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Client Update: Finkel: the solution for our energy future?

13 June 2017

In brief: As the saying goes, 'never let a good crisis' go to waste. The Finkel Review, commissioned after blackouts in South Australia and delivered by Australia's Chief Scientist last week, may prove to be the right report at the right time to garner support for energy and emissions policy positions that could provide investment certainty, regulatory direction and political peace for generations. Our energy experts consider the report's broader implications for Australian business: what questions should business leaders be asking of their teams in a post-Finkel world?

Three problems, four outcomes, five trends

The expansive summary of the Report provides a very good overview. Rather than produce another summary, we have analysed the report and considered its broader implications for Australian businesses. That is, what questions should business leaders be asking of their teams in a post-Finkel world? Set out below are our picks for the most important issues that will, if the report's recommendations are adopted, change the energy landscape for all Australians who use, produce, distribute or invest in energy.

The strength of this report is its breadth and independence. The report presents a range of ideas, many of them well-trodden paths, and makes recommendations with the goal of improving the National Electricity Market through increased security, future reliability, rewarding consumers and lower emissions. However, underlying the recommendations that support these desired outcomes, the report reveals three problems that Finkel, explicitly or implicitly, sets out to solve:

  1. The current energy market mechanisms and frameworks are unable to coordinate and encourage investment in ways that reliably and optimally produce the desired NEM outcomes.
  2. The political uncertainty around emissions reduction mechanisms has led to investment uncertainty which has in turn caused price, reliability and system security problems.
  3. The regulatory bodies tasked with controlling the energy market lack the direction, resources and accountability to regulate the NEM appropriately in the face of a changing technological and emissions environment.

Finkel proposes that if his recommendations are adopted, these three problems would be solved and the desired outcomes achieved. From these recommendations, we see five key trends emerging which lead to a series of key questions business leaders should be asking their executive teams.

Key trends and the questions to be asking

Key trends and recommendationsQuestions for business leaders
1. Increasing intervention by regulators and governments
  • AEMO should start monitoring fuel availability, particularly gas, and have 'last resort' powers to intervene in markets.
  • Market mechanisms for system security are unlikely to be successful in the short term so these measures should be regulator led.
  • Governments and AEMO should identify particular transmission network projects that could be invested in directly to overcome market problems.
  • Large generators should be required to provide at least three years' notice before exiting the market.
  • Depending on the needs of a particular region within the NEM, new generators should be obliged to be 'dispatchable' or partner with other generators to provide reliable, dispatchable generation.
  • What sort of control could a regulator exercise over us currently and what impact would this have on our business? How would their powers interact with those of the Critical Infrastructure Centre?
  • What groundwork can be done to ensure any regulatory intervention is helpful and profitable rather than harmful and problematic?
  • How can we participate in regulator led markets for new products and services?
  • How can we be, and be seen to be, part of the solution?
  • What would it mean if we were required to give three years' notice before making a decision to close our business?
  • How does the level of generation 'dispatchability' in our areas of the NEM affect the reliability of our power supply or our generation investment decisions?
2. Greater technical control over generation to provide system security
  • To support the system's security, a range of technical services such as inertia and fast frequency response should either be required from new generators connecting to the grid or procured by transmission networks.
  • Stricter controls should be applied to new generators as part of their connection standards.
  • Generators should be required to operate in ways that may increase wear and tear while improving the system's ability to withstand frequency changes.
  • New technologies such as pumped hydro storage systems and battery storage should be procured to provide new black system restart and frequency control services.
  • How will requirements for new system security technology affect the viability of our investments in generation and transmission?
  • How will changing connection and operating settings affect the cost and risk profile of our assets?
  • How can we provide products and services that respond to greater demand for system security?
  • Who can we partner with to provide system security services at a scale that will have impact?
  • Which investments in innovation, research and development will allow our assets to do more with less?
  • How would investment in energy storage affect our business?
3. Optimised data from multiple sources – managed securely
  • AEMO should have more information from generators to allow it to forecast problems and intervene earlier.
  • Distributed energy sources that connect to the grid should be required to provide more data to AEMO to allow grid transmission and security services to be optimised.
  • Consumers' ability to access and use energy data should be enhanced.
  • How can we aggregate, analyse and use the data from the NEM and our demand to unlock value without affecting natural market forces?
  • How can our business use our data better and be paid to reduce load and contribute to energy security?
  • How would our energy business fare in a cyber security audit or attack?
  • How can we use data to predict extreme weather, high demand or network faults and capitalise on this by supplying more electricity at critical times?
4. Political stability leading to a smooth transition
  • The Australian Governments should agree a national emissions reduction trajectory.
  • A Clean Energy Target with strong similarities to the Renewable Energy Target has the best chance of being a politically palatable and stable emissions reduction platform.
  • Which technologies and investments will win and lose as the energy sector responds to new emissions incentives?
  • How can we stay part of the conversation and protect our interests?
  • Which of our projects become viable or threatened under a Clean Energy Target scheme?
5. Energy market institutions require clear direction and more resources
  • An Energy Security Board should be created to report into the COAG Energy Council and coordinate the efforts of the three main energy market institutions.
  • The Energy Security Board should plan and report on progress against a strategic energy plan.
  • The Australian Governments should renew their energy vows and re-align their policy approach.
  • Energy market institutions should be better resourced and faster at adopting new market rules.
  • What changes to electricity rules would see the greatest benefit or threat to our business?
  • What would a regulator find if they had the resources to investigate our business?
  • What would our ideal energy policy look like and how can we convey this message to decision makers?
  • How will changing energy market rules affect the price of electricity or ability to hedge against market risks?

Where to from here

Of course, the Finkel Review is not law or even policy yet and it is likely to be weeks, months or years before these recommendations  emerge from the political and regulatory review process. In the meantime, the energy market will continue to change, with a number of important rule changes and reports due from the Australian Energy Market Commission in the next month or so and climate policy being rapidly shaped at home and abroad.

We encourage you to take time to consider the Finkel Review and what it may mean for your business. Regardless of which recommendations are eventually adopted, we see strong partnerships between energy market participants, investors, technology providers, advisers and financiers as being a sure bet in navigating an uncertain energy future. We invite you to get in touch and share your thoughts – of course we would be delighted to share ours.

Look out for further analysis from us over the coming weeks on the implications of Finkel's recommendations.

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