This article was written by Cassandra Hogan and Daniel Hamel from KPMG.
Why are market design principles important?
Decreasing wind and solar costs, along with government emissions reduction policies, are driving the transformation of the Australian electricity sector. This is well-known. However, what is sometimes taken for granted is that the investment required to facilitate such a change – estimated to be $23 billion to 2030 for the NEM – will be provided by capital markets*.
Investors require certainty in the energy policy framework. Change in any market is inevitable. What is important is this occurs in a way that is well understood and provides both investors and customers with confidence to make long-term decisions. Markets may not deliver if this certainty is lacking or regulatory change is not somewhat predictable.
In our view, policy certainty requires the following:
- A single, unambiguous policy objective against which all reforms are tested. For the electricity sector this is the National Electricity Objective (NEO).
- Established and accepted market design principles to support the assessment of reform proposals against the NEO. Table 1 sets out the market design principles that were developed by KPMG for the Australian Energy Council.
- An objective regulator that assesses proposals on their merits, against the overarching objective and using a consistent set of principles. This is the role played by the Australian Energy Market Commission.
While the first and third points are on track, we believe there is merit for the Energy Council to work with industry to agree upon a set of market design principles to promote greater certainty and discipline in how electricity market reforms are assessed.