The Minister for Climate Change and Energy has announced a review of the governance arrangements of the Australian Energy Market Operator, with the aim to ensure governance arrangements remain fit for purpose now and into the future. 

The rapid decarbonisation of the electricity and energy systems is essential for Australia to meet its obligations under the Paris Agreement. Electricity generation is the nation’s largest source of greenhouse gas emissions. The adoption of renewable energy will reduce emissions to near zero for the electricity sector (approximately one-third of 2024 totals) and enable decarbonisation of other sectors of the economy. 

Since 2018, the Australian Energy Market Operator (AEMO) has engaged CSIRO, supported by Climateworks, to conduct multi-sector modelling to quantify the dynamic influences that would shape energy demand under different emissions-reduction scenarios. That modelling continues to inform AEMO’s planning and forecasting tools, including the 2026 Integrated System Plan (ISP).

Key considerations and context

AEMO’s existing structure as a not-for-profit company limited by guarantee under the Corporations Act 2001 was put in place during a different energy system era. This form could now be misaligned with the increased breadth and complexity of responsibilities accrued by AEMO since then. AEMO now performs functions across planning, forecasting, market operation, investment guidance and policy delivery, which each have distinct and sometimes competing obligations. The existing governance structure was not designed to manage these tensions, and its retention risks undermining public confidence in its outputs and compromising the achievement of the National Energy Objectives. 

The Review of AEMO Governance discussion paper identifies a suite of complex considerations relating to AEMO’s current governance arrangements. The case for reform spans accountability and oversight, policy and energy planning alignment, industry and public conflicts of interest, responsiveness to ministerial requests, and the pace of the rule-change process.

In addition to the complexities captured in the consultation paper, Climateworks has identified several further issues related to AEMO’s existing governance arrangements:

• Limited policy scope: AEMO currently excludes consideration of some policies that affect emissions and economic outcomes from its planning functions. 
• Government use of AEMO planning: The optimal development pathway in the ISP can be used to justify the ambition and trajectory of energy system policy, rather than policy proactively guiding the trajectory and ambition of the ISP. 
• Fragmented planning: Electricity and gas system planning remain siloed, reducing the effectiveness of whole-of-system planning for energy needed to manage the transition effectively. 
• Supply-side bias: AEMO’s planning is disproportionately focused on supply-side solutions, and does not yet adequately value the potential contribution of demand-side solutions. 
• Absence of industrial energy planning: There is currently no place-based planning function to detail and support the specific energy requirements of industrial regions. 
• Land-use trade-off optimisation: Trade-offs between energy infrastructure development and alternative land uses are not yet sufficiently integrated into AEMO planning processes. 

The goal of any reform should be to support the transition of the energy system to one that enables Australia to make the most of global economic opportunities while meeting National Energy Objectives. The central question for this review is what governance structure would best ensure the energy system serves Australia’s economic and emissions transition through an integrated approach that delivers across multiple demands. Climateworks encourages the Review to consider the full range of governance reform options, including those that are ambitious in scope.

In this submission, Climateworks puts forward recommendations that can support the transition of AEMO toward a governance structure that is fit-for-purpose for the challenges of today’s energy transition – while accounting for the significant challenges that reform could bring. We have identified six key aspects that would strengthen this transition, each of which would be prioritised and embedded in any evolution of the AEMO Governance model: 

• Alignment of policy and energy planning: Ensure that government policies likely to lead to increased demand on the energy system, such as Future Made in Australia and the Net Zero Fund, are incorporated into and enabled by energy system planning 
• Integration of demand-side solutions: Ensure demand response, load shifting and CER are given equal weight as supply-side solutions in energy system planning 
• Integration of electricity and gas planning: Account for the interaction between the reticulated gas network and electricity system, including planning for the orderly phase-out of gas
• Land-use trade-off analysis: Comprehensively and optimally account for competing demands on land-use in energy infrastructure siting decisions
• Industrial Area Energy Plans: Support industrial regions to navigate the transition through tailored, local energy plans
• Data transparency: Enable transparent and timely sharing of sensitive energy system data to improve planning, investment, and policy outcomes. 

Submission summary 

Climateworks recommends the Review:

1. Propose that any new governance arrangements the development of  the ISP aimed to deliver an optimal development path with demonstrated net benefit in the scenario most consistent with government policy commitments. To support this:
   • maintain the ISP’s primary focus on energy system planning, ensuring it supports broader industrial and economic policy objectives through infrastructure and system readiness while avoiding the appearance of directing or replacing those policies 
   • consider a broader set of policies that affect the energy system when determining needs, including firm and established government commitments such as Future Made in Australia and the Net Zero Fund
   • establish a transparent policy prioritisation framework with specific rules for resolving policy conflicts between governments, enabling appropriate determinations of which policies are reflected in ISP scenarios 
   • embed contingency planning in the modelled scenarios where there is uncertainty in power system needs and/or policy achievement.
2. use the jurisdictional authority of the ECMC and establish a mandate for AEMO or its successor to comprehensively integrate electricity and gas system planning, addressing gaps in ambition, coordination and implementation under current arrangements.
3. propose that new governance arrangements give equal weight to demand-side energy management and performance improvements in system planning.
4. propose that governance arrangements enable the body responsible for energy planning to work with state and territory governments to develop Industrial Area Energy Plans for regions with high concentrations of industrial energy demand.
5. integrate spatial land-use and energy infrastructure siting decisions so that trade-offs between biodiversity, agricultural, cultural heritage and energy objectives are resolved in an economically and environmentally optimal way.
6. establish a formal data-sharing framework to share sensitive planning and market data with government agencies where it is required for policy development, investment decisions and/or national security.
7. Fully explore the transition of AEMO, including all of its operational, planning, forecasting and policy functions, to a structure better suited to meet increased obligations to government in terms of governance, reporting and oversight, and with accountability mechanisms that reflect its national role and responsibilities to the ECMC.

More detail on these recommendations can be found in the submission [PDF 0.4mb].