“Like a Corolla with racing tyres:” Why Australia’s outdated electricity market fails renewables

Australia’s electricity market is old, outdated and not doing enough to drive investment in the renewable energy needed for the country to hit its climate targets.

These are the conclusions of a “diagnostic” discussion paper commissioned by the Clean Energy Investor Group that represents 18 investor businesses with a combined portfolio of 11GW of operation clean energy projects worth $24 billion.

The paper, produced by Castalia, sought to understand why Australia’s electricity grid is not delivering enough energy at low prices.

It found that problems concerning price and reliability had nothing to do with renewable energy technology that was already in place and working, but structural problems associated with the way Australia has built its power grid that were encouraging ongoing efforts to prop up old, aging coal-fired power plants.

“As a result, state governments have negotiated agreements to extend the operation of coal plants beyond their planned retirement dates,” the report says. “This approach has unintentionally hindered investment in renewable energy and storage, creating a cycle of delayed progress.”

Alex Sundakov, Castalia executive director and one of the authors of the paper said the current electricity market evolved in a time when governments were big players in the electricity market and there were a small number of large, centralised generators.

“Over the last ten years as we’ve embarked on a massive transition program where we have tried to make this market design work through various add-ons and interventions,” Sundakov said.

“But really we’ve just been taking a Corolla that’s not designed to be a racing car, sticking some racing tyres on it, and it’s just not working.”

The recent establishment of a review into the National Electricity Market is an implicit acknowledgement by the government that something is amiss, Sundakov says and that it is important to get any reform process right.

“I think everything’s at stake,” he says. “If consumers feel that what is being delivered to them is unaffordable and unreliable, there will be both a market and political revolt. That threatens trust not just in market design but any transition.”

CEIG CEO Richie Merzian says the nature of the market makes it harder for investors to respond to short-term price signals and did not encourage planning for long-term projects – putting “billions and billions” in investment dollars at stake.

“The majority of investment into renewables in Australia comes from overseas, so we are competing for global capital and in order to ensure that we have that sufficient investment going forward, we need to think about what investment signal we’re sending,” he said.

“What’s at stake is billions and billions of dollars of investment; we will not hit 82% if we’re not sending the right signals to investors.”