getting closer and closer to their exit … so we really do need some mechanism in place to bring forward that replacement capacity.”
Public feedback on the consultation package will close on October 13th.
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