A review of the Energy Security Board (ESB) conducted by Rhys Edwards [Edwards Review] and the energy ministers’ response was published late Friday. This document was a good read, although just as challenging to a financial analyst as writing about digital inertia.
Law, governance, and policy development are complex areas and lots of smart people have lots of well-argued opinions. I would like to compliment the energy ministers and the secretariat for publishing both the review and their prompt advice as to how the Edwards Review recommendations will be treated.
For reference, the diagram below shows the various bodies as presented in the Edwards Review. Amusingly, it doesn’t even show the Senior Committee of Energy Officials that Edwards wants to give a bigger role.
The Edwards Review stated:
“As previously discussed, it would be highly unusual if policy makers were starting governance design from scratch that you would come up with a model of three market bodies (a rule maker, a regulator and an operator) along with a fourth coordinating body to provide policy direction and market development advice.”
My own view is that a version of the ESB is pretty much exactly what is needed in the National Electricity Market (NEM). That isn’t what I thought when Finkel report was first published. At that time, I thought: ‘Why do we need another government body?” Now I think the ESB has done a job the AEMC (Australian Energy Market Commission) wasn’t doing, and additionally it has championed the ISP in a necessary way.
I still think the federal government dislikes the ESB as an organisation because it doesn’t control it. Early on, COAG made it clear that the federal, or indeed any other government, couldn’t individually task the ESB; its agenda had to come from COAG. In my view, this is an appropriate way to run co-operative federalism. But what would I know?
The need for the ESB is because:
1. It takes an independent NEM-wide view of market design and policy. Doing a good job here clearly depends very heavily on the quality of the Chair and there is a wide recognition of the good job Kerry Schott performs. An alternative body, in practice, run by the Chair of Senior Energy Officials, could never bring that degree of independence and NEM-wide view. Similarly, a market bodies’ forum with no single person in charge and without any executive responsibilities may not be very useful to anyone.
2. The ESB is, by nature, proactive looking forward. In my view, that’s what required.
3. It coordinates the roles of the Australian Energy Market Commission (AEMC), the Australian Energy Regulator (AER) and the Australian Energy Market Operator (AEMO). In my view, the market development function of the AEMC might be removed and the AEMC might be tasked with developing rules that implement principles and designs of the ESB.
Different ways of doing things might be possible if the federal government was more aligned with the states, but it’s not. And even if it were there is always the possibility of strong disagreement. A policy development and advice organisation empowered by and reporting to the National Federation Reform Council and with executive responsibility still seems like a workable model to me.
Over and beyond the body, progress would be faster if a decarbonisation heading was written into the National Electricity Objective. The long-term interests of current and future Australians, most of whom are or will be electricity consumers, will be best served by a National Electricity Objective that recognises the economic and public health benefits of decarbonisation.
ESB born from shortcomings identified by Finkel and Vertigan:
“The Finkel Review focused on four key outcomes from the NEM: increased security, future reliability, rewarding consumers and lower emissions. Importantly, these outcomes were to be underpinned by the three pillars of an orderly transition, better planning system and stronger governance (Finkel, p5). The rationale for the recommendations around stronger governance in Finkel’s focus on a requirement for trusted, capable, empowered and accountable institutions, and the energy market bodies responding in a timely way to rapid changes that will occur in the NEM.”
Clearly, the recommendation for stronger governance wouldn’t have been made if the Finkel Inquiry members felt that the existing governance was sufficient. However, I’m sure there are lots of folk out there who don’t accept that the governance of the NEM did need to be strengthened. Existing governance prior to the ESB was, arguably, primarily the responsibility of the committee of officials and the AEMC.
For instance, as described in the Edwards Review as in part:
“The AEMC is responsible for developing Australia’s energy markets under national electricity and gas laws, bringing consistent decision making and regulation to the energy sector.”
I don’t think the AEMC had done a good job of market development, and it seems that others were of a similar view, which is why the ESB exists. To this day there is ongoing duplication/overlap of function between the ESB and the AEMC and this is reflected legally in that they both have rule-making powers. The Edwards review recommended that the ESB lose its rule-making power but this recommendation was specifically rejected by the energy ministers.
As dumb as I am, I feel that this means the energy ministers want to preserve a way to get things done without having to go through the AEMC. I think this reflects poorly on the AEMC and equally, perhaps the AEMC may feel it reflects poorly on the energy ministers.
