The Australian Energy Market Commission (AEMC) has released a Clarifying the treatment of jurisdictional policies and system costs rule change consultation. AEMC has sought feedback on the potential for a rule change that would change the way jurisdictional policies are incorporated into the Integrated System Plan (ISP), the categories of costs considered and the information published. 

The rapid decarbonisation of the electricity and energy systems are 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 renewables will reduce emissions by approximately one-third 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). 

In this submission, Climateworks recommends AEMC direct the Australian Energy Regulator (AER) to change the ISP Cost-Benefit Analysis Guidelines to require AEMO to shift its approach to developing the ISP optimal development path. Instead of basing the path on what is ‘most likely’ to happen, AEMO would base it on what is ‘most consistent with government policy commitments’. Rather than infrastructure potentially lagging behind policy ambition, it would be designed from the outset to deliver an energy system most able to meet committed policies, while remaining reliable and affordable.

To manage the risks associated with this change, such as overbuilding energy infrastructure and increased costs for consumers, this submission puts forward several recommended safeguards. This includes contingency planning within the ISP, a framework for prioritising policies, enhanced transparency and accountability mechanisms, and measures for allocating risk.

With these changes, Climateworks seeks to address three key energy system challenges:

1. Alongside the effective operation of the energy market, AEMO’s role is to plan the long-term future of the energy system. However, the nature of this future is largely determined by governments. At present, in many instances, governments use the ISP to guide specific aspects of energy system policy, rather than allowing policy to guide the trajectory and ambition of the ISP and therefore the energy system.
2. AEMO currently considers jurisdictional emissions reduction targets, as detailed in the emissions targets statement, and other policies where they meet the committed policies threshold. Both exclude consideration of many policies that affect emissions and economic outcomes through electrification, low-carbon exports and renewable energy expansion. 
3. The transition away from fossil fuels will significantly increase the economy’s reliance on electricity, green hydrogen and bioenergy. For this shift to succeed, industry and investors need confidence that renewable energy will be sufficiently available, affordable and reliable. Currently, this confidence is lacking, which is hindering private sector investment in the transition.

Climateworks’ recommendations are designed to offer several important benefits. They will ensure energy system planning better aligns with democratically determined policy rather than technocratic probability assessments. They will ensure the energy system enables government policy ambition rather than undermining it where there is uncertainty about the pace of changing electricity demand. Finally, they will clearly delineate accountability, assigning responsibility for setting the pace and scale of the energy system transition to governments, and infrastructure planning to AEMO.

Broadly, the recommendations in this submission are designed to enhance the energy system’s operation and ensure it delivers the rapid transformation needed to achieve a net zero economy. Climateworks will be pleased to provide further analysis in writing or through meetings, where helpful, to the AEMC. 

Submission summary 

Climateworks recommends that AEMC:

• retains AEMO’s obligation to account for emissions reduction targets in all ISP scenarios it models and publishes, consistent with the National Energy Objectives and Australia’s decarbonisation commitments and obligations. 
• implements a rule change and/or compels the AER to adjust the Cost-Benefit Analysis Guidelines to require AEMO to develop an ISP optimal development path with a positive net benefit in the scenario ‘most consistent with government policy commitments’.
• maintains the ISP’s primary focus on energy system planning, ensuring it supports broader industrial and economic policy objectives through infrastructure readiness rather than attempting to direct or replace those policies.
• requires AEMO to 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.
• establishes a framework and review mechanism to enable AEMO to systematically and transparently assess which policies to include in the ISP optimal development path, and to reassess those policies proportionally and efficiently when fundamental settings change. More specifically, AEMC would: a) establish a policy prioritisation framework with specific rules for resolving policy conflicts, enabling AEMO to determine which policies it must consider when deciding which scenario is ‘most consistent with government policy commitments’. b) enhance transparency by requiring AEMO to publicly disclose which policies are included in and excluded from ISP scenarios, document its rationale for policy prioritisation and conflict resolution, and publish sensitivity analyses for key policy uncertainties. c) implement a rule change and/or requires the AER to adjust the Cost-Benefit Analysis Guidelines so AEMO embeds contingency planning in the modelled scenarios where there is uncertainty in energy system needs and/or policy achievement.
• further addresses overbuild risk by recommending the Australian Government employ risk-allocation mechanisms, such as the NEM Review’s proposed ESEM framework and/or direct government investment.

More details on these recommendations can be found in the submission [PDF 0.3mb].