Australia’s electricity market has always been weather dependent. What it needs is visibility

The head of the panel tasked with the rewrite of the market rules for Australia’s main grid has given some fascinating insight into the thinking about how the pricing signals for a new, renewables dominated grid may evolve – and it’s certainly not based on the old paradigm of baseload and peaking fossil fuels.

Tim Nelson made the point at the EEC annual conference in Melbourne on Tuesday that the pricing signals for Australia’s National Electricity Market have always been weather dependent, even if they were dominated by coal and fossil gas.

“The system, historically was very weather dependent on the demand side – very hot, very cold days had much higher demand,” Nelson said. “It’s now becoming very weather dependent on the supply side; very windy, very low prices, not so windy, higher prices.”

And then Nelson got to the hub of the real problem in the market, for both customers and investors. “Very importantly, a growing number of participants are invisible to AEMO (the energy market operator),” he said. “And that means they’re invisible to price formation, and that can result in some really inefficient outcomes.”

Some of those inefficiencies are plain to see, if not always recognised in the way energy prices are discussed in the political arena in Australia. The lack of competition has created extraordinary market volatility, and managing those risks has clearly become a headache for generators, retailers, investors and customers.

And when you read media stories about the “cost of generation” rising in Australia – either due to the growth of renewables or the unreliability of coal – the real answer is that the “price” is being driven higher by a cabal of big market players who have control of the market, often through levers not visible to others.

But that is not the only problem. The growth of consumer energy resources – rooftop solar, household batteries and EVs – is also clouding demand and supply forecasts. And what they market needs is clarity.

Nelson painted one extreme scenario, relating to the growth of battery storage. It’s a good thing, because it allows for excess electricity to be stored and moved to a time of the day that can be more useful, and it also encourages flexibility on the side of customers.

The problem arises when there is too much capacity that is being driven by non-market signals.

“You could see many gigawatts of batteries charging while many gigawatts of batteries are discharging because they weren’t forming part of the price, which would be an unfortunate outcome for the market,” he noted.

Essentially, Nelson says his panel’s takes comes down to ensuring market visibility, and creating a liquid market for hedging and derivatives, so participants can protect themselves against sudden price movements that are outside their control and ability to respond. And to create space for small players in the market too.

“We think there should be an expanded role for the reliability panel in looking at future market prices and market price caps and market price floors, so that investors in both supply and demand side activity can have some degree of assurance about what the long term settings in the market look like, not just the next couple of years.

“We think that there are a bunch of options that we can undertake that would effectively encourage participants to become more visible.

“And when I talk about participants being visible, in particular, batteries behind the meter, batteries that want to help the network, want that to help the wholesale market by injecting their power in in response to price.

“We think that by encouraging those participants to be visible, that will allow for a more efficient pricing outcome and a lower cost over time.”

Nelson says his panels preference is to see – in the long term – “a new entry mechanism focused on fungible contracts, rather than revenue underwriting.”

That, he says, “is a great way of seamlessly integrating pricing signals within the existing energy market infrastructure.” Which suggests that after the current burst of underwriting via the Capacity Investment Scheme to reach Labor’s 2030 renewables target, there will be a very different mechanism and price signal.

“Very importantly, we think that that mechanism should be demand supply side, competitively neutral, and also large and small scale, competitively neutral,” Nelson says.

“And so as an example, in providing a firming service, an industrial user that has flexibility in how they operate their widget factory could provide firming services in a seamlessly integrated way, in the same way that a larger spinning plant or a pumped hydro or a battery line on the supply side.”