In part, it’s an issue with the Senior Energy Officials. Apparently even the earlier Vertigan review of the AEMC recommended their role should be strengthened with an explicit policy development function. There are lots of problems with that, in practice, as there is unlikely to be much commonality of purpose between the officials given that they serve different masters and have different agendas.
The advantage of the ESB is it is independent of any one government, and is focused on market development. This seems obvious enough to me but not apparently to others.
The planning system was AEMO’s responsibility and clearly they have got on with that, at least as far as transmission goes via the ISP. One can argue whether the transition is “orderly”. Indeed lots of people still dispute whether a transition is needed at all and whether indeed one is actually happening.
COAG replaced by National Federation Reform Council
It’s interesting that “reform” makes it into the title of the Council. “Energy is one of the National Cabinet Reform Committees established under the Reform Council to focus on key national strategic issues for energy and will replace the former COAG Energy Council. The detail about how the Reform Committee will operate is still under development at the time of delivery of this Review.”
ESB may be replaced by an empowered Market Bodies Forum (MBF)
The Edwards Review stated that:
“The period of time since the ESB has been in existence has shown the desirability of a forum that brings the energy market bodies (Australian Energy Market Commission (AEMC), Australian Energy Regulator (AER) and Australian Energy Market Operator (AEMO) together to help integrate the interlocking responsibilities for overall national energy security and enable a formulation of a single coherent and collaborative approach to strategic policy and market development advice to ministers.”
The Edwards review recommended that the ESB remain in part until December 2021. The Energy Ministers responded that:
“Energy Ministers agree to extend the term of the ESB until at least December 2021, pending completion of the post-2025 market design project.” With the operative words being “at least”.
My comment is that the post-2025 design will need to be agreed by all parties and then implemented. Someone will have to oversee the implementation, assuming there is agreement. That project will effectively need a chief executive and it’s bound to be difficult. In turn, the chief executive will need a Board to report to.
I personally doubt whether the market bodies forum (discussed below) will be the right organisation. The Edwards Review went on to recommend, on the assumption the ESB is wound up:
“Transition planning for the cessation of the ESB should include a proposal for a Market Bodies Forum (MBF). The Review recommends that there is representation by Senior Energy Officials on an MBF and that senior officials should be responsible for working with the market bodies to develop this forum…… A range of other issues will need to be considered including: membership, which entity should chair the MBF, and in what way should the market bodies be given a statutory obligation to coordinate in pursuit of their common statutory objectives in order to underpin the working of the MBF.“
The current MBF has no legal power and is just a forum. The Edwards Review States:
“The Market Bodies Forum is a non-statutory, unincorporated body and has no legal functions or powers separate from those of each member.”
I think something with more meat is required. The energy ministers’ response to the review recommendation was “Agreed in principle Energy Ministers will consider options for future energy governance arrangements in mid- 2021 pending the recommendations of the post-2025 market design work.”
The ESB from now on is going to be focussed on the post-2025 market design advice and current work program.
Senior Energy Officials – Chair is a federal appointee
The Edwards Review proposes empowering the Senior Energy Officials. If I have understood things correctly that would effectively had policy development to the federal government because the senior officials would be dominated by the Chair, who is a federal government appointee.
A quote from the Edwards Review:
“Central to Vertigan’s recommendations around the role of SCO was how they might best undertake the role of oversighting and reporting on the delivery of the Council’s work program in a way that enhances the national perspective of the work without creating ‘another organisation’.”
The Edwards Review in recommendation 11 stated that the Chair of the Group of Senior Energy Officials should be appointed as an ex officio but non-voting member of the ESB, but energy ministers rejected this advice.
And in my view, a working group, or an empowered group of Senior Energy Officials, is likely to be compromised before it starts. The Edwards Review states that:
“This will also require Senior Energy Officials, and in particular the Chair of the Officials, to demonstrate that in that role they are working as a “national official” focussed on the delivery and outcomes embodied in the SEP, not a Commonwealth official representing jurisdictional interests.”
However this seems a highly unlikely outcome to me and for that reason I cant see the Senior Officials, no matter how talented, being the appropriate body to develop policy.
David Leitch is a regular contributor to Renew Economy. He is principal at ITK, specialising in analysis of electricity, gas and decarbonisation drawn from 33 years experience in stockbroking research & analysis for UBS, JPMorgan and predecessor firms.