The enormity of the recommendations handed down in the Independent Review into the Future Security of the National Electricity Market has seen great debate around the ideal blue print for Australia's future energy policy. Much of the focus has been directed at the proposed clean energy target and what this means for future investment for energy generation. However, there have been a number of recommendation that have largely avoided the limelight, especially when it comes to market governance and regulation.
Weeks after the Finkel Review was released the implications are still being analysed and critiqued. While the focus has been on the Clean Energy Target and affordability, a number of other potentially fundamental changes to energy market governance arrangements have garnered less attention. These could significantly change the way energy markets and businesses are governed and regulated.
In this area, Finkel makes two recommendations.
First, Finkel recommends stronger governance arrangements via a new Energy Security Board to improve coordination and accountability across the market institutions. Second, he recommends the rules be streamlined in light of changing technologies and conditions.
These recommendations recognise that current arrangements have failed to respond to the changing market dynamics and customer use of electricity arising from new technologies. The processes for market reforms are slow and, as a result, the rules are not keeping up with technology changes nor provide clear direction to businesses and investors.
The proposed governance reforms are a positive first step to achieving a more responsive and coordinated framework. However, there are still a number of issues to be worked through in implementing the recommendations.
Streamlining the rules could fundamentally change the philosophy in which markets and businesses are regulated. Ideally there should more adaptability and flexibility under a principles based framework. However it is not clear how the various market institutions will implement this recommendation in practice. More guidance needs to be given by government on this recommendation sooner rather than later given that the institutions are about to embark on the next wave of reforms for the industry. This would ensure that, going forward any reforms are consistent with the new ethos of a streamlined set of rules.
On this, there has been a general shift internationally from prescriptive regulations to a more output-based approach, with a greater focus on achieving outcomes for customers. Businesses have greater commercial flexibility and are better able to take ownership and responsibility for their decisions. This new approach has proved to be effective and consideration should be given to how it could apply in Australia.
Finally, new institutions and bodies can improve coordination, particularly as the reforms stemming from the Finkel review are progressively implemented. However, we need to be careful to avoid the risk that the Energy Security Board will add another voice to what is already a crowded policy arena.
The importance of improving the governance arrangements for energy policy should not be under-estimated and if done right, has the potential to place energy markets on a strong foundation for the future.
This article originally appeared in the KPMG NewsRoom.