The Centre for Independent Studies (CIS) welcomes the opportunity to respond to the AEMC’s Consultation Paper for the Enhancing the Integrated System Plan to Support the Energy Transition rule changes.

The CIS is a leading independent public policy think tank in Australia. It has been a strong advocate for free markets and limited government for more than 40 years. The CIS is independent and non-partisan in both its funding and research, does no commissioned research nor takes any government money to support its public policy work.

While this rule change request identifies genuine shortcomings in the ISP process, the proposed changes do not go far enough to rectify them. To achieve the rule changes’ stated goal to “improve the ISP to ensure that it remains fit-for-purpose to support the energy transformation” the following should be implemented:

1. along with AEMO utilising more gas market data in the ISP, the ISP should co-optimise gas infrastructure to support the gas and electricity markets;
2. along with AEMO explicitly stating the assumptions underpinning different CER trajectories and accounting for distribution network constraints, the ISP should co-optimise CER with large-scale generation and storage, and explicitly state the costs of CER in each scenario; and
3. The ISP should not use community sentiment to justify selecting alternative options which are otherwise sub-optimal because TNSPs are likely to give AEMO an incorrect or partial understanding of community sentiment.

Better integrating gas into the ISP

Question 1: Should greater gas market analysis be required under the ISP?

• Would requiring AEMO to include greater analysis of gas in the ISP provide benefits to electricity consumers? This includes information to inform the following:
  • further analysis of future gas demand and pricing
  • developing projections about the future utilisation of gas infrastructure
  • collating pipeline closures or conversion dates
  • reflecting updated gas generator fuel costs

Should the rules be amended to explicitly require this?

The ISP should only include greater analysis of gas in the ISP if the ISP aims to find a least-cost electricity and gas system, with the power to direct construction of the least cost option regardless of whether that option is gas or electricity based.

Under the current rule change, if additional gas infrastructure is cheaper than additional electricity infrastructure, then the ISP will not be able to direct or plan its construction. If additional electricity infrastructure is cheaper than gas, then the ISP will be able to plan it. This asymmetry means that the ISP will systematically over-invest in the electricity system.

For example, the consultation paper says that this rule change will lead to better outcomes for electricity consumers by:

“allowing AEMO to better consider whether [electricity] alternatives to gas investments (such as storage) might be more economically beneficial for improving the ODP identified in the ISP” (p7).

However, the change will not allow AEMO to consider the opposite situation where (gas) alternatives to electricity investments might be more economically beneficial and to direct their construction. Such cases would languish because both AEMO and the gas industry lacked the certainty about the other’s choices required to both build the cheaper gas option, and avoid building the electricity-based option as well.

A second example may help: the ISP can direct transmission to be built if it can save gas costs, but cannot direct gas to be built if it saves transmission costs.

In other words, any additional information must be capable of leading to more investment or less investment to avoid systematically over or under-investing. This rule change does not provide confidence that this information would be capable of leading to less investment.

Electricity consumers are often gas consumers as well. The ISP has a responsibility to these consumers to minimise their overall costs and avoid over or under-investment in either system.

Question 2: Will the proposed solution support a more robust ISP by better integrating gas and electricity infrastructure developments?

1. a) Will requiring AEMO to carry out further analysis of gas in the ISP improve the ISP analysis? Why or why not?

Not without also co-optimising gas. This is because the ISP is a planning document which directs decisions rather than just analysis.

While additional information will always improve analysis, it can lead to perverse results when used for decision making, where the outcome of the analysis influences information the analysis relies on.

In this case, on page 6 of the consultation paper the AEMC states that “AEMO’s gas development projections are intended to inform market participants and policymakers about the investments that need to be made in the electricity sector, given the likely future path of the gas sector.”

This ignores that the investments in the electricity sector that assume a particular future for gas will make that future for gas more likely. This is true even if those projections represent a less-than-optimal path.

Question 3: What are your views on the costs and benefits of requiring AEMO to undertake additional gas analysis in the ISP?

• What do you consider to be the benefits of the proposed solution? Is there anything that might erode the benefits of reduce the likelihood of the benefits being achieved?

Further analysis should in theory allow greater complexity or subtlety to be incorporated into the ISP. This could lead to more optimal outcomes. However, adding further analysis that leads just to better ‘inputs’ or ‘assumptions’ about the future of gas, without the rigor of attempting to co-optimise that future, creates the risk that the inputs become more complex, less transparent, and less contestable, leading to potentially worse outcomes being more easily accepted.

Improving consideration of demand-side factors in the ISP

Question 6: Should AEMO be required to expand consideration of CER and distributed resources in the ISP?

