Reforming the Australian energy sector


In order to enable consumers to have a clearer understanding of their energy consumption and better manage their demand, and to encourage active incentives and demand-side programmes by supply chain businesses, in 2012 the Australian Energy Market Commission (AEMC) implemented a set of reforms known as the Power of Choice reform.

This article was originally published in Smart Energy International 5-2018.  You have access to our digital magazine here.

In July 2018 the AEMC delivered two further reports which addressed the need for reliability and security – keeping the lights on at the lowest cost in the face of sector transformation and managing the increased distributed generation sources on the network.


The 2012 reforms proposed included:

• The implementation of a ‘market-led’ rollout of smart meters and services

• The introduction of cost-reflective network pricing • Improved access to information for customers about their energy consumption

• The ability to more easily switch retailers

• Enhance access to demand-side participation information for market operators

In December 2016, Australia’s chief scientist Dr Alan Finkel presented the Preliminary Report of the National Electricity Market (NEM) Security Review to the Council of Australian Governments (COAG) Leaders in Canberra.

The report identified the forces of change confronting the NEM and key questions to guide consultations on the development of a blueprint for Australia’s electricity future. Finkel told the COAG Leaders that “our national electricity grid is under pressure and in need of urgent attention.”

“We now have a once-in-a-generation opportunity to reform the electricity sector to maximise its resilience in the face of rapid market changes. The goal is to ensure we have a secure electricity supply, at an affordable price for all Australian consumers, while meeting our international obligations to lower emissions.”

Residential consumers are driving the transformation as they take charge of their energy use and bring down their bills. Australia leads the world in solar rooftop penetration per capita, with more than 1.5 million systems installed. More than 1 million home battery storage systems are projected over the next 20 years.

“It is clear from our early consultations that investors are less confident today than they were in the past. There are solutions to the challenges we face and we will have to change the way we operate,” Finkel said.

Some key observations identified in the report include:

• The security and reliability of electricity supply is less assured than in the past

• The rate of technological change is unprecedented and consumer expectations are shifting rapidly

• Household energy bills rose on average almost 50% (inflation adjusted) in the six years to 2014

• Inadequate supply and the high cost of natural gas are contributing to electricity price rises

• There is broad enthusiasm for a coordinated national approach to energy and emissions reduction policies.

Two predominant concerns coming from the Finkel report are those of reliability of supply and security of that supply.

According to the AEMC definition, a power system is reliable when there is enough generation, demand-side and network capacity to supply customers with the energy they demand, with a very high degree of confidence; secure when it can operate within defined technical limits, such as frequency, even if there is an incident such as the loss of a major transmission line or large generator.

In order to facilitate this level of reliability and security, the AEMC in July 2018 recommended the following obligations:


There is a need to improve the information available to the market in order to allow for more informed decision making by market participants, the operator, regulators and policy makers. This will be facilitated by the provision of forecast deviation data which will inform operational and investment decisions; a quarterly report of the variation between forecast and actual values in “projected assessments of system adequacy (PASA), and pre-dispatch forecast processes.” Additionally, demand will be integrated into the wholesale market in order to support an active demand side. This will be done by a wholesale demand response mechanism, supported and informed by Australian Energy Market Operator (AEMO) and Australian Renewable Energy Agency (ARENA) demand response trials; a voluntary, short-term forward market that would allow trading of financial contracts closer to real time; and potentially “giving consumers the ability to contract with multiple retailers or aggregators at the same connection point (multiple trading relationships)” thereby providing more opportunities for consumers to offer their demand response in the wholesale market.

Development of a register of distributed energy resources:

There is an obligation on the AEMO to establish, maintain and update a register of DER devices in the NEM, including small scale battery storage systems and solar. National service providers are required to request this information for their customers and share this with AEMO. The AEMO will then share disaggregated data regarding the locational and technical characteristics of DER devices on the network.

Other obligations are the need to improve wholesale market outcomes and signals to further facilitate efficient investmentand operational decisions. This will focus heavily on improving self-forecasting accuracy to non-scheduled generators and an investigation into the future expansion needs of the NEM. This will be supported by adapting the intervention framework so it is fit for the purposes of a changing power system.


The gradual increase in variable sources of electricity generation and consumption on the grid, and the accompanying difficulties in predicting variability increases the potential for imbalances between supply and demand that can cause frequency disturbances. The AEMC therefore undertook a framework review as one of the crucial technical parameters of power system security – frequency control.

The review takes five frequency control parameters into account:

1. Frequency control during normal operation

According to the report, frequency performance under normal operating conditions has been deteriorating. In order to better understand the reasons behind this deterioration, AEMO will be undertaking a number of studies to determine how frequency performance can be improved in the short term and how new business models like virtual power plants can be integrated. Until such time as these are complete, no further action is recommended in this regard, although there is a need for a more permanent solution.

2. Future FCAS frameworks

Determination needs to be made as to whether the current frequency control ancillary services (FCAS) markets remain fit for purpose in the longer-term; and how to incorporate fast frequency response, and longer-term options to facilitate co-optimisation of energy, FCAS and inertia. The best approach to the procurement of frequency services in the longer-term is one that is performancebased, dynamic and transparent.

3. Frequency monitoring, reporting, and forecasting Adjustments to existing forecasting and frequency reporting may enhance the operation of the frequency control frameworks.

Two rule changes are proposed to promote transparency of the frequency performance of the power system and competitiveness of FCAS markets.

4. Participation of distributed energy resources in system security frameworks

The potential for distributed energy resources to provide system security services needs to be supported by regulation and rule changes.

5. AEMO’s market ancillary services specification (MASS) Market ancillary services specifications underpin the provision of FCAS in the NEM. The MASS should be amended to facilitate and refine the provision of FCAS from new technologies, including storage, aggregated distributed energy resources and demand response. A review of the MASS started in August 2018.