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National Electricity Market has served its purpose – it’s time to move on

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The Conversation

A single, national market that supplies all of Australia’s electricty is looking dangerously outdated – and politically impossible. Source: The Conversation

A single, national market that supplies all of Australia’s electricity is looking dangerously outdated – and politically impossible. Source: The Conversation

The Finkel Review was a valiant attempt to find a path towards a 21st century energy market model for Australia. But political infighting and powerful interests have blocked one of its core proposals, a Clean Energy Target (CET).

Despite the creation of a new Energy Security Board to try to hold regulators and policy makers to account, the ability of the present structure to deliver is uncertain.

State energy ministers, who have gathered today for the COAG Energy Council meeting, are now threatening to go it alone if the Commonwealth government does not commit to a CET. But the problem and opportunity is much broader. It’s time to step back and rethink energy policy.

The national model is failing

The National Electricity Market (NEM) was established in a context of an energy system comprised of large generators and large energy utilities, with energy flowing in one direction: from power station to consumer. Things have moved on.

Most of the activity now is behind the meter, local, or within regions, although interstate energy flows are still very important.

State governments now recognise that their voters will blame or reward them for “keeping the lights on”, and are not prepared to suffer to help supply other states.

Forward-thinking politicians also know they will win votes, and create jobs, by driving clean energy solutions.

The NEM has failed. Its very narrow economic objective was to provide low prices, reliable and safe energy, and to act in the long term interests of consumers. Many would score it zero out of three.

Despite the government’s acceptance of 49 recommendations of the Finkel Review that aim to fix many of the problems, few observers are confident that the deep cultural problems and powerful vested interests can be overcome – let alone the impact of a small number of conservative politicians within the Commonwealth government, who are holding energy policy hostage.

The COAG Energy Council is unworkable. It requires consensus to act, but differing state-level agendas block this on key issues.

Indeed, the government has just proposed to go over the heads of the Council, and COAG, to remove the right of energy businesses to appeal against regulatory decisions after years of internal disagreement.

Overriding the COAG Energy Council is an extreme tactic that cannot work for many other problematic issues.

The “top-down” nature of the NEM is out of date. Repeated criticisms of the lack of discipline of state governments by federal energy minister Josh Frydenberg merely confirm that this model won’t work.

Importantly, a large proportion of the real energy industry is not acknowledged as a formal part of the NEM structure.

The NEM framework defines the electricity industry as licensed generators, network operators and retailers.

While NEM reports talk about consumer choice and rights, they ignore the emerging industries such as renewable energy, storage, demand management, energy efficiency, businesses with new financial models, and so on.

These businesses simply do not have a seat at the table.

The scale of change needed to make the present NEM model work is simply beyond our political system. In any case, there is an emerging alternative that can evolve in parallel with the NEM.

A real 21st century energy model

In practice, the NEM has functioned in parallel with several other mechanisms for years.

The Renewable Energy Target has operated since 2001. It was introduced to address the failure of the NEM to support renewable energy development.

This market is quite separate, and operates on an annual basis, using trading of certificates and obligations on energy retailers.

Several states and the ACT now operate energy efficiency obligation schemes. These also operate through obligations on energy retailers, and most use tradable certificates.

These schemes drive the installation of a range of energy efficiency measures.

At the industrial level, increasing numbers of businesses are investing in large renewable energy systems “behind the meter”, so they can insulate themselves from the chaos of the NEM. They need the price stability and reliability the NEM can’t deliver.

Several states and the ACT now have aggressive renewable energy targets – which have repeatedly been criticised by Frydenberg.

The ACT has demonstrated that these schemes can work very well. They can reduce electricity prices, create local jobs, reinvigorate rural and regional economies – and win votes.

Because they involve long term contracts, their output is predictable. Other states (and consortia of councils, businesses, universities and others) are copying this model. State governments also still have significant powers to regulate network operators and retailers.

The future is distributed

If we look to the future, we see enormous growth in a diverse range of distributed energy solutions. These have many advantages over centralised solutions. Further, we see astounding diversity emerging in the energy system.

These trends cannot be managed by “command and control”, top-down mechanisms. Although national standards and coordination can be useful, they are not essential, and can easily block innovation.

Slide from ‘Our efficient, smart, flexible, distributed and diverse energy future’ presentation to APEC energy ministers conference. Source: The Conversation

Slide from ‘Our efficient, smart, flexible, distributed and diverse energy future’ presentation to APEC energy ministers conference. Source: The Conversation

A practical energy model involves states and territories working with businesses, councils and communities.

They would use existing powers over network operators and energy retailers, and would implement their own strategies for security and emissions reduction.

In this scenario, AEMO would monitor their policies and rates of implementation of demand-side and supply side energy services, and use its modelling capabilities to identify emerging imbalances.

It would warn states where issues such as gaps between supply and demand and grid instability were emerging. Where states failed to act, AEMO would have power to intervene.

Slide from ‘Our efficient, smart, flexible, distributed and diverse energy future’ presentation to APEC energy ministers conference. Source: The Conversation

Slide from ‘Our efficient, smart, flexible, distributed and diverse energy future’ presentation to APEC energy ministers conference. Source: The Conversation

The NEM would continue to operate as a wholesale market for the “big guys” – large generators, industrial sites and transmission line operators. It would also provide performance information and advice to AEMO to inform its modelling and analysis.

The national RET effectively finishes in 2020: it can easily be replaced by state level strategies.

Thanks Dr Finkel. The reactions to your Review have demonstrated conclusively that we need a real 21st century energy system, and that a national approach based on the existing NEM simply won’t work.

Source: The Conversation. Reproduced with permission.  

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  • john

    With adverts like this in National Media being pumped out with sci-ency sounding sources people are being mislead.
    No doubt the aim of this advert is to spread FUD.
    https://uploads.disquscdn.com/images/6efd269683f0b34a8e80434fed72504908882abac6450a2050886d5c4c38e710.jpg

    • Doug

      One issue that our ill-ustrious Minister Friedenburg has not taken into account with distributed generation is that it migh actually make the grid much harder to hack.

      It is about time that the current govt, that is obviously still on ‘L’ plates, changed to what the majority of Australians seem to want: Cheaper power, that is more sustainable. This can never be achieved (in my opinion) by fossil fueled generators, or even Nuclear.

      I seem to remember that one of the Universities did a study years ago that renewable energy was viable, & wind energy was valid base load generation because the wind always blows somewhere?

      Please wake up Federal Government!

      regards, Doug

      • john

        Doug
        Yes look at the Conversation to find the papers your referring to.
        CSIRO, ANU papers there setting out how distributed Renewable Energy sources together with Pumped Hydro can give a very resilient power supply.
        The important aspect is Distributed and a National Grid to connect same.

  • Peter F

    Alan
    You are being too polite, the NEM was never any good to start with. It has always been a dog designed to rip off customers and state governments for the benefit of the finance industry.
    Take Victoria. The SECV had reduced real prices every year since then they are up. In real terms they have risen by 60-80% since privatisation. In the last years of the SECV it paid all the interest on its “terrible debt” invested in the network and paid the government $500m per year in dividends $A900m/yr in current dollars.
    It employed less people than the current industry does while training hundreds more apprentices, technicians and engineers and maintaining world class labs, workshops and testing facilities providing a source of trained employees for companies throughout Australia
    What have we got in return?

  • Tom

    None of this hand waving explains how your idea is better than having the NEM.
    The problem is government not having a market.
    Decentralisation is always in the context of the larger network.