Not fit for purpose: Australia energy market rules to be rewritten to keep pace with renewables

The first step in what is expected to be a fundamental reform of the Australian electricity market and the rules that govern it has been kicked off with the appointment of an expert panel that has 12 months to deliver a roadmap to a properly functioning renewable dominated grid.

Australia’s electricity market rules have been struggling to keep pace with the rapid change of technologies, the rollout of large scale wind and solar, the arrival of battery storage at scale, and the enormous uptake of rooftop solar by homes and businesses.

The grid is rapidly changing from being centralised around so-called “baseload” fossil fuel generators to a two-way market based on distributed, low marginal cost renewables, and flexible resources such as battery storage. It is generally recognised that the current rules are no longer fit for purpose.

The transition will be further complicated by the fact that within a few years, more ageing coal plants will need to close and the vast majority of grid resources will be supplied and owned by consumers themselves – either through rooftop PV, home storage, electric vehicles and smart controls.

One of the challenges of the new panel will be how to think about a market that can capture all those trends, and whether it continue to be a top down approach in the image of existing utility business models, or bottom up in response to consumer needs. And to finally embrace energy efficiency and demand management.

The expert panel announced on Tuesday by federal energy and climate minister Chris Bowen will be led by Dr Tim Nelson, a widely respected energy economist from Griffith University, who will step down from his position as head of energy markets at the Spanish-owned utility Iberdrola Australia to devote his attention to the new role.

Nelson will be supported by Paula Conboy, a former chair of the Australian Energy Regulator, former Boston Consulting Group partner Phil Hirschhorn, and Ava Hancock, a former policy advisor to Matt Kean who is credited with helping design the NSW energy roadmap.

Bowen said in a statement that the panel will look at wholesale market settings in the NEM (National Electricity Market) to ensure the market promotes investment in firmed renewable energy generation and storage capacity into the 2030s and beyond as ageing coal fired power stations exit the system. 

The Labor government is currently relying on its Capacity Investment Scheme to underwrite at least 23 gigawatts of new wind and solar capacity and another 9 GW (36 GWh) of storage to help it meet its target of 82 per cent renewables by 2030.

However, that intervention is expected to have a distorting impact on the market – as do most policy interventions – and there have been calls for a fundamental design to support a grid dominated by renewables and consumer energy resources, and needing to support enough flexible and dispatchable energy resources.

Some, in the big utilities, have been calling for a kind of capacity mechanism that can deliver fixed payments to dispatchable resources.

Others are calling for a rethink of the way the markets are designed to ensure they support the needs of the consumers who will emerge as the major asset holders, particularly as electric vehicles and vehicle-to-grid technologies become widespread.

“We’re doing the work now to ensure our grid will be stable and there will be enough clean, cheap, reliable renewable generation and storage to power Australia’s needs,” Bowen said in his statement.

“The Albanese Government implemented a reformed Capacity Investment Scheme in 2023, and it has massively outperformed to date, which is a good thing and shows the investment appetite to deliver reliable renewables in Australia is very strong.  

“The review will provide a comprehensive assessment of what the market will need next, once the current CIS tenders end in 2027, to ensure that investment pipeline remains strong.”

 The first of the CIS tenders has already closed and was swamped with more than 40 GW of proposals. The winners are expected to be announced before Christmas, while the second 6 GW tender will open for registrations in the next week.

The decision to appoint an independent panel, rather than relying on the existing energy institutions that were the feature of the Coalition’s efforts to reshape the market rules (usually to protect baseload fossil fuels) has been welcomed by analysts and activists.

Stephanie Bashir, from Nexa Advisory, says the the appointment of an expert independent panel is welcome evidence that the Federal Government is genuine about NEM reforms that will make a practical difference, and get the transition back on track.

“Tim Nelson is an excellent appointment to deliver on what needs to be done,” she said.

“We need enduring market signals and certainty about the retirement of coal-fired power stations. This is the only way to support long-term investment in the future energy system and ensure a supply stability, reliability and affordability for all consumers.  

“We must also have mechanisms such as a strategic off market reserve, as we highlight in our recently published discussion paper. Development of ancillary services that reflect the changing techno-physical requirements and two-way nature of the grid, such as through improved demand-side response, will also be important.”

Rewiring Australia says the reforms must deliver a “new deal” for consumers, ensure they benefit from permanent cost of living relief and get the most out of their trillion dollar investment in electrifying houses and vehicles.
 
“Australia desperately needs a new deal in energy markets that puts consumers on the same footing as institutional investors and big energy companies,” said Rewiring Australia Executive Director Dan Cass.
 
“Consumers are the biggest and most reliable investor in new energy capacity through solar, batteries, electric appliances and electric cars.
 
“Over the next 20 years everyday Australians will invest up to eight times more in energy technologies including EVs than big institutional investors. They must be front and centre of this transition.
 
“The biggest shift in energy policy required over the next two decades is to redesign markets around consumers and electrification.”

Bowen also took the opportunity to attack the federal Coalition, which has made clear its intentions to try and keep ageing coal fired power stations open as it waits for hoped-for nuclear technologies.

The fragility of those ageing coal fired generators has been underlined this past week, with nearly half of all coal capacity offline in NSW, and several more in Queensland, prompting the market operator to call back other generators and cancel network upgrades to ensure there is enough capacity to meet demand amid forecasts for high temperatures.

“During its decade of delay and denial, the Coalition made no attempt to address the foreshadowed closure of 90 per cent of Australia’s coal fleet,” Bowen said.

“They continue to ignore reality in calling for these increasingly unreliable generators to be kept open longer than planned, as their only solution to meet Australia’s growing energy needs for the next 15 years or more.”