Energy regulation and market control has become a highly politicised issue in Australia. So much so that Australia’s previous Prime Minister, Malcolm Turnball, was voted out of this position mid-term by his own party largely due to an inability to pass a coherent energy policy through Federal Parliament. With a federal election announced for 18 May 2019, we expect that energy policy will continue to be a political football in the near term, and can only hope that the next Commonwealth government of Australia is able to deliver the holy grail of energy policy that delivers:

  1. reduced electricity costs for households and industry (which are currently being crippled by souring electricity prices);
  2. reduced carbon emissions so that Australia can meet its commitment at the Paris climate change conference to reduce emissions by to 26–28 per cent on 2005 levels by 2030;2 and
  3. stability and reliability of supply so that consumers can be confident of uninterrupted supply, including during peak demand periods.

Since 2007, Australia has seen a parade of different energy policies at a federal level, with not one staying in place for more than a couple of years. This has left the electricity generation, transmission and retail industry in limbo, and no doubt has been the driver behind the lack of investment in new generation facilities, which has in turn driven up electricity prices and provided no coherent and integrated pathway for investment in grid upgrades and carbon reduction schemes.3

In many ways the chaos at a federal level has left state governments and industry to go it alone. Therefore, we have seen state governments each introduce their own different energy policies designed to address the three issues noted above and industry making investment decisions based predominantly on those market drivers that are divorced from the influence of federal policy.

Given the differing energy regulation and markets around Australia, this chapter will summarise the following in each state of Australia and look at possible policy and market developments:

  1. regulatory framework;
  2. transmission and distribution networks;
  3. retail markets; and
  4. policies and developments.


iThe regulators

The Australian Energy Market Operator (AEMO) is the industry-funded organisation that oversees the functioning of the National Electricity Market (NEM) in the states of Queensland, New South Wales, the Australian Capital Territory, Victoria, Tasmania and South Australia and the Wholesale Electricity Market (WEM) in Western Australia.

The NEM is regulated pursuant to the National Electricity Rules and National Electricity Law created by the Council of Australian Governments (COAG). The WEM is regulated pursuant to the WEM Rules and related WEM Market Procedures. There is a proposal for Western Australia to also be regulated by the National Electricity Rules and National Electricity Law,4 so that Australia can have national uniform regulations; however, this proposal has stalled pending certain integration issues being resolved.

In relation to the NEM, the Australian Energy Regulator (AER) oversees economic regulation and compliance with the National Electricity Rules and is accountable to the Commonwealth Government as an arm of the Australian Competition and Consumer Commission. The Australian Energy Market Commission (AEMC) works alongside the AER and AEMO to determine the policy and governance structures that support Australia’s energy markets. The AEMC is responsible to COAG. To coordinate the operation of AEMO, AER and the AEMC in overseeing energy policy and regulation relating to the NEM, these organisations also come together as members of the Market Bodies Forum, which reports to COAG in relation to matter requiring action on the part of these organisations.5

In relation to the WEM, the Economic Regulation Authority (ERA) is established under the Economic Regulation Authority Act 2003 (WA) as an independent statutory authority designed to oversee the energy industry in WA and ensure that all parties abide by the relevant regulations. It issues licences to providers of various sources of energy, including electricity. In addition, the ERA monitors and publicly reports on industry performance, including the WEM; taking enforcement action when required. It also has authority through various codes6 to approve contracts and service standards that protect residential and small business electricity, gas and water customers and assess the performance of utilities in relation to the treatment of customers experiencing financial hardship.

The Clean Energy Regulator Act 2011 (Cth) established the CER, a non-corporate Commonwealth entity for the purposes of the Public Governance, Performance and Accountability Act 2013 (Cth). As an independent statutory authority, the CER is comprised of the chair and members, who set the ‘strategic direction’7 for the agency’s administration of its regulatory schemes. The role of the CER is to administer climate change law legislated by the Australian government to measure, manage, reduce or offset Australia’s carbon emissions.8 Accordingly, the CER has administrative responsibilities for the National Greenhouse and Energy Reporting Scheme (NGERS) under the National Greenhouse and Energy Reporting Act 2007, the Emissions Reduction Fund (ERF) under the Carbon Credits (Carbon Farming Initiative) Act 2011, the Renewable Energy Target (RET) under the Renewable Energy (Electricity) Act 2000, and the Australian National Registry of Emissions Units under the Australian National Registry of Emissions Units Act 2011.9

