Reform of the Electricity Industry in Australia

Updated August 2006

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 National Electricity Market Management Company (NEMMCO). NEMMCO was established in 1996 to fulfil the roles of both market operator of the NEM and operator of the power system that underpins NEM operation. The owners of the company are the five States and the Territory within which the NEM operates.

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 comply 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 Commonwealth 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 Commonwealth, 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 that is being pursued progressively by both State and Australian Government officials. 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) performs economic regulation of the wholesale electricity market and electricity transmission networks in the NEM, and enforcement of the National Electricity Law and National Electricity Rules. These functions will expand over time as electricity distribution and retail functions are scheduled to transfer to the AER by the end of 2006.

As at mid-2006, State and territory regulators are responsible for regulation of electricity distribution and retail functions within the jurisdictions in which the NEM operates. This includes the responsibility for regulating retail prices and distribution network use of system charges.

At present, the individual regulators adopt somewhat different regulatory approaches within their jurisdictions. Subject to agreement by the individual jurisdictions, the responsibility for regulating electricity distribution and retail is scheduled to be transferred to the AER by the end of 2006 and it is likely that a single national approach to regulation will then be adopted.

Current structure of the Australian electricity industry

Role of DSM and Energy Efficiency

Electricity Licence Conditions

Energy Efficiency Certificates Trading Scheme