AEMC submission to the Independent review into the future security of the national electricity market

• The National Electricity Market was established in the context of a national productivity reform agenda aimed at delivering markets that are competitive where possible, and well -regulated where not. • The NEM was established to introduce competition in the electricity sector and to decentralise operational and investment decisions away from governments and regulators to commercial parties. It also recognised the fact that the energy sector is not static. Change in markets is not new, and the framework was designed to, and does, evolve continuously while still meeting the need for a stable investment environment. • Regulatory and market arrangements can be thought of as primary mechanisms for allocating and managing risks. Diagnosing and responding to regulatory and market failures therefore demands both clarity of policy objectives and a deep understanding of the technical, economic and financial risks inherent to the energy sector. • The success of any regulatory framework largely depends on how the people who operate the system and its many parts respond when something happens that had not been anticipated. • When designing frameworks, consideration should always be given to the fact that consumers are best served by workably competitive wholesale and retail markets that allocate risks to commercial parties that have the strongest incentives and abilities to manage those risks. Changes in technology or market conditions should not require changes in frameworks; rather the frameworks should be capable of adapting and self-correcting. • The overall aim of the NEM is to provide a reliable, secure energy supply at the best possible price for consumers and it must deliver this while the sector transforms. Significant investment is needed to support this transformation and regulatory frameworks must support investment in the broadest range of technologies possible in order to deliver the outcomes customers want, at lowest cost. • A comprehensive system security work program is already underway which will help deliver technical solutions and regulatory and market framework changes necessary to maintain a secure supply of electricity for customers as the NEM transitions to a lower emissions future. • There are three matters the AEMC believes are critical to maintaining security in the current environment of change : 1. Good Governance - there are opportunities to improve the effective functioning of the current governance arrangements to shorten the lag between when challenges emerge, and when they are acted upon. 2. Effective integration of emissions reduction and energy policy - the design of any mechanism to achieve emissions reduction objectives is crucial if we are to achieve both the required emissions reductions and the safe, secure and reliable supply of electricity at the best price for consumers. If the impact on how the electricity markets operate is not properly considered when designing a mechanism to drive emissions reductions in the electricity sector, then the achievement of both energy and emissions objectives will be at risk. 3. Giving investors and consumers confidence - appropriate investment signals, and the ability to respond to those signals, are critical to achieving sufficient and timely investment in the technology necessary to maintaining security of supply and competition in the retail market. Fundamental risk management structures within the NEM must be maintained so as to protect customers from bearing the risk of those investments. • As the Australian energy market becomes more dynamic , it is more important than ever that all parties are committed to playing their appropriate role in supporting timely , national energy market development