The original design of the NEM assumed that private markets and price signals could not only guide investment in generation, networks and retail, but also accommodate changing environmental requirements.

Experience has shown that this is not the case. The NEM now operates as a hybrid in which reliability and investment are secured through administrative intervention and long-term contracting, while emissions reductions are driven by a set of overlapping federal and state policy instruments.

The analysis makes several recommendations to fix the NEM:

• Split the Australian Energy Market Operator into two bodies, a rule-bound market operator and a national grid authority with responsibility for reliability, transmission integration, long-term contracting and emissions integration.
• Consolidate transmission under public ownership within the grid authority.
• Operate generation under a mixed public–private model.
• Reforming distribution, while keeping public ownership available as a long-term option.
• Retaining retail competition, but default pricing should be treated as a public obligation linked to system costs.

“Australia’s transition to a low-emissions electricity system has exposed the structural weaknesses of the National Electricity Market.” said Professor John Quiggin, Professor of Economics at The University of Queensland and author of the report.

“After decades of patchwork reform, the elegant design of the original NEM is almost invisible under all those tweaks.

“The market can be left to do what markets do best: match supply and demand in the short run. The larger task of planning and operating a national grid, and the process of transition to clean energy, is a job for a single national authority, overseen by state and federal governments.

“If Australia wants a clean, reliable electricity system, with reasonable prices, reform is necessary and urgent.”