iiRegulated activities


The National Electricity Law and associated National Electricity Rules regulate market activities, and the National Energy Retail Law and associated National Energy Retail Rules regulate retail activities. A National Energy Customer Framework (NECF) has also been adopted in all states participating in the NEM other than Victoria. The NECF is effectively a package of reforms to the National Energy Retail Law that implement the framework together with the National Energy Retail Regulations 2012 and the National Energy Retail Rules. The extent to which the NECF has been adopted in each state is slightly different; therefore, it is necessary to consult the relevant state and territory laws to see which provisions have been amended.10

The following key activities are regulated within the NEM by the AER:

  1. at a wholesale level, participant bidding, dispatch and prices, network constraints and outages and forecasting in relation to demand and capacity are monitored by the AER to ensure there is no misuse of market power;
  2. in relation to networks, the AER sets a maximum revenue that network service providers can earn based on proposals submitted by those providers detailing their required revenues based on customer demand, their cost base, age depreciation of their infrastructure and maintenance measures required to maintain network safety and stability; and
  3. at a retail level, the AER provides a price comparison guide on their website (applicable to those jurisdictions that have adopted the National Energy Retail Law) to provide customers with visibility of costs and charges across the different providers. Thus, the AER seeks to reduce prices in the market through aiding competitive tension between providers, rather than setting retail energy prices. The AER also authorises new retail providers and enforces compliance with the National Energy Retail Law, Rules and Regulations.11


Pursuant to the Electricity Industry Act 2004 (WA) (the EI Act), there is a legal requirement to obtain different classifications of electricity licences from the ERA where you intend to:

  1. construct or operate generating works;
  2. construct or operate a transmission system of a voltage of 66kV or higher;
  3. construct or operate a distribution system of a voltage of less than 66kV;
  4. sell electricity to customers; or
  5. construct or operate any combination of generation, transmission, distribution and retail activities for the purpose of supplying electricity to customers other than through the SWIS.12

However, there are also certain activities in the electricity industry that fall outside the scope of the licensing requirements under the EI Act and do not require a licence; these include:

  1. self-supply: where the generating works, transmission system or distribution system is to be used solely for the supply of electricity for consumption by the person who owns, controls or operates the works or system or a related body corporate of that person; and
  2. where the sale of electricity is to a person who is not the end-use customer; for example, a generator who sells electricity solely to retailers is not required to hold an electricity retail licence.

iiiOwnership and market access restrictions


The NEM is described as an open access transmission system whereby generators apply to the network service provider with an access proposal and the network service provider makes an offer to connect to generator’s whose load meets network requirements and will enhance the reliability of supply on the network. Network service providers must invest in network upgrades on an as-needed basis to meet their statutory obligations to maintain reliability of supply to end customers. Generators have a right to connection, but not to being able to export all their output to the system and therefore pay a fix connection charge. Customers then bear the cost of network usage by paying variable charges linked to demand. Network service providers can also invest in network upgrades along their region of the network to reduce network congestion, provided this passes a cost benefit test relating to the benefit to market participants and consumers of the proposed investment. The AER also creates incentive schemes to promote investment by network service providers in targeted areas of the network to meet its network planning objectives.13


The Electricity Networks Access Code 2004 (the Access Code) is established under the EI Act and provides the framework for the independent regulation of certain electricity networks in WA.14 The objective of the Access Code is to promote efficient investment in, and operation and use of, networks and services of networks in WA and to promote competition in electricity retail and wholesale markets.15 The Access Code allows a ‘coverage application’ to be made to the Minister for Energy requesting that the whole or any part of an electricity network be covered. If a network is covered, it is deemed to be regulated and must have an approved access arrangement in place that sets out the terms of access to the network, including the conditions and prices that apply to the covered services of the network.

Service providers of a regulated network must submit their own access arrangement information to the ERA, which allows:

  1. the ERA, users and applicants to understand how the service provider established the proposed arrangement; and
  2. the ERA to form an opinion as to whether the proposed access arrangement complies with the Access Code.16

Currently, the SWIS is the only regulated network in WA and Western Power is the service provider.

