AEMO says major market reform essential to cut energy prices

Two key Australian energy institutions have again pushed for more rapid and wholesale changes of market rules, saying this was essential if Australia was to manage new technologies and return to its former status of a low-cost energy nation.

Testimony from the Australian Energy Market Operator and the Australian Renewable Energy Agency underlined their plea for changes to market rules, changes which many in the industry say have been stalled under the current market rule maker.

New AEMO chief executive Audrey Zibelman says Australia used to have low energy prices, but had obviously lost that status. “The question is, how do we use the resources we have to get back to that level of affordability?” she told a parliamentary inquiry in Canberra.

The answer was with new technologies like battery storage and demand management, a new set of market rules. “What we need is to think how to get these opportunities into the market. We are operating 20th Century power system trying to keep pace with 21st Century change,” Zibelman said.

Both AEMO and ARENA have been highly critical of the slow pace of reform of Australian energy market rules, the province of the Australian Energy Market Commission and the COAG energy ministers.

In its submission to the parliamentary inquiry into a modern electricity system, AEMO said that Australia’s rule making was not sufficiently forward-looking to meet the needs of the “paradigm shifts” the National Electricity Market was undergoing.

In particular, AEMO and ARENA want rule changes that can encourage battery storage and demand management, and that will address the over-investment in networks and generators that are responsible for Australia now having some of the highest electricity prices in the western world.

The AEMC, however, has been sitting on both these proposals. The request for demand management incentives made way back in 2012 have been stalled, and it is still considering a request for a change to a 5-minute settlement rule, which would encourage battery storage, nearly two years after it was made.

The AEMC, appearing at the same inquiry, conceded there had been delays because of the “complexity” of the issues, but said the biggest problem was the lack of clarity over emissions targets.

Zibelman said answers to questions about emissions would be helpful, but “there are other things we need to start talking about. “

She cited demand management, where new market incentives could allow consumers to be paid $50/MWh to not use power at certain times, rather than having to pay $10,000/MWh when supply is tight.

AEMO and ARENA, frustrated by the glacial pace of AEMC rule-making, last week launched their own pilot to install 100MW of demand management in Victoria and South Australia by this summer, “to show it can be done”.

Zibelman says Australia’s energy market structure meant that on average the power stations in the grid were operating at only around 50 per cent capacity. That’s because so much extra capacity – mostly gas and diesel plants – had to be built historically to meet several hours of peak demand each year.

They basically “sat around waiting for a hot day” and then tried to recoup a year’s worth of revenue in just a few hours of generation. Hence the high prices.

“It’s like building a hotel and deciding you are only going to fill it on Anzac Day,” Zibelman told the inquiry. “You probably won’t build it.

“We should be creating a market that is more efficient, so we don’t need to have new generators that have to get one year’s revenue in 10 hours.

“That’s what we’re talking about when we say we should be rethinking the grid and making it more efficient. You need to work out how to build a grid that doesn’t have to build resources for few hours a year, which tends to be very expensive.”

ARENA boss Ivor Frischknecht said his organisation wanted rule changes in four key areas.

One was a shorter settlement period – to the 5 minute period now being considered. “Even shorter would be better,” he said.

Another was changing rules that did not penalise storage attached to, say, a large-scale solar plant, being pinged twice (as the batteries were charged and then discharged) with the full cost of the transmission network. He said transmission and distribution costs needed to be “truly cost reflective” rather than being “smeared” across the sector.

The third was on demand management initiatives such as demand response. “There is inadequate regulation.”

And the fourth was on inertia in the market, normally delivered “free” by turbines (coal, gas or hydro), but which now needed a market signal to encourage wind and solar farms to deliver the same service.

Frischknecht estimated that the total back-up costs for a high renewable energy grid – which he said was clearly achievable – would be between $20/MWh and $40/MWh.

Zibelman, in a reference to the “cultural” difference in the Australian energy market over the inevitable energy transition, and whether it could or could not be achieved, said it was essential to seize the opportunities as well as dealing with the challenges.

“What we need to do is think of market changes, and do how do we turn those challenges into opportunities. Even with this paradigm shift, we are seeing how challenges can be opportunities.”

She cited the push by South Australia and Victoria into battery storage, but also noted that “lots of innovators” were coming to AEMO with new ideas.

“What we need is to think how to get these opportunities into the market. We are operating 20th Century power system trying to keep pace with 21st Century change,” Zibelman said. “The question for us is – given that rate of change, of customer preference and customer security – what changes need to be made, and have to be made?”