How do you solve a problem like the NEO?

In Asia, they say that a fish rots from the head. That’s usually applied to corruption in high places, but it could equally apply to Australia’s energy markets, which are ruled by the near-identical national electricity, gas and retail objectives (the NEO).[1] But that might be about to change.

First, some background. The NEO was conceived as an economist’s dream. Let the market follow the mantra of economic efficiency, and let other arms of government take care of warm and fuzzy stuff like the social and environmental consequences of our electricity supply and demand.

So while the Finkel Review recognises the “energy trilemma” – security, affordability and sustainability – we have a market that, like a wobbly tripod, recognises only the first two of these objectives.

Back in the real world, this purist view of market dynamics has become increasingly divorced from the complexities of public policy. The glacial pace of energy market reform, the multiple biases towards the current business models of the incumbent fossil fuel industry and the quagmire of federal climate policy have combined to ensure that the electricity sector is only marginally less dependent on coal and gas than it was five years ago.

This disconnect between the market and environmental policy wasn’t always so. The 1992 National Grid Protocol referred to the “environmentally sound development of the electricity industry”, and one of the objectives of the current (but ignored) COAG National Energy Market Agreement is to “address greenhouse emissions from the energy sector, in light of the concerns about climate change and the need for a stable long-term framework for investment in energy supplies.”

Some state legislation covering networks not yet in private hands includes environmental objectives. More importantly, numerous other OECD jurisdictions do include decarbonisation or broader sustainability or environmental objectives in their energy market legislation and/or regulations. There is no evidence that this makes it harder to keep the lights on or to constrain retail prices any more than has been the case recently in the NEM.

There have been numerous calls for reform of the NEO – from the Australian Greens, GetUp, the group of prominent Australians commissioned Our Energy Future late in 2016, Victoria’s Energy Minister Lily D’Ambrosio, and others.

These calls have grown louder since Australia ratified the Paris Agreement on climate change last year. It is now critical that decarbonisation is part of the mix when regulators are making decisions that will impact on the future of the energy sector.

Instead we have a situation where decarbonisation targets and the costs of climate change mitigation, adaptation, damage and delayed action are effectively ignored in a regulatory bubble.

Recent problems related to blackouts and price spikes in several states are an indication that a “whole of system” approach is needed. It is easy incorrectly to blame wind farms in South Australia when there are blackouts because market bodies are not tasked with ensuring that we are on a long term decarbonisation path requiring cooperation on both the supply and demand sides.

The energy market rule-maker, regulator and operator need to be working together with a clear mandate about aligning their processes and decisions with government decarbonisation targets. This would ensure, for instance, that the rapid rollout of grid scale energy storage technologies is incentivised alongside more wind and solar energy to ensure that the system remains reliable even during those peak periods when there is insufficient renewable generation.

So, what to do? Calls for reform of the NEO are often short on detail. GetUp and Solar Citizens’ Homegrown Power Plan goes a step further, proposing that the NEO be reworded to: “Deliver an affordable, efficient, reliable, safe and fair electricity system that is powered by 100% renewable energy.” A laudable outcome, but perhaps not a practical market objective on its own, since its introduction would, among other things, require all non-renewable generation to be shut down overnight.

There may, however, be some baby steps we can take on the road to recognising full decarbonisation of the energy sector. A submission from thirteen environmental groups and local government bodies* to the Commonwealth’s  Finkel Review – which raised the prospect of reforming the NEO in its preliminary report – proposed a variety of options.

In the short term this could involve the COAG Energy Council issuing a Statement of Policy Principles (provided for in the National Electricity Law, but never utilised to date) requiring regulators to issue Carbon Impact Statements with every major decision they make. This would ensure they start to think about how their decisions help or hinder the decarbonisation process.

The next step could be for regulators to be required to factor decarbonisation goals and climate change costs into their decisions more explicitly – for instance, by requiring network investment decisions to take into account the shift to renewable and distributed generation, or by imposing maximum time limits for identified decarabonisation-related regulatory reforms.

Then there are more radical options. AEMO could be required to add the costs of the health impacts of coal mining and transportation (even aside from climate change damage and adaptation) to the wholesale price of brown and black coal in the wholesale market dispatch price. But that would be a political minefield. And we have to ensure that reforming the NEO is not about duplicating policy levers like the Renewable Energy Target and some kind of carbon price. We want to align energy market regulation with climate policy – making sure the former doesn’t get in the way of the latter – rather than duplicate it.

In the longer term, amendments to the national electricity law will still be required to include decarbonisation in the national energy objective in some form. But given the way COAG works, with agreement required from all state and territory ministers before any reform happens, incremental reform appears to be the most viable option in the current political environment.

Does this sound like a plan – or a fishy recipe at least?

* These signatories do not necessarily all agree with all of the views expressed in this article.

Mark Byrne is Energy Market Advocate at the Total Environment Centre

[1] The NEO is Section 7 of the National Electricity Law:

The objective of this Law is to promote efficient investment in, and efficient operation and use of, electricity services for the long term interests of consumers of electricity with respect to:

(a) price, quality, safety, reliability, and security of supply of electricity; and

(b) the reliability, safety and security of the national electricity system.