Unlike the NEM, the WEM is described as having a ‘physical firm access’ system whereby generators are only able to connect to the network if they can show that their generation output will not interfere with other generators on the network who have a firm right to export their capacity onto the network. This means that
where the network is already constrained in the region where the generator wants to connect its asset, the generator must pay to upgrade the transmission line to alleviate the congestion. This is beneficial in the sense that generators are incentivises to connect in areas of low congestion to avoid the cost of upgrading the network, customers do now bear the costs of network upgrades and once connected generators have certainty that they will be able to export their output. However, the downside of this regime is that it has resulted in an over investment in the transmission line as it has been built to carry the output of all generators at all times, however in practice, not all generators will be exporting at the one time. In turn this has driven up the cost of electricity prices because generator’s pass on the cost of network upgrades through higher prices.17 This system is threatening to prevent new entrants to the market because while there may be sufficient spare capacity on the network at various times throughout the day, the existing generators have a contractual right to ‘unconstrained network access’, which means that this spare capacity is held aside for the existing generators, thus reducing the available capacity for new generators to connect.

ivTransfers of control and assignments

Where a proposed acquisition may have the actual or likely effect of substantially lessening competition in the market, approval of the proposed transaction may be required under the Competition and Consumer Act 2010 (Cth) from the Australian Competition and Consumer Commission (ACCC). The ACCC may provide either formal or informal clearance, with clearance typically taking up to three months. Alternatively, the Australian Competition Tribunal may grant authorisation based on a ‘net public benefit test’ where satisfied that the proposal is likely to result in such a benefit to the public that it should be allowed to occur, even if it is likely to substantially lessen competition in the market.

The ACCC has previously expressed concerns about the accumulation of market power through merger activity in the electricity sector, as well as the potential for anticompetitive conduct to ensue from vertically integrated structures.18

Those investors who are either based overseas or owned by a foreign entity must apply to the Foreign Investment Review Board (FIRB) for approval from the Federal Treasurer where they are seeking to acquire a ‘substantial interest’ in an Australian company (i.e., 20 per cent or more), assets of an Australian business or Australian land. The acquisition of electricity generation or distribution assets by foreign persons and companies is likely to trigger a requirement for FIRB approval. Once FIRB is notified, the board will consider the proposed transaction and assess whether it is against the ‘national interest’. New requirements introduced in 2016 allow FIRB to consult with other government departments to determine whether the proposed transaction is within the national interest. The Australian Taxation Office and the ACCC are among the departments that have been actively assessing foreign investment proposals.19

On the recommendation of FIRB, the federal Treasury may then issue a notice of no objection or, where the transaction is against the national interest, disallow the proposed transaction, or impose conditions on how it may be conducted.20 The FIRB approval process generally takes 40 days from the time the application is made; however, FIRB may extend this period for complex applications.


iVertical integration and unbundling

While the generation, transmission and retail sections of the electricity market were segregated in the 1990s, there has been a trend towards vertical integration by generators and retailers as a means of managing market risk and reducing reliance on hedging arrangements. This trend is true within the private businesses that own most of the generation capacity in Victoria, NSW and South Australia and also the government generators and retailers in Queensland and Tasmania.21

Similarly, there is a significant degree of vertical integration in WA with Synergy, a state-owned corporation, owning or controlling the majority of generating plants on the SWIS while also supplying over half of the state’s consumable load.22 Western Power, as another state-owned entity, then owns and operates the distribution network.

Similarly, the NWIS operates though a vertically integrated model, with Horizon Power (also a state-owned entity) being responsible for the generation, procurement, distribution and retail of electricity to customers in the NWIS. The NWIS is owned by significant users of the electricity network: Horizon Power, Alinta Energy, BHP Billiton, Pilbara Iron (Rio Tinto) and ATCO Australia.

iiTransmission/transportation and distribution access

Across the different networks within Australia the connection process is broadly similar. Generators must approach the network service provider with a connection proposal that details the design and technical connection requirements of the generation facility. The network service provider then considers the enquiry or application against set criteria (such as the technical rules for the SWIS in Western Australia and the reliability standards set by the National Electricity Rules on the east coast).23 The network service providers are responsible for approving the connection of new generation systems to their network. A system can only be connected once all of the applicable connection eligibility criteria have been met, as a means of ensuring that the quality and reliability of supply is of an appropriate standard. The connection of new generation systems may also be subject to the completion of overall network upgrades or the installation of new infrastructure to ensure network capacity is large enough to service the additional generation capacity and community and industrial demand. Therefore, the approval process depends on the size of the system to be embedded and the capacity of the network in the region where it will be installed.24


As noted above, in the NEM, network service providers set network charges, but they are limited by a cap on allowable revenue set by the AER. The allowable revenue is set based on the revenue required for the network service provider to cover its costs of reliably supplying customers and to provide an appropriate return on capital.

