NEG’s reliability guarantee needs to empower businesses through choice

Last summer, South Australia was subjected to forced blackouts due to demand on the grid. This summer, the RERT and demand response enabled Victoria and South Australia to survive without any major blackouts.

The market is proving that through demand response, we have the power to increase the reliability of the NEM and prevent shortfalls in supply. And the ESB has taken note, identifying the critical role that retailers have to play in supporting the reliability of the system.

Without them, customers would not be empowered to actively respond to market signals and do their part to support reliability.

In principle, the reliability guarantee will forecast reliability gaps and provide an opportunity for the market to respond, placing the onus on retailers to actively connect their customers to market signals.

Given the role that businesses and their retailers have to play in meeting the reliability guarantee, the NEG must account for their needs and right to elect to pay or not to pay for reliability – whether this means choosing to power down to avoid peak pricing or to pay a premium for consistent pricing and supply.

We work with two types of business: those that value set pricing and increased reliability, and in turn pay a premium; and those that respond to market signals and value trading in supply to reduce costs.

So we ask, should businesses that are actively responding to market signals, such as those on wholesale spot agreements, be forced to take on additional costs under the reliability guarantee?

These businesses are already doing their part to add to the reliability of the system.

Conversely, a business that values consistency of supply during periods of peak demand should incur the costs to deliver a reliable system, either through demand response from other users or contracts with generators.

We can learn from the announced closure of Liddell. It is a perfect example of the challenges that the reliability guarantee will need to address. Current industry and government assessment of the reliability gap left by Liddell is supply-side centric.

Going forward, discussions must recognise increasing consumer choice to participate in the value created by Liddell’s closure.

The ESB has an opportunity to incentivise the growth of demand response and meet the needs of the market by recognising the businesses responding to market signals.

From firming renewable generation to programs similar to the RERT, demand – not supply – is an untapped resource that will prove to be a game changer for the Australian energy market.

The NEG also risks biasing the market towards vertically integrated retailers – a concern that has been vocalised by many in the energy sector. If compliance is required through specific contract procurement, predominantly supplied by these retailers, gentailers will see an increase in market control to the disadvantage of smaller retailers and generators.

In a recent customer survey conducted by Flow Power, businesses echoed this sentiment. One customer stated: “A guarantee that enshrines large incumbents at the expense of competition will lead to worse outcomes in the long run.

We would favour policy certainty that encourages new investment as the energy sector transitions to lower emissions technologies.”

This discussion has focussed on the reliability guarantee but further consideration of the NEG’s emissions guarantee is relevant due to its potential impact on future renewable generation growth.

The emissions guarantee should be met by renewable generation and not carbon credits. This will drive investment in the renewable sector, especially as more renewable corporate PPAs enter the market, supporting these projects as they reach final close.

If these PPAs are linked to customer demand, this will improve the reliability of the market while minimising emissions from generation.

The energy market will be more reliable when Australians are empowered by choice, whether this means choosing to meet the reliability guarantee by powering down at peak periods or paying the price of reliability. It’s up to the ESB to ensure that retailers have the opportunity to give choices to customers to make the reliability guarantee work.

 Matthew van der Linden is managing director of Flow Power.