AEMO review rejects radical change of governance, green lights auction house exit

The energy market operator should spin off its subsidiary that handles tenders but keep its ownership over the Integrated System Plan, an independent review says. 

The review into the Australian Energy Market Operator’s (AEMO) governance arrangements suggested tweaks to the way the organisation is run, but rejected calls for more radical changes that had been put forward in some submissions.

It did however accept that the largely unchanged governance system from 2009 did “reflect a different era”, but tweakments could achieve the same result as a full facelift with less disruption.

The biggest change recommended by the review, led by senior governance expert Nigel Ray, was to spin off AusEnergy Services Limited (ASL), which was set up to handle New South Wales’ (NSW) energy auctions but now handles tenders for several government schemes.

Ray found “near universal” support for splitting the two apart, given ASL’s investment-driven mandate is to get infrastructure built, fast, versus AEMO’s need to balance reliability, security and affordability for the grid and consumers.

“The review considers there is a strong case for ASL to be spun off as a standalone entity, structurally independent from AEMO, to help focus AEMO on those functions, remove a source of structural conflict and promote multi-jurisdictional participation in ASL” the final report says. 

The discrepancy between what ASL and AEMO are tasked to do could be a problem for the Electricity Services Entry Mechanism (ESEM).

“Most stakeholders who considered ASL’s potential role as the ESEM administrator note that it should sit in an entity separate to AEMO,” the review says.

“This is largely based on the scale of the ESEM and a concern that its contract recycling function is of a highly commercial nature that could result in conflict with AEMO’s market operation function.”

The other key alteration to AEMO’s mandate is another addition, this time to embed a national security objective.

The recommendation is to have AEMO explicitly consider national security in its system planning, operations and emergency management arrangements. 

AEMO was set up in 2009 to manage the day-to-day energy system and wholesale market. 

But its remit has been expanded since then to include long term planning, gas market reliability and security, grid system strength, and running energy investment schemes.

As a result, its processes are already under the rapid pace of change and many submissions called for radical alterations to cope with the new energy era.  

These included splitting AEMO in two and making it a full government body (rather than an independent corporate entity) – although AEMO itself argued strongly to remain as is. 

Keep planning in house

What industry is divided over is whether AEMO should be the one handling the planning of Australia’s energy systems. 

Among its planning tasks, AEMO delivers the Integrated System Plan (ISP), which draws a picture of how to meet the country’s future energy requirements over two decades, and the 10-year reliability outlooks the Electricity Statement of Opportunities (ESOO) and Gas Statement of Opportunities (GSOO).

But some in the energy industry think AEMO shouldn’t handle planning at all and say this is a “policy-like” function that should be handled by a government body. 

“The highlighted concerns largely fall into the following categories: policy misalignment, a lack of national leadership and insufficient national-scale focus in planning inputs and outputs; different risk appetites and potential conflicts of interest leading to increased costs for consumers; concerns about AEMO’s role in designating projects ‘actionable’ under the ISP,” the review says.

It’s a problem, some submissions say, that could be solved by absorbing AEMO into the government entirely – it currently sits outside as a corporation – with governments paying its costs rather than industry members. 

Taking long term planning roles from AEMO and giving them to governments would create more problems than it would solve though, the review found. 

Not least would be the difficulties in having non-operational people trying to create a long term plan that works, without much idea of what is and isn’t working now. 

However, the review did accept that a “keeping the lights on” approach could be improved with tweaks, such as asking AEMO to also consider lower cost options, for example.