How to replace the National Electricity Market

There are quite a few proposals around to intervene in, or repair, the National Electricity Market. In my view, it’s much too late for that. We need to scrap the NEM and start on a new path towards a zero-carbon electricity and energy system. I’ve written down some preliminary thoughts. I’d appreciate comments and also suggestions as to how I might push this idea along a bit.

Background

(a) The National Electricity Market has failed, and requires radical restructuring

(b) The ultimate goal of energy policy should be a 100 per cent renewable supply of electricity, providing both for existing needs and for conversion to electric vehicles by 2050

(c) The goal of a bipartisan policy is currently unattainable. Policy design should be based on the premise of a change of government at the next election

Outline

The starting point would be the creation of a single Australian Energy Authority, to replace the Energy Security Board, AEMC, AEMO, AER, and the energy-related functions of the ACCC and state regulators. The authority would 

(i) determine requirements for investment in the network, and undertake auctions for power purchase agreements, in which both privately owned and publicly owned generators would be free to compete.  The agreements would encompass both generation and storage, and would seek to phase out coal-fired generation over time, before a complete transition to renewables. Bids for fossil fuel generation would be required to incorporate a carbon price

(ii) match supply and demand using an order of merit for generators and appropriate demand management,  where the decision as to which generators to use at any given time would be made on the basis of cost and reliability of supply.

(iii) enter demand management arrangements with large power users, allowing for interruptibility of supply and investment in on-site storage

(iv) set out standard retail contracts, allowing households to manage their use through smart meters, which would be rolled out with costs being spread across the network as a whole

(v) plan and, to the extent possible, undertake new investments in transmission and distribution networks, with the ultimate goal of restoring public ownership of the entire network

(vi) Regulate returns to owners of monopoly distribution assets, with  net rate of return set equal to the government bond rate, guaranteed for the life of the asset

The objective of the Authority would be the provision of a stable, reliable and affordable supply of energy while managing a transition to a zero-carbon economy.

 Comparison with the NEM

The existing National Electricity Market is unique to Australia. Wholesale prices are set on the basis of bids for five-minute periods, with a cap of $12,500 per megawatt hour (MWh).  Electricity is purchased by retailers who then supply consumers. The consumer price consists of the average wholesale price paid by retailers, the retail margin and a regulated charge for distribution and transmission.  

The objectives of the market design were to provide market signals for investment in new generation capacity, drive efficiency gains in network monopolies, enhance consumer choice through retail competition and reduce prices overall.  The design took no account of the need to decarbonize electricity supply (though this was clear even at the time the NEM was designed in the 1990s), with the result that emissions reductions policies had to be overlaid on a market structure designed primarily for coal-fired power.

None of the objectives of the NEM have been achieved. Prices have risen drastically, investment has been chaotic and inadequate and retail competition has resulted in large increases in retail margins. Despite a plethora of confusing options, retail customers face prices that bear little or no relation to the actual costs of generation, particularly at times of peak demand.

The proposed scheme would maintain competition in generation through PPA auctions. It would enhance the role of price signals to consumers by offering contracts designed to allow households to minimise the cost of electricity use.  However, instead of relying on market price fluctuations to guide investment decisions, the investment requirement would be determined at a system wide level, taking account of demand and the need for reliable supply. The use of market comparators for monopoly transmission and distribution enterprises would also be abandoned, in favor of a low, guaranteed rate of return. 

42 thoughts on “How to replace the National Electricity Market

  1. Oh, and it’s possible to split the monopoly functions between a single regulator and a single grid manager (Ofgem and National Grid in the UK). Germany has IIRC the Bundesnetzagentur and three superregional grids. I fail to see what advantage this offers, especially as the largest grid operator, Tennet, is a wholly owned public corporation of the Dutch government. (I kid you not.) In Texas, ERCOT is the regulator and grid manager, but I don’t think it owns all the transmission assets. So there is some room for manoeuvre within JQ’s correctly Colbertian model. I doubt if these tweaks make much difference in practice, but they may affect political feasibility. A split allows conservative politicians to pretend that the grid is not part of the public sector.