In relation to the SWIS in Western Australia, a schedule of network charges is submitted by Western Power to the ERA, who then assess and approves the proposed schedule of network charges by reference to the price control and pricing methods in Western Power’s access arrangement.25

ivSecurity and technology restrictions

As a general principle, all primary equipment on the transmission and distribution system must be protected so that if an equipment fault occurs, the faulted item is automatically removed from service by circuit breakers or fuses. Protection systems must be designed so that, if there is a fault, unnecessary equipment damage is avoided and any reduction in terms of power transfer capability or level of service to users is minimised.26

The scale and changing nature of electricity networks now dictates that security is of greater significance. The roles of key electricity sector stakeholders are changing with a gradual shift toward a shared responsibility for network security, with customers becoming generators that use distributed generation technologies, and vendors assuming new responsibilities to provide advanced technologies as well as their own security mechanisms. With these changes, all stakeholders are becoming responsible for ensuring the continued overall security and resilience of the broader grid, including through:

  1. facilitating public–private partnerships to accelerate cybersecurity initiatives for the grid of the 21st century;
  2. funding research and development of advanced technology to create a secure and resilient electricity infrastructure;
  3. supporting the development of cybersecurity standards to protect against vulnerabilities;
  4. facilitating timely sharing of actionable and relevant threat information;
  5. advancing risk management strategies to improve decision-making;
  6. supporting sector incident management and response; and
  7. enhancing and augmenting the cybersecurity workforce within the electric sector.27

With the growth of renewable technologies, the AEMO will be undertaking further studies designed to investigate how the integration of such technologies is likely to affect market operation in the future.

In 2018, the Inaugural Cyber Security Preparedness Report was issued in relation to the NEM and WEM. The report addressed the following issues:

  1. the cyber maturity of all energy market participants to understand where there are vulnerabilities;
  2. an assessment of current regulatory procedures to ensure they are sufficient to deal with any potential cyber incidents in the NEM;
  3. assessment of the AEMO’s cybersecurity capabilities and third party testing; and
  4. an update from all energy market participants on how they undertake routine testing and assessment of cybersecurity awareness and detection, including requirements for training employees before they access key systems.

vDevelopment of energy markets


The NEM is a spot market whereby generator’s offer to supply specified amounts of electricity at a set price for set time periods and can revise and resubmit this offer at any time. Based on the bids submitted, AEMO then decides which generation offer to accept and therefore which generators shall be dispatched to meet demand in the most cost-efficient manner. The spot price for electricity in the NEM is driven by supply and demand and set at half hour intervals. The National Electricity Rules set a maximum spot price which is adjusted annually for inflation.28 There is a different spot price in each of the five NEM regions. Customer’s purchase their electricity from a retailer who charges them a set price based on their contract plan. The retailer then bears price risk of fluctuations in the spot price and must manage this risk through entering into wholesale hedging contracts.29


The WEM is a capacity market, with each retailer required to acquire capacity credits from the AEMO, or generators directly, to match their individual capacity requirements. These capacity requirements are based on estimates made by the AEMO in relation to the overall capacity requirement of the SWIS for the next 10 years, in accordance with provisions specified in the Western Australian Market Rules. As well as supplying capacity credits to retailers, the AEMO is also responsible for assigning capacity credits to generation facilities.30

After determining the amount of reserve capacity required, the AEMO places obligations on market customers (i.e., retailers) to purchase capacity credits equivalent to their forecast contribution to peak demand. Those supplying electricity into the network earn ‘capacity credits’ by providing capacity to the system and, where that generation arises from renewable sources, can also earn renewable energy certificates (RECs), which is the general term used to cover small-scale technology certificates and large-scale generation certificates. These are created in the CER’s REC Registry to be bought, sold, traded or surrendered. Commonly referred to as ‘green products’, they can be bought by customers along with the electricity as part of a bundled power purchase arrangement so that customers can use them to meet their own obligations to surrender RECs or sell to the AEMO through a capacity auction.31

