Evaluating the impact of alternative policy levers and market mechanisms to drive NEM decarbonisation using a Total Systems Cost approach

The National Electricity Market (NEM) is a complex, interdependent system. Government policies (e.g. Renewables Energy Targets, RET) and governance mechanisms (e.g. Energy Security Board and Australian Energy market Operator, AEMO) influence energy system, price and carbon emissions outcomes in ways which are difficult to predict. The Market has is no ‘central controller’ or body accountable for delivering a system of “lowest total system cost”, market mechanisms and regulation are the available tools and options that may be used to drive towards a lowest “total system cost” system within some other policy goal (such as decarbonisation). The situation is further complicated in a real physical system which is inter-linked (between States) and where both Federal and State policies and targets are being set independently.

In this context, a gap in understanding exists of the impact of various policy levers and market mechanisms on the essential elements of a competent electricity generation and distribution system (grid) that is being decarbonised. It is important to understand the impact of instruments like energy certificates, carbon price, inertia markets and frequency response mandates on the role of future low emissions coal plants. Understanding the impact of market rules and regulations

required to achieve a lowest total system cost outcome is critical to shaping what the ‘rules of a lowest cost NEM’ might need to be.

Although modelling can help determine where to go it is of limited value in saying how to get there, or, in a complex system, what else might happen.

This project will seek to explore policies that can be put in place to achieve the optimal systems modelled and looks at regulation vs markets for grid services necessary to “keep the lights on”. Such policies may have already been suggested as part of historic NEM reviews, or have been suggested in key academic texts or by ‘think- tanks’; or they may already be in place in other jurisdictions.

This project will investigate through system modelling and/or exploring experience analogues jurisdictions:

• The effectiveness and limitations of a raft of policy levers that can be used to deliver decarbonisation, viz RETs, Carbon price, emission limits, etc.

• How policy levers could have unintended consequences for grid security and/or total cost.

• The mechanisms that can be used to deliver grid services at risk. Which are best regulated and which can be commoditised?

This project will also undertake an international comparison of NEM and South West Interconnected System (SWIS) with other systems undergoing similar transformations.

Advisory Team: Associate Professor Paul Dargusch, Professor Andrew Garnett

Funding: Gamma Energy Technology