The Australian Energy Market Commission (AEMC) has published a consultation paper reviewing the Integrated System Plan (ISP) framework, with a view to assessing how that framework can best contribute to achieving the National Electricity Objectives.

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 act as an enabler for decarbonisation of other sectors of the economy. 

Since 2018, the Australian Energy Market Operator (AEMO) has engaged CSIRO, supported by Climateworks Centre, 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 ISP. 

In this submission, Climateworks recommends that AEMC ensure the Australian Energy Regulator (AER) 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 the potential for overbuilding and increasing 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 or costs related to risks.

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 for 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 ISP’s trajectory and ambition and, by extension, the energy system.
  2. AEMO currently considers jurisdictional emissions reduction targets, as detailed in the emissions targets statement (AEMC 2023), and other policies where they meet the committed policies threshold (section 5.22.3(b)) (AEMC 2025). Both exclude consideration of many policies that affect emissions and economic outcomes through electrification, low-carbon exports and renewable energy expansion. This could mean the electricity system is not adequately planned to support the delivery of these policies.
  3. The transition away from fossil fuels will significantly increase the economy’s reliance on electricity, and to a lesser extent, 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, 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, our recommendations aim to delineate accountability, assigning the responsibility for setting the pace and scale of the energy system transition. The recently announced review into AEMO governance offers an opportunity to advance this objective. 

In addition to aligning the ISP with government policy ambition, Climateworks puts forward three further recommendations. These are to: evolve the ISP framework to optimise the data and modelling used for land-use complexity scoring; enable the orderly closure of underutilised gas distribution pipelines; and incorporate the Demand-Side Statement of Opportunity (DSOO) into the National Electricity Rules (NER), including specifying its required content and bring it in line with the ESOO, GSOO and other reports used to build the ISP.

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

Submission summary 

Climateworks recommends that AEMC:

  1. ensure the AER 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’
  2. maintains the ISP’s primary focus on energy system planning, ensuring it supports broader industrial and economic policy objectives through infrastructure and system readiness and avoids appearing to direct or replace those policies
  3. 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
  4. 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:
    • 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’
    • enhance transparency by requiring AEMO to publicly disclose which policies are included and excluded from ISP scenarios, document its rationale for policy prioritisation and conflict resolution, and publish sensitivity analyses for key policy uncertainties
  5. requires the AER to adjust the Cost-Benefit Analysis Guidelines so AEMO embeds contingency planning in the modelled scenarios to better address uncertainty in energy system needs and/or policy achievement
  6. further addresses overbuild risk by recommending the Australian Government employ risk-allocation mechanisms, such as the National Electricity Market (NEM) Review’s proposed Electricity Services Entry Mechanism (ESEM) framework and/or direct government investment
  7. require AEMO to draw on the best available spatial land-use datasets and models, including those developed by governments and research institutions, to inform land-use complexity scoring and energy infrastructure siting
  8. amends the National Gas Rules to enable AEMO and state governments to proactively plan for the orderly closure of gas distribution pipelines in areas experiencing reduced demand
  9. seeks to include in the NER an obligation for AEMO to produce the Demand Side Statement of Opportunity, specifying its purpose, content and publication frequency. 

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