The supply and wholesale price stresses in Australia’s gas and electricity market has prompted some remarkable recent interventions by government. This article considers new South Australian powers to intervene in the national electricity market, and proposed Commonwealth powers to restrict LNG exports.
The supply and wholesale price stresses in Australia’s gas and electricity market has prompted some remarkable recent interventions by government, two of which involve the introduction of “border controls”; one, domestically within the electricity market, and the other, nationally to raise the prospect of restricting exports of LNG.
South Australia: emergency intervention in the national electricity market
In February 2017, in response to concerns that AEMO’s operation of the national electricity market (NEM) had contributed to the September 2016 statewide blackout, and load shedding events over summer 2016/17, the South Australian government announced a series of measures to improve local control over energy security in South Australia. The measures announced included funding to facilitate large-scale battery storage and for a new government-owned gas-fired generator to provide emergency standby power, along with incentives to encourage onshore gas exploration.
Most controversially, the South Australian government has legislated to empower its Minister for Energy to make emergency interventions in the NEM, if the Minister reasonably considers that there is a real risk that the supply of electricity to South Australia may be significantly disrupted. In that event, the Minister may direct AEMO to limit interconnector flows, by giving emergency directions to generators or other market participants, or by directing that the wholesale spot market be suspended in South Australia. If exercised, those powers override the operation of the NEM by AEMO, the national independent market operator, which has its own powers under the National Electricity Rules to give emergency directions in such situations.
As enacted, the Emergency Management (Electricity Supply Emergencies) Amendment Act 2017 requires the South Australian Minister, so far as is reasonably practicable in the circumstances, to take reasonable steps to avoid “unduly” interfering with the operation of the NEM and to consult with market participants who will be subject to the direction. An emergency direction given under the new provisions is expressly stated to over-ride any other Act or law, including the National Electricity (South Australia) Act 1996, which applies the National Electricity Law and Rules within South Australia. It is an offence to fail to comply with an emergency direction, with a maximum penalty of $250,000.
Apart from the headache of having to accommodate the sui generis South Australian emergency powers within AEMO’s protocols and programs for operating the NEM, some interesting questions arise. Can South Australia lawfully require AEMO, sitting interstate, to constrain transmission across an interstate interconnector? (It would seem so, as the interconnectors are in part situated in South Australia, and there is no over-riding Commonwealth law.) Might the emergency direction regime be vulnerable to challenge under section 92 of the Constitution, as an impermissible impediment to trade and commerce between the States? (Doubtful, given that the powers are conditioned on a real risk of significant disruption to the supply of electricity.)
In any event, this South Australian legislation marks a significant step back from the principle of an independently-operated “national” electricity market. Whether the emergency powers come to be invoked, or are instead used as political leverage to make AEMO use its own emergency powers with greater alacrity to prevent future outages in South Australia, may become an interesting sub-plot over the next summer or two.
The Commonwealth: emergency restrictions on gas exports
Not to be outdone, and in recognition of the constraints that large-scale LNG exports from Queensland are imposing on both the gas and electricity markets in the eastern States and South Australia, in late April, the Commonwealth government announced the introduction of an Australian Domestic Gas Security Mechanism, to impose controls on gas exports in the event of a shortfall of supply in the domestic market.
That announcement was made after the Commonwealth had entreated the gas producers to come forward with voluntary measures to alleviate future domestic shortages. In late April, apparently dissatisfied with the gas producers’ responses, the Commonwealth announced that it would move to consulting with the industry on draft regulations that are proposed to take effect from 1 July 2017.
Subject to that consultation, it appears that the Commonwealth proposes to use its (undoubted) powers to prohibit or restrict exports under Customs legislation. It is proposed that the Commonwealth Minister will have power to impose export controls, if advised of a pending shortfall by AEMO, but that exporters will first be given an opportunity to fill any domestic shortfall through other commercial solutions, such as international swap trades.
The detail, of course, will be in the impending regulations. Given the prospect that the export controls may interfere with existing long-term supply contracts, it will be interesting to monitor whether any threat of investment treaty claims arises. Fortuitously, perhaps, Australia is still yet to ratify the Energy Charter Treaty, despite having signed the treaty as long ago as 1994.
In the meantime, turning back to the domestic challenge of keeping the lights on (and keeping industrial energy users viable), the next significant milestone will be the release of the Finkel Report into the future security of the national electricity market, which is due to be delivered to the COAG energy ministers in June. One might dare to hope that it will pave the way for a more co-ordinated and orderly response to the multi-faceted challenges that our energy markets now face.