  2. I agree with much of what Quiggins says but what ever we move to must take account of of the lack of consensus, particularly at federal level.
    I also have doubts about a national system and am inclined to independent state systems with some systems for interstate power flow. This may include options for states to set up generators outside of their boundaries so that, for example, Victoria is not too dependent on wind or Qld on solar. There may also be an option here for states to sell outside their boundaries and set up load sharing agreements outside their boundaries.
    The central system and monopolistic things like the grid should be publicly owned.
    I am agnostic re whether generators are publicly or privately owned provided that private supplies must not be able to shut down until replacement capacity is built.
    It is also important that the systems selected do not depend on durable consensus. This rules out using trading schemes like the RET

  3. AEMO is owned 60:40 govt/industry so its hard to identify which party contributed to the weakness of the NEM.

    However, to the best of my knowledge (which has its limits) its not the AEMO that is at fault as they can only consult, report and advise, blame for lack of action must ultimately come back to the head of govt i.e. Malcolm Turnbull.

    And as for Turnbull’s obvious capitulation to coal I can only think that energy corrupts.

  4. “I am agnostic re whether generators are publicly or privately owned provided that private supplies must not be able to shut down until replacement capacity is built.”

    That in itself is a difficult problem to solve, if generators are privately owned by different players. How can you prevent someone from shutting down their plant, when the replacement, belonging to someone else, is in the pipeline but was delayed for reasons having nothing to do with the owner of this plant?

    In addition, you are neglecting the issues I pointed out above. How will you “cost” all the services provided by a “generator”: active power, reactive power, rotational inertia (synthetic as well as real), other stability controls, etc. Without a proper system for doing this you will be comparing apples with oranges when you compare different generation technologies.

  5. Writing for the Herald Sun David Speers puts forward a novel concept

    So who’s right and who’s wrong? Is keeping an old coal-fired plant pumping the best option? Or is solar with gas-peaking more viable? Well, here’s a novel idea: let the market decide. In fact, that is what the regulator being cited by the government has suggested.

    The Australian Energy Market Operator has not actually said Liddell must keep pumping beyond 2022 to meet the 1000MW shortfall in dispatchable power supply it’s worried about. AEMO chief executive Audrey Zibelman instead says the government should put in place a “reliability mechanism” to let the market decide how best to cover the shortfall. The government would conduct a reverse auction. Whoever can provide the necessary supply at the cheapest price wins. It may be coal, gas, hydro or something else.

    A “reliability mechanism” to guarantee dispatchable power could work with a Clean Energy Target, or whatever clever name the government wants to call it.”

  6. Kevin Cox :
    Give preference to community cooperatives to finance local infrastructure, local generating and storage.This will keep profits within local communities.

    Yes I agree with this and also Geoff Edwards’ point about decentralisation (though I think you coukd decentralise more down to local government level).

    I would also be interested to see how the logic and principles would apply to a decentralised model. I wonder whether the ‘unit’ in that model could be local communities rather than households, encouraging communities to manage their energy use?

  7. @Val
    Agree too with Val and Geoff Edwards that more micro grids are inevitable as storage costs decrease, and particularly as in Qld the subsidy ( c $700m) to regional users is wound down. But the point missing about a decentralised grid is that States would not be able to negotiate a nearer optimal layout for new location ,type of generation and interconnectors. Weather-driven -trade depends on locations of wind and power based on low climate correlations.

  8. @Mpower
    Not completely sure I understand you, perhaps you could explain a bit further?

    My question may not have been clear, I mean how would the principles in the national system outlined by JQ apply if we were trying to decentralise and localise power generation and distribution to local communities as much as possible? I understand that we would still need a national system as well.

  9. @Val

    Why do we want to localise power generation? If you’re going to build wind farms, you put them where it is windiest. There might not be many of those places. As long as you can transport the electricity to where the people fairly cheaply, you should generate the electricity in the best places to generate electricity. Same with solar farms.