(a) Should the ISP’s analysis include greater consideration of the assumptions and contingent factors underpinning the expected development of CER and distributed resources? Why or why not?

Yes, but CER should also be co-optimised from the perspective of the whole system. The ISP should consider the cost of CER investments, and the costs of government policies they are contingent upon in order to produce the least-cost system for the consumer (and taxpayer). The level of CER should be balanced against other generation, storage, and transmission. It’s also critical that all assumptions are laid out clearly.

This is important because while CER can be considered an external input for utility-scale investors, they are paid for by consumers, and the uptake and contribution to the system is driven largely by government policy.

One potential benefit of the rule change listed on page 16 of the consultation paper is “optimised costs and… electricity prices resulting from more robust analysis of the lowest cost pathway for electricity”. However, the costs for consumers cannot be truly optimised if the significant CER costs remain excluded when determining the ODP. In other words, integrating demand side factors in the ODP without co-optimising CER investments (including necessary government incentives) with large-scale investments will fail to ensure a least cost system for consumers.

One of the key reasons for this proposed rule change, as stated on page 2 of the rule change request, is: “multiple ISPs have identified that a rapid, consumer-led transformation of the energy sector forms part of the most efficient pathway to decarbonise the energy system”. However, no ISP has, in fact, identified this. Past ISPs have simply assumed trajectories of CER without testing whether these trajectories were more efficient for the system than greater investments in large-scale generation and storage. This means it is crucial that future ISPs test the efficiency of “a rapid, consumer-led transformation” of the energy system by co-optimising CER with large-scale investments.

Question 7: Will the proposed solution address the issues raised by the proponent and improve the robustness of the ODP?

(b) What type of demand-side information should be provided by DNSPs that would be useful for the ISP analysis?

DNSPs should provide estimates of the expected costs of providing infrastructure that not only supports existing consumer energy resources, but supports the levels and usage patterns of CER that are projected in the ISP. This should be used by the ISP to optimise the costs to consumers across generation, storage, transmission, distribution, and their own resources.

DNSPs should also provide information about the prices, costs, and subsidies that are faced or given to consumers.

Question 8: What are your views on the costs and benefits of the proposed solution?

• What do you consider will be the benefits of the proposed solution? Is there anything that might erode the benefits or reduce the likelihood of achieving the benefits? Are there any additional amendments that could be made to improve the benefits?

Consumers would benefit most from an ISP that balances CER with utility scale storage, generation, and transmission.

On page 17 of the 2024 ISP, AEMO states that “without effective coordination of consumer batteries, around $4.1 billion of additional grid-scale investment would be needed, increasing the costs that are reflected in consumer bills”. However, there is no indication of the magnitude of the capital or operating costs to the consumer of these home batteries that are being coordinated, or of rooftop solar. Without co-optimisation, the right trade-off will not be made for consumers. Without information about the costs, policymakers will be unable to make appropriate decisions about the scale of CER to incentivise, or what costs are justified in that effort.

This failure to optimise CER along with the rest of the system is concerning because CER do not enjoy the same economies of scale as utility scale generation and storage and therefore are likely to be costly for the system, and more expensive for consumers. Indeed, the 2023–24 GenCost report states that home batteries are “around twice the cost of large‐scale battery projects”. GenCost indicates similar capital costs for utility-scale and rooftop solar panels but a large capacity factor gap (12% for rooftop against 22.5% for utility),[1] means that rooftop solar is functionally at least twice as expensive.

AEMO states on page 51 of the ISP that “CER have the potential to reduce the need for utility-scale solutions”, and on page 17 states that consumers investing in CER and contributing to VPPs “will help deliver more reliable and secure energy, at lower cost for all consumers.” However, both statements contradict the estimates from the CSIRO, because ultimately consumers must bear the cost of CER.

AEMO also states that coordinating CER “depends on a mix of financial incentives, technology and communication standards, customer preferences, and market or policy arrangements” but does not assess the cost of providing these incentives.

Rather than modelling CER as essentially being free, it is crucial AEMO be transparent about the cost of home batteries and rooftop solar for the consumers whose interests it has a responsibility to protect. CER should be co-optimised with large-scale generation and storage, not simply assumed to offset it at no cost, when in fact it will cost a great deal for consumers and taxpayers. At the very least, the costs of CER to consumers and taxpayers in each scenario should be transparently stated in the ISP to give policymakers a clear sense of what incentives are required.

Question 9: Are there important implementation considerations for the Demand-side rule change request?

(b) Are there any transitional measures that should be considered to support the implementation of the rule in time to inform the 2026 ISP?

