The National Electricity Market (NEM), the system which connects more than 80% of Australians to one electricity grid, needs a fundamental overhaul according to a new report by Professor John Quiggin, published by The Australia Institute.
Thu 14 May 2026 12.10 AEST
Photo: AAP Image/Lukas Coch
As the old Irish saying goes, if I were trying to design a better electricity supply system for Australia, I wouldn’t start from here. Australia took a wrong turn in the early 1990s, when it became feasible to build a single grid connecting the largely separate state systems of the eastern states (including South Australia). We could have built on the existing model of Snowy Hydro, with a grid jointly owned by the state and national governments and maintained the long-term trend to lower prices achieved under public ownership of electricity. We could also have paid attention to the emerging problem of global heating, widely publicised after the 1992 Rio Earth Summit.
Instead, with neoliberalism at its zenith, governments trusted our energy future to markets, privatisation, and competition. The core of the system was (and remains) the National Electricity Market (NEM), which, as planned, had two main roles. First, the price of electricity would be set by a continuous pool market, matching bids from generators with demand from electricity users and retailers. If prices were high, this would stimulate new investment, bringing costs down again. Competition and privatisation were supposed to drive prices down and ensure efficient provision of distribution and transmission.
The system worked well enough in the 1990s, when there was plenty of reserve capacity (derided as “gold plating”) inherited from the old publicly-constructed networks. But by the time consumers were exposed to market competition, the system had run down. Reliability standards were breached. The “gold plating” was expensively replaced under regulations allowing a high rate of return. Prices began a steady increase, driven by network costs, which has continued to the recent past.
Moreover, the system, designed for coal and gas, was unprepared for the rise of solar and wind energy after 2000. The corporate interests of established generators and distributors clashed with the need for decarbonisation and the challenge posed by rooftop solar.
The response from government was a series of ad hoc fixes: including the Renewable Energy Target, the National Energy Guarantee, the Energy Security Board, and the Reliability Panel. All of these overlapped in various ways with the primary manager of the system, the Australian Energy Market Operator (AEMO). As well, we have seen emergency interventions such as the suspension of the market in June 2022.
From this unpromising starting point, how can the system be reformed? The first necessity is to accept that markets alone cannot do what is needed. The electricity grid is a national asset which should be under direct public control.
The central institutional tension is that AEMO is required to perform two functions that rest on different principles. As market operator, it must apply dispatch rules neutrally and allow price signals to operate. As system steward, it must intervene to ensure reliability, manage security services, plan transmission expansion, and respond to emergencies. When scarcity pricing or volatility becomes politically unacceptable, intervention is inevitable. The result is blurred accountability and an increasing reliance on discretionary fixes.
AEMO should be separated into a rule-bound pool market operator and a national grid and system authority with explicit responsibility for reliability, transmission integration, long-term contracting, and emissions integration. Markets would continue to determine short-run dispatch. Investment adequacy, network expansion and decarbonisation would be managed transparently through planning and contracts rather than implicitly through crisis management.
Transmission should be consolidated under public ownership within the grid authority, reflecting its natural monopoly character and the advantages of sovereign financing. Generation should operate under a mixed public–private model, with both merchant and contracted pathways. Distribution reform should focus on aligning allowed returns with actual risk, with public ownership available as a long-term option. Retail competition should be retained where it delivers measurable benefits, but default pricing should be treated as a public obligation linked to system costs.
The objective is not to abandon markets but to assign them a role consistent with their strengths. The NEM has evolved into a planned system operating through a market interface, but this has been done in a backhanded and incoherent fashion. Formalising the reality of public planning would improve transparency, clarify accountability, and provide a more stable foundation for the clean energy transition.
A more detailed proposal is set out in my recent report.
John Quiggin is a Professor of Economics at the University of Queensland
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