Nelson Review’s plan to reshape energy markets gets warm welcome – now for the hard part

The draft recommendations from the Nelson Review of Australia’s electricity markets have received a warm welcome – so much so that most of those with a particular vested interest in the outcome, with the exception of Barnaby Joyce, signed a joint statement welcoming the findings.

Australia’s electricity market – and the rules and regulations that have governed it – has often been described as “not fit for purpose”, but Nelson and his team have resisted the temptation to scrap the whole thing and start over.

They have chosen instead to tweak it and modify it – in some substantial ways, it should be said – with the centrepiece being a new system of contracts for bulk power, shaping and firming that will be known as the Electricity Security Entry Mechanism.

Nelson says the two main problems the panel is trying to solve is ensuring enough dispatchable capacity is built, and fixing the problem of “tenor”, giving long term visibility over the market that help fill the gap on financing.

And it will provide some long term signals that will take the place of the renewable energy target and the Capacity Investment Scheme by the time those two policy initiative come to the end of their journey by the end of the decade..

The Australian Energy Council, largely representing coal generators and other fossil fuellers, issued a statement welcoming the recommendations as a path forward. It was co-signed by lobby groups representing energy consumers, network operators and renewable energy investors.

“Whilst there is more work to be done on the detailed design, the expert panel’s draft report represents a path forward as well as an opportunity for genuine collaboration between Federal and state governments and the energy sector more broadly, to deliver optimal policy and outcomes for all energy users,” it said.

So far, so good. But having set the course, and gained approval, now comes the hard part of working out the details.

Nelson, in an interview with Renew Economy earlier this week, said the panel decided that the problem was not the market, but incomplete market signals. The physical world had changed (to wind, solar and batteries, for instance), but the market hadn’t.

See: “Physical world has changed, the contract world needs to catch up:” Nelson says no to capacity markets

“The derivative markets can give you some degree of ability to manage risk in that kind of three to five year time frame, but the investor time frame is much, much longer, and the signal is simply incomplete,” Nelson says in a discussion with the entire Nelson panel in the latest episode of Renew Economy’s weekly Energy Insiders podcast.

See: Energy Insiders Podcast: Lifting the lid on the Nelson Review

“(The market signal) does not go that far into the future. So the package of reforms we’ve put forward aren’t really, really fundamentally changing the market itself, but correcting for that.”

What exactly that looks like be discussed with industry players and other stakeholders and coming months, and will be tested in a pilot.

“The next level of detail becomes critically important for the package of proposed reforms and their success,” Nelson says.

“And that’s where what we’ve tried to do is to build into the existing architecture of the market bodies and the various other kind of frameworks that we’ve got in place that allows industry to co convene some of those those programs.

“We’re going to run a pilot process of what we’ve proposed that would be stood up as a permanent feature of the market, to define what those contracts look like, those standard contracts across the energy shaping and firming.

“We are aware participants will have different views, but … we’re in a world now where all investors, consumers, everyone is aware of the reality of the firm renewable system. Now it’s a case of coming together and pragmatically working through what those contracts will look like.

“And again, we’re very lucky. There’s been so much innovation that’s been done in the OTC (over the counter) market, we don’t think we really have to reinvent much at all. We need to utilize that thinking that’s being done and bring it into the light, so to speak, so that it can be used for those two purposes.

“We’ve been very heartened by the fact that everybody has approached this task with a real degree of pragmatism and been willing to compromise because they know the urgency of the task at hand.

“And so I’m pretty optimistic that by the end of the year, we’ll have a fairly good working model that we’ll be able to put in front of ministers and say, ministers, we think this has broad support.”

While the big players in the industry are focused on what happens in the wholesale and contracting market, the majority of Australians are more interested in what it means for their energy bills, and decisions they might need to make about rooftop solar, household batteries, electric vehicles, and if they want to or are able to kick gas out of the home.

Panel member Paul Conboy, a former head of the Australian Energy Regulator, says consumer choice is paramount.

“What we heard from our consultation is that most consumers want predictable, stable bills. There are a bunch of consumers who say, look, I’ve got my solar panel, I’ve got my battery, this is just for my own use. I don’t want to participate in the market. There’s no change there. There’s no change to consumer choice.

“Then there are other consumers, like a couple of my fellow panel members here, who like to really engage with the market, … through their retailers,” she said, in reference to Ava Hancock and Phil Hirschhorn who choose to participate in the market, through VPPs (virtual power plants) with their solar batteries.

“Phil and I have this very enjoyable dialog every day about who’s made or lost money overnight on trading their solar battery system,” Hancock says.

“We do have the capability and interest in engaging, so that option is available to us, and we take some risk in doing so. And that’s great. If people want to do that. That’s fantastic.

“But we’re also acknowledging, acknowledging that most people probably aren’t interested in that, and Tim’s pointing to himself, and they would actually prefer something that’s much simpler, something that doesn’t require them to check apps every day or every hour, and can just carry on with the rest of their lives.

“And so you’ll see in that report, in the observations we talk about inner and outer segments of the retail market, and we’re feeding that thinking into the pricing review for how they can shape some of the outcomes of that work.”

You can hear more of the discussions, including some challenging question from co-host David Leitch about the proposed structure of the market, and what to do about the energy market oligopoly, in the latest episode of the Energy Insiders podcast.

You can find it here: Energy Insiders Podcast: Lifting the lid on the Nelson Review