Could AEMO’s Cautious Grid Planning Be Costing You Money?

Australia’s electricity market operator has been warned that an overly cautious approach to planning the grid could leave consumers paying more than necessary.

That’s one of the findings of an independent review of the Australian Energy Market Operator (AEMO), which has also raised concerns about potential conflicts between some of the organisation’s expanding responsibilities.

Energy ministers have agreed to reforms aimed at addressing both issues.

Why Could Caution Cost Consumers?

Keeping the lights on is AEMO’s day job, so being cautious about the future electricity system might sound like a good thing.

The problem is that caution can be expensive.

AEMO develops the Integrated System Plan (ISP), which maps out the generation, storage and transmission infrastructure needed as Australia’s electricity system changes.

The review, led by former senior Treasury official Nigel Ray, found AEMO’s responsibility for maintaining system reliability and security gives it a naturally conservative approach to risk.

But it warned:

“This approach has cost consequences for consumers if that caution brings forward investment or overstates required intervention.”

That matters because the ISP can identify major transmission projects as “actionable”. The review says that status is difficult to unwind and can commit consumers to significant, long-lived regulated expenditure.

Those network costs are ultimately recovered from electricity consumers.

The review does not conclude AEMO has been unnecessarily building infrastructure or wasting consumers’ money. Instead, it identifies a risk in the way planning decisions are made.

Could Solar And Batteries Help Keep Grid Costs Down?

Regulators are looking at how home batteries can better support the grid.

Rather than taking long-term planning away from AEMO, the review wants changes to the rules governing the ISP.

Among them is greater consideration of the demand side – how electricity consumers and resources connected to distribution networks can help meet the needs of the system.

The review says greater innovation, including on the demand side and at distribution level, could reduce reliance on costly and time-consuming grid-scale infrastructure and minimise the overall cost of the energy transition.

That potentially includes the growing fleet of rooftop solar systems, home and community batteries, electric vehicles and flexible loads.

Energy ministers have agreed, with the ISP rules now under review.

And Then There’s A Potential Conflict Of Interest

Consumer costs weren’t the only concern to emerge from the review.

AEMO also controls AusEnergy Services Limited (ASL), which carries out energy investment procurement work for governments.

That creates an unusual arrangement. AEMO operates the electricity system and helps determine through its planning what the future system needs, while its subsidiary is involved in procuring energy investment.

The review found ASL’s investment procurement role did not align with AEMO’s core functions, creating differing mandates and “perceived conflicts of interest”.

The proposed solution is simple: separate them.

Energy ministers have agreed ASL should be spun out as a standalone organisation.

That hasn’t happened yet. Senior officials still need to work out the implementation and timing, in consultation with ASL, its existing members and potential future members.

Who’s Watching AEMO’s Own Spending?

The review also turned its attention to what AEMO itself costs to run.

Its budget has nearly tripled over five years, although AEMO estimates its NEM functions currently add only around $16 a year to an average residential electricity bill.

The bigger governance problem identified by the review is the lack of binding independent external scrutiny of whether AEMO’s expenditure is efficient.

Energy ministers have agreed in principle to give the Australian Energy Regulator a new role overseeing AEMO’s annual budget.

AEMO has welcomed the review and begun work on the recommendations that fall within its control.

For households, however, the more consequential reform may be changes to the way AEMO decides what future grid infrastructure is needed.

Australia needs enormous investment in its electricity system over the coming decades. The review isn’t arguing against that investment. It’s asking whether consumers can be better protected from paying for infrastructure earlier than necessary – or when a cheaper solution could do the job.

And with more solar, batteries and flexible loads appearing behind the meter, what consumers can contribute to the grid may increasingly matter just as much as what gets built in front of it. AEMO’s recent analysis of 20,000 Australian homes shows just how much difference home batteries are already making to when households rely on the grid.