Reliability Review: Why are the settings so crucial for the NEM?

While the recent focus around the National Electricity Market (NEM) has been on the Federal Government’s Expert Panel, an equally important review on the reliability standard has also been underway. 

In June, the Reliability Panel (The Panel) published an issues paper to initiate the 2026 Reliability Standard and Settings Review. These underlying market settings remain key to a well-functioning NEM and will work hand-in-hand with the Expert Panel’s recommendations. 

The reliability of the energy market has never been far from discussions and has most recently been heightened by a combination of the changing generation mix in our energy system and some political anxiety.  

The Reliability Panel’s function and periodic review is  vital and necessary.  However, we do not believe a material overhaul of the settings as a whole is warranted right now.  And we are not at all persuaded that the advent of either the Capacity Investment Scheme (CIS) or the Electricity Services Entry Mechanism (ESEM) which has been proposed by the Expert Panel should pave the way for lower market settings. 

Here we take a look at the reliability review, some of the areas in our submission to that process as well as the rationale behind our position. 

Reliability Settings

The market settings profoundly impact every layer of the NEM, from day-to-day operations to the medium-term derivatives market, and the long-term investment decisions needed for the energy transition.  

The Market Price Cap (MPC) and Cumulative Price Threshold (CPT) are vital for informing contracts and promoting liquidity in the market.  If the price caps are relatively high, it creates a powerful incentive for market customers to enter into hedging contracts.  This is crucial as contract liquidity is a key concern right now, and these settings directly support it. 

Beyond contracts, these settings are critical in guiding investment decisions.   The contract prices, shaped by these settings, send direct signals to both existing and prospective projects.  These signals impact everything: whether an old plant decides to close or be refurbished, and whether a new plant can build a viable investment case.  We firmly believe it's an appropriate goal for the Reliability Panel to implement settings that support investment, especially since many of the major government support schemes are designed to work with market price signals, not override them. 

Lastly, some elements of these settings, like the Administered Price Cap (APC), have a more immediate influence on how the market dispatches electricity and its overall operational efficiency.  If these settings are pitched at the right level, they can reduce the need for the Australian Energy Market Operator to intervene, helping the system run more smoothly and efficiently, and at least cost to customers. 

Given how foundational these roles are, it should be no surprise that a healthy NEM depends on stable and predictable reliability settings.  Of course, sometimes material changes are needed – for instance, the APC was increased after the 2022 market suspension event, and that was a necessary improvement. But generally, volatility in these settings is something we need to avoid. If any changes do come out of this review, we hope they're at the margins and carefully considered to better achieve the National Electricity Objective (NEO). When we think about when to implement any changes, stability and predictability remain paramount, balancing the desire for prompt improvement against any negative impacts on the contract market and how participants manage their existing contract positions. 

The AEC's Overarching Views and Key Considerations 

Our submission to the Panel highlighted a few overarching principles for the 2026 review. We believe the primary focus should be on ensuring these settings effectively deliver the right incentives for the marginal plant to achieve reliable outcomes. Marginal plant is crucial for keeping the lights on when supply is tight. 

While we advocate for the Reliability Panel to maintain a broadly technology-neutral approach, it's also important to be aware of which specific resource types are most likely to be affected by the levels and any changes to these reliability settings.  For example, dispatchable plant, such as various forms of energy storage and gas-powered generation (GPG), are significantly influenced by these settings. Why? Because they are the most likely players to be the marginal plant during times of scarcity. Variable renewables (VRE) like wind and solar, on the other hand, are less impacted by reliability settings; their investment drivers are more about average prices and curtailment levels. And investments in consumer energy resources (CER) are largely driven by retail tariffs, which don't have a direct link to the reliability settings, though tools like virtual power plants (VPPs) which coordinate CER infrastructure can link to the wholesale market. 

Our Take on the Reliability Standard and the Value of Customer Reliability (VCR) 

When it comes to the reliability standard itself, our position is pretty straightforward: we see no indications that the current standard needs to change. We believe the current standard is broadly appropriate. It's worth noting that the vast majority of loss-of-supply events customers experience are due to network outages, not issues that the reliability settings are actually designed to address. 

The energy transition brings fascinating, yet complex, trends that could have opposing effects on how much value consumers place on a reliable supply. On one hand, the increasing penetration of CER might make some consumers less dependent on the grid. But on the other, growing electrification could make consumers more dependent on electricity supply overall. At this stage, it's simply not possible to definitively say which effect will be stronger. Plus, consumers might use their CER to manage retail energy prices, which may not always align with wholesale prices, potentially limiting their use for grid reliability support. 