In the WEM, only the electricity volume that is not already covered by bilateral contracts is traded. For example, market customers (typically electricity retailers) may need to purchase additional electricity over and above their contracted position because of fluctuations in the weather or unanticipated increases in demand. In this scenario, the market customer bids into the market for the volume of electricity required to balance its contract position and pays market price for that balancing amount of electricity. The WEM’s bilateral net settlement system for uncontracted energy is overseen by the AEMO.



Significant change is occurring in the NEM that regulators are grappling with at a regulatory level, including the change in:

  1. the mix of generation facilities connected to the network with a decline in dispatchable generation (with the retirement of aging traditional coal fired plant) and increased renewable generation, which is variable by nature;
  2. patterns of demand with higher ramping and more customers exporting to the network with their own rooftop generation facilities; and
  3. weather patterns with prolonged heat waves which are placing more stress on the network.32

AEMO has considered these issues and how they interact which the spot price electricity market and has determined that a market based on real-time spot market price and bilateral contracts is no longer offering the best outcome. This is because with the increased presence of renewables on the network, generators’ are needing to compete with low-cost renewables in the spot market and in situations where the spot price is below that of the generator’s marginal costs, the generator is not incentivised to bid into the market during these periods. Unfortunately, this is compromising reliability on the network because the more stable and traditional dispatachable generators are withdrawing from the market during peak demand periods when such reliability is needed.33 Therefore, AEMO considers that a series of reforms will be required to augment the current market design to better suit supply and demand characteristics going forward by appropriately valuing generation resources with flexibility and dispatchability to incentivise investment in such facilities.34


During 2018 a WEM Reform Coordination Committee was established to manage a three-stage reform process within the WEM to implement an open access regime for the connection of new generation facilities (similar to that in the NEM) by October 2022.35 The reforms aim to make more efficient use of the existing transmission infrastructure, attract private-sector investment by reducing barriers to entry (particularly for renewables) and generally improve the wholesale market to reduce the retail price paid by consumers.36 By moving to an open access regime it is hoped to make the market more efficient by dispatching to the generator with the lowest-cost power, rather than the generator that has priority accesses to network capacity (i.e., ‘unconstrained access’).37 This system ought to make it easier for new renewable generation facilities to connect to the network and also increase their economic viability because with their low operating costs they ought to provide the lowest cost power and therefore be dispatched first. As part of the reform process it is anticipated that those generators with ‘unconstrained access’ will be paid some form of compensation for the loss of that right, which will be negotiated individually with those generators.38

iiiDevelopments in renewables

One of the most publicised recent developments in the renewable energy industry in Australia was the deal struck between the South Australian government and technology company Tesla to deliver up to 50,000 solar power systems for domestic use, utilising Tesla’s domestic lithium-ion batteries.39 This project is in addition to the Tesla Powerpack battery system, coined the ‘world’s largest lithium-ion battery’, a 100MW battery that is connected to the Hornsdale wind farm.40 The development of lithium ion battery systems is expected to increase the viability of renewable energy power generation on a commercial and domestic scale in the coming years and provide much needed stability to the South Australian grid which had been plagued by load shedding events. The Tesla Powerpack has been in operation since December 2017 and is said to be performing in line with, and in some cases exceeding, expectations in terms of its ability to respond to outages and peaking demand.41

Further, in early 2019 the federal government announced that it would help fund the Snowy Hydro 2.0 project in Tasmania by investing A$1.4 billion in equity. The Snowy Hydro 2.0 project in Tasmania will, if completed, be one of the largest pumped hydro projects in the world and add 2,000MW of energy generation and 175 hours of storage to the NEM. This expansion of Tasmania’s famous Snowy Hydro facility will provide critical storage capacity and dispatchable base load power that will help support the network and counter the influx of intermittent renewable generation facilities.42