If it is not possible to co-optimise CER for the 2026 ISP, there should at least be put in place transitional measures requiring AEMO to publish the costs of assumed levels of CER, including the costs of necessary incentives to achieve the given trajectories.

(c) If adopted, should the development of guidelines be subject to the Rules Consultation Procedures under NER Rule 8.9?

Yes, it is vital that any guidelines developed on this issue are open to consultation from consumers.

Better integrating community sentiment into the ISP

Question 11: Do you consider that the current process for developing the ISP is creating uncertainty and inconsistency in how community sentiment is incorporated in the ISP?

• Should AEMO be explicitly required to consider community sentiment when developing the ISP? Should TNSPs be explicitly required to share relevant information as part of the joint planning process?

AEMO should not be explicitly required to consider community sentiment from data provided by TNSPs when developing the ISP. The proposed rule change has the potential to worsen the situation rather than benefitting local communities and consumers. This is because it delegates responsibility for assessing sentiment to TNSPs who have an interest in only some projects and the discretion to collect more or less information.

The proposal in the rule change request to “Amend clause 5.14.4 to explicitly require TNSPs to provide AEMO with information about community sentiment… as part of the joint planning process for the ISP, where this information is already held by TNSPs” is likely to create perverse incentives.

Given TNSPs must only share information they have already obtained, they could choose to engage in more or less community consultation for preparatory or early works for different projects in order to provide AEMO with a view of community sentiment that favours certain projects and not others. They also may choose to delay community consultation until shortly before an ISP’s publication so that it is too late for AEMO to consider this information in the selection of the ODP.

This risk would be significant where a TNSP stands to be disadvantaged commercially by a certain transmission pathway being deemed too costly by AEMO due to community sentiment, leading to its exclusion from the ODP. Thus, requiring community sentiment data to be shared may result in less data being collected in the first place, or community consultation being delayed – the exact opposite of the intention of the rule change. This means the proposed rule change fails to protect consumers and provides a doorway for manipulation of the ISP by TNSPs, acting in their commercial interests.

Additionally, the consultation and data collection processes of some TNSPs may be influenced by the proposed rule change more than others. This creates a risk that AEMO receives information from different TNSPs with a large variance in the quality, quantity and granularity of data. A patchy, incomplete picture of community sentiment such as this has the potential to skew AEMO’s decision-making process. This could lead to transmission projects being recommended for inclusion in the ODP due to ‘less community opposition’ compared to other projects than is really the case.

The clarification in the rule change proposal that “the proposed changes do not seek to result in AEMO selecting a more costly ODP in favour of community preferences, but would involve AEMO factoring in timing and cost considerations that are linked to community sentiment and sensitive locations in determining the lowest cost pathway” is a contradiction in itself.

Either AEMO allows community sentiment to influence the optimisation of costs in the ODP or it does not. Factoring in timing and cost considerations linked to community sentiment will either have no impact on the ODP or will alter the ODP through AEMO selecting more costly options to avoid pathways with known community opposition. Given that it is not feasible to have a complete and balanced picture of community sentiment for all possible transmission options across the NEM at every stage of project development, it would be better for AEMO to not allow community sentiment data to influence project selection at all.

Community opposition to transmission projects is widespread, as evidenced by recent projects, such as VNI West and HumeLink. There are likely to be few transmission options that will be wholly accepted by local communities without significant financial incentives. This rule change could even have the unintended effect of local communities contacting their TNSPs to express opposition to any new transmission in their area before any local project has been deemed actionable.

This could alter the selection of projects in such a way that lower-income communities with less resources to campaign against transmission projects end up having transmission routed through their area because it appears there is less opposition. If this has a negative effect on land values or industries such as tourism or agriculture, it risks further entrenching economic inequality of disadvantaged communities. Therefore, the risks associated with attempting to incorporate patchy data on community sentiment into the assessment of project timing and costs for the ODP would far outweigh the benefits of including such information.

Question 16: Assessment framework
Do you agree with the proposed assessment criteria? Are there additional criteria that the Commission should consider or criteria included here that are not relevant?

The AEMC needs to also consider the criterion “Outcomes for consumers”. This is crucial, given the consumer pays for the multi-billion-dollar projects approved through the ISP. It is vital that the energy system as a whole is optimised, including gas and CER, so that consumers do not end up paying more for transmission than is needed. Consumers should not be expected to pay for CER that will be controlled externally, and is less economical for the whole system than large-scale generation and storage, simply to reduce the need for investors to pay for large-scale generation and storage.

[1] Australian Energy Council, 2022. Report provides insights into energy transition. https://www.energycouncil.com.au/analysis/report-provides-insights-into-energy-transition/