The reform of the Australian electricity industry commenced in the early 1990s.  Separate commercial structures have been developed for the monopoly transmission and distribution ('wires') functions and the competitive generation and retailing functions of the industry.

The major reform in the Australian electricity industry involved the establishment in southern and eastern Australia of the National Electricity Market (NEM).  The NEM operates in the States of New South Wales, Victoria, Queensland, South Australia and Tasmania and in the Australian Capital Territory.  Western Australia and the Northern Territory will always be excluded from the “National” Electricity Market because of the lack of electrical interconnections and the vast distances between their load centres and the interconnected electricity network in the southern and eastern States.  Western Australia has a wholesale electricity market that operates only in that State.

The market operator for the NEM is the Australian Energy Market Operator (AEMO).  AEMO operates both the NEM and the retail and wholesale gas markets in south eastern Australia.  AEMO is responsible for generator dispatch, reliability management and financial settlements in the NEM.  AEMO was established in 2009 by combining the functions of its predecessor, the National Electricity Market Management Company (NEMMCO), with that of various gas markets operators and electricity transmission planning bodies.  AEMO is incorporated as a company limited by guarantee under the Corporations Act.  The ownership of AEMO is comprised of 60% government members and 40% industry members.

The National Electricity Market commenced operation on 13 December 1998 under a detailed set of rules called the National Electricity Code.  A separate organisation, the National Electricity Code Administrator (NECA), was responsible for administering the Code, for making sure that participants complied with the rules, for ongoing development of the Code and for undertaking reviews of various parts of the rules.  The National Electricity Code was authorised by the Australian Competition and Consumer Commission (ACCC), a federal government body responsible for administering the Commonwealth Trade Practices Act.  Any changes to the Code required ACCC authorisation.

In June 2001, following general dissatisfaction with the original governance arrangements for the NEM, the Council of Australian Governments (COAG) endorsed the need for a national energy policy and agreed to commission an independent review of the strategic direction for stationary energy market reform in Australia.  The final report of the review was published in early 2003 and recommended significant changes to the organisations which governed and operated the National Electricity Market.

Also in June 2001, the Council of Australian Governments (CoAG) agreed to establish a new Ministerial Council on Energy (MCE) to provide a forum for national leadership on energy issues.  The MCE includes federal, State and Territory energy ministers, in addition to ministers from New Zealand and Papua New Guinea as observers.  The MCE has responsibility to provide effective policy leadership to meet the opportunities and challenges facing the energy sector and to oversee the continued development of national energy policy.  A key task of the MCE is to identify policies and programs which will deliver significant improvements in energy efficiency through co-ordinated action by federal, state and territory government agencies.

The MCE agreed to a series of far reaching reforms of the energy market.  These initiatives are set out in the MCE Communiqué of 11 December 2003 and the associated MCE Report to CoAG on Reform of Energy Markets.

At its December 2003 meeting, the Ministerial Council on Energy recommended to CoAG that NECA be abolished and two new statutory commissions be established:

• an Australian Energy Market Commission (AEMC); and
• an Australian Energy Regulator (AER).

These bodies were established under a new National Electricity Law and commenced operation on 1 July 2005.  The National Electricity Market now operates under the National Electricity Rules which are authorised by the National Electricity Law.

The Australian Energy Market Commission (AEMC) has responsibility for rule-making and market development in relation to the NEM.  The AEMC reports directly to the Ministerial Council on Energy (MCE).  The MCE has the power to direct the AEMC to carry out reviews of the National Electricity Market and the National Electricity Rules.

The Australian Energy Regulator (AER) regulates the wholesale electricity market and is responsible for the economic regulation of the electricity transmission and distribution networks in the national electricity market (NEM) and enforcement of the National Electricity Law and National Electricity Rules.