The continued transformation of Australia’s electricity market in recent years has, along with the growth of the renewables sector, brought about considerable policy and regulatory changes. Notwithstanding these changes, the energy market in Australia still faces major challenges, the first of which is the geographical isolation that restricts certain areas from being serviced by the existing electricity network. The second is the status of the existing grids’ current regulations and technology, which do not support the optimisation of renewable energy generation. Wind and solar electricity generation offers a clean, green and potentially cost-effective means of meeting the peak electricity demand of Australia’s growing metropolitan population and can also service Australia’s remote off-grid communities through stand-alone facilities. Therefore, it is imperative that Australia invest in the technological research and development, infrastructure upgrades and legislative reforms required to ensure Australia builds on this natural advantage to reduce the cost of electricity for families and businesses while also securing efficient and reliable electricity supplies for future generations.


1 Simon Rear is a partner, Fiona Meaton is a senior associate and Connor McClymont is an associate at Squire Patton Boggs.

2 Australian Government Department of Environment and Energy, ‘Australia’s 2030 climate change target’, (2015).

3 Since 2008 power prices have risen 117 per cent, more than four times the average price increase across other sectors (source: Australian Bureau of Statistics).

4 National Electricity (Western Australia) Bill 2016 Explanatory Memorandum.

6 Economic Regulation Authority, Electricity (13 March 2018),; Code of Conduct (for the Supply of Electricity to Small Use Customers); Electricity Industry Customer Transfer Code 2016; Electricity Networks Access Code 2004; Electricity Industry Metering Code 2012; Electricity Industry (Network Reliability and Quality of Supply Code) 2005; Wholesale Electricity Market Rules and Energy Industry (Rule Change Panel) Regulations 2016.

7 Clean Energy Regulator, Who we are, (10 July 2017).

8 Note 8, above.

9 Clean Energy Regulator, What we do, (14 December 2016).

12 Electricity Industry Act 2004 (WA) Section 4; Economic Regulation Authority, Licence Application Guidelines and Form (November 2016), 2.

13 Factsheet: How transmission frameworks work in the NEM (18 July 2017).

14 Economic Regulation Authority, Guidelines for Access Arrangement Information (6 December 2010), 1.

15 Electricity Networks Access Code 2004 (WA) Section 2.1.

16 Electricity Networks Access Code 2004 (WA) Section 4.1, Section 4.48.

17 Government of Western Australia Department of Treasury, ‘Improving access to the Western Power Network, proposed approach to implement constrained network access’, Department of Treasury, Public Utilities Office, 9 August 2018, page 4

18 Australian Competition & Consumer Commission, Merger Reviews,

19 Australian Financial Review, ‘ATO to test national interest’ (1 April 2016).

20 Foreign Acquisitions and Takeovers Act 1975 (Cth) Section 17.

21 AER Report, ‘State of the Energy Market 2014’, Chapter 1, National Energy Market (2014).

22 Alinta Energy, Public Submission to Assistant Director of Electricity, Economic Regulation Authority (21 December 2015) available at:

24 Western Power, Network Integration Guideline,; and AEMO, ‘Transmission and distribution in the NEM - Process Overview’,

26 Note 21, above, at 2.9.1.

27 Jason Lazar and Mark McKenzie, ‘Australian Standards for Smart Grids – Standards Roadmap’ (Standards Australia 2012), 23.

28 AEMO, ‘Fact Sheet – the National Electricity Market’.

30 Australian Energy Market Operator Western Australia, The Wholesale Electricity Market (WEM),

32 Australian Energy Market Operator, AEMO observations: Operational and market challenges to reliability and security in the NEM, March 2018, page 3.

33 ibid., page 10.

34 ibid., page 11.

35 Government of Western Australia Department of Treasury, ‘Wholesale Electricity Market Reform Program – Industry Reform, 20 September 2018,

36 Government of Western Australia Department of Treasury, ‘Improving access to the Western Power Network, proposed approach to implement constrained network access’, Department of Treasury, Public Utilities Office, 9 August 2018, page 4

37 ibid., page 5.

38 ibid., page 7.

39 Nick Harmsen, Elon Musk’s Tesla and SA Labor reach deal to give solar panels and batteries to 50,000 homes (4 February 2018),

40 Nick Harmsen, Elon Musk’s giant lithium ion battery completed by Tesla in SA’s Mid North (24 November 2017),