We also urge caution against relying too heavily on the Value of Customer Reliability (VCR)i as the sole signal for changes to the settings. The Australian Energy Regulator's (AER) 2024 VCR estimation exercise showed some significant changes from 2019. While some residential and a couple of business VCRs increased, most business VCRs actually decreased quite materially. We highlighted that the industrial customer VCRs were based on surveys of a relatively small number of respondents, and many were different from the 2019 exercise, suggesting the changes might be more about who responded rather than a clear market signal. Ultimately, we feel the Reliability Panel's assessment needs to focus on the long-term interest of consumers, not just a snapshot. We suggested that averaging VCR across all customer types and locations, or focusing on the VCR of customers who cannot access CER (which would presumably be higher), might offer a better long-term perspective. Crucially, since the MPC remains well below the average VCR, the AER's results don't provide a clear justification for changing the settings. 

Our Perspectives on Specific Reliability Settings 

Let me briefly outline our views on each of the specific reliability settings: 

• Market Price Cap (MPC): We believe the MPC and its impact on contract prices are most relevant for dispatchable resources that can provide firming services, like large-scale storage and GPG. It's worth highlighting that GPG doesn't currently access government investment schemes; it relies entirely on market signals.iiYet, it plays a critical role in supporting secure and reliable market operation alongside renewables. Government support schemes for storage are designed to work with market settings, not override them, so they don't provide a strong reason to change the MPC. Since the MPC isn't based on the cost of any single technology, the changing mix of technologies isn't necessarily a direct reason to change its level.
• Market Floor Price (MFP): We think the MFP plays a limited role in mitigating Market Suspension Level (MSL) events. Most load isn't exposed to spot prices anyway. We'd need to understand the implications of a potential negative Cumulative Price Threshold (CPT) much better before forming a view on it. We also believe the MFP has little effective role in addressing "race-to-the-floor" bidding by Variable Renewable Energy (VRE), as this behaviour is largely a consequence of physical constraints and dispatch mechanisms, not the MFP.
• Cumulative Price Threshold (CPT): The CPT should continue to be technologically neutral, but it should be informed by the evolving mix of technologies that provide reliability services during extreme market conditions. We suggest the Panel could consider a multi-stage cap, where the maximum allowed price progressively steps down once an initial cumulative threshold is reached. This would need to be informed by modelling. It's also vital to avoid distorting incentives for participation in both energy and Frequency Control Ancillary Services (FCAS) markets. The CPT's role is to protect against systemic risk from persistent elevated prices, not to shield individual participants from their own failures to adequately hedge.
• Administered Price Cap (APC): The APC's primary purpose is to maintain incentives for market participation across all plant types and demand-side resources, while also limiting consumer cost escalation. It's not a material driver of investment decisions because it's so rarely hit. Determining the right APC level is complex due to gas price volatility, challenges in figuring out short-run marginal costs (SRMC) for storage, and the evolution of the contract market. Despite this complexity, the APC needs to balance these factors with the critical need for predictability and stability for market participants.
• Indexation: We support indexation as a good default approach for the MPC and CPT. This simply helps preserve their real value over time.

Our Thoughts on the Modelling Approach and Sensitivities 

Overall, we generally support the high-level modelling approach the Reliability Panel has outlined. It makes sense to leverage the extensive analysis already done by AEMO and CSIRO for the Integrated System Plan (ISP). However, we do propose several refinements. 

We think the modelling should account for the potential implications for existing plant if settings change. If changes were to cause existing plants to close earlier than expected, that would require even more new investment, and that needs to be factored in. 

It's also crucial for the modelling to incorporate realistic timeframes for the deployment of generation, storage, and transmission. Recent years have shown that physical deployment limitations – whether due to social licence delays, financing issues, or supply chain bottlenecks – mean that policy targets might not always be met within desired timeframes. We believe it's not a criticism of government policy to test realistic scenarios where targets aren't met. 

While it's appropriate to include the value of emissions reduction in resource cost assessments, we believe that emissions reduction goals should not be incorporated as a hard constraint in the modelling. Prioritising one limb of the NEO is inconsistent with the regulatory framework, which requires all limbs to be considered for the long-term interest of consumers.  Storage shouldn't be considered a zero-emissions technology. In most cases, the NEM's emissions intensity is non-zero, and the marginal plant is rarely a zero-emissions plant, so it's unrealistic to assume storage only charges from zero-emissions electricity. 

Finally, we encourage the Panel to incorporate up-to-date information where possible. Sensitivities should focus on stress-testing the system with plausible alternative inputs and avoiding "blind spots," especially since reliability is often truly tested under extreme conditions.