  10. @rog
    On co-ownership of the grid by utilities: this has been part of the reason that a bill, supported by Governor Brown, to link the California grid to neighbouring states has just failed in the state legislature. The existing US regional multi-state grid agencies follow this utility cooperative model, and progressives in California refused to allow out-of-state generators to acquire new influence over state energy policy.

    I think they were probably right. Utilities should be barred from ownership stakes in grid operators. The grid is an *intermediary* between suppliers and consumers, and must be neutral between their often conflicting interests. California should offer to cooperate – with independent grid operators like Texas’ ERCOT.

  11. @Val
    Grids need diversity, supply and demand, whether national or micro. The Vics would need to look to NSW and SA for back up when no wind and/or no sun – obviously more likely in a small state. the best location for NSW wind farms might be near the Murray- probably not optimal for Vic because of the high correlation.
    Of course the States on their own could negotiate directly but not many examples. For R&D they usually rely on Federal schemes, for example.

  12. @Smith

    @Mpower

    Thinking about it and trying to get an overview, there’s some different principles and values here
    – efficiency, large scale, either state or capitalist run, vs
    – localism, resilience, potentially equity if there are mechanisms for low income residents to buy in to community renewables

    I think there are benefits to local community action and ownership that aren’t necessarily captured by the idea of efficiency. I think from memory they had some good results in Germany.

    In a general sense I think involving local communities in action around mitigating climate change is important. One of the problems with climate science is that it’s been top down and remote, and so have some of the major responses. Garnaut, for example, had nothing to say about local communities in his first big report as far as I remember.

  13. Smith and Mpower

    I tried to reply to both of you at once and my comment went into moderation. So here it is again (JQ when you see the previous one could you please delete it)

    Thinking about it and trying to get an overview, there’s some different principles and values here
    – efficiency, large scale, either state or capitalist run, vs
    – localism, resilience, potentially equity if there are mechanisms for low income residents to buy in to community renewables

    I think there are benefits to local community action and ownership that aren’t necessarily captured by the idea of efficiency. I think from memory they had some good results in Germany.

    In a general sense I think involving local communities in action around mitigating climate change is important. One of the problems with climate science is that it’s been top down and remote, and so have some of the major responses. Garnaut, for example, had nothing to say about local communities in his first big report as far as I remember.

  14. @Val

    WADR, this sounds very waffly. A more straightforward objective is to keep the lights on at reasonable cost with a minimum of carbon emissions.

  15. I agree with Smith here Val. As I’ve said before, best keep the “smash capitalism” and “stop AGW” agendas well apart from each other because failure to achieve one will jeopardise the other.

    You like community autonomy – great (though my personal experience is that the internal power dynamics of small self-contained communities are far worse than those in larger more open ones. I suppose YMMV). But, anyway, don’t bugger up the things most people value – well paid employment in a liveable environment – in pursuing that. And stuffing the electricity grid would do that.

  16. @derrida derider
    I have to agree with that last comment; too much of the obstructionist rhetoric is built around “green socialists wrecking the economy” – and it doesn’t seem to matter that the problem is a mainstream economic one as much as it is an environmental one, driven at it’s fundamentals with mainstream, non-political science.

    I’m not convinced nationalising is the way to go because it will devolve into well worn and diversionary conflicts of ideology, potentially making it all messier rather than achieving the hoped for freeing up of policy makers to intervene more directly for the greater good.

    Especially given the very changed market conditions since the big power sell-offs, with solar and wind being increasingly competitive – periodically winningly competitive and increasingly overall competitive in their own rights – pushing market based solutions in thorough overhaul look more likely to be effective. It would put the pro-coal interventionists and obstructionists who are supposedly pro-free markets on the back foot.

    I think the whole energy scene is so subject to change that the best policies today will probably be subject to revision tomorrow. Agility and Innovation anyone? The real things not the empty slogans.

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