Our energy market is designed for a system that no longer exists: It’s time for change

Current market, regulatory and governance arrangements will not, and cannot, deliver the energy transition within the required timeframe.

Emissions will not fall fast enough. System reliability will be at risk. Consumer price relief is nowhere in sight. The coordination challenges of the energy transition are overwhelming the energy market’s institutional arrangements.

Those arrangements have remained largely unchanged since they were put in place in the 1990s and 2000s. Back then, the energy system was effectively in steady-state. It was only those benign conditions that made possible the energy market reforms of that era.

The manifold uncertainties of the energy transition are now unravelling the regulators’ established methods, processes, instruments, and assumptions.

But the regulators have nowhere to go. All they can do is attempt to corral these uncertainties using the same methods developed for an energy system that no longer exists.

After all, today’s regulators remain largely unreconstructed versions of their earlier selves, albeit significantly larger. Regulatory arrangements and market rules are now a drag on the energy transition. System-wide reform is needed.

In a new paper, I identify six institutional reforms for moving the energy transition apace. They are:

#1.    Promote urgency, not just efficiency

The National Electricity Objective’s (NEO) narrow and exclusive focus on efficiency was the product of an energy system that was once relatively benign. The upcoming amendment to the NEO requires the market bodies to “have regard to” jurisdictional emissions reduction targets. It is unlikely to greatly hasten the energy transition. If there is to be a NEO, then it must explicitly promote urgency as well as efficiency.

#2.    Invest in long-term system planning

The community is already demonstrating ‘diminishing marginal tolerance’ for invasive infrastructure. The social licence for the energy transition is being tested. Long-term system planning must now focus on minimising the drawdown on this social licence – including by maximising the benefits extracted from existing assets (eg. easements).

#3.    There’s no transition without derogation

State governments are now entirely ‘back in the game’. They have reasserted their constitutional responsibility for the well-being of their citizens. Romantic visions of a single (‘national’) regulatory framework seems like a quaint whim from long ago. Whimsical or not, those legacy arrangements are confusing the lines of accountability for the energy transition. The States must free themselves (derogate) from national arrangements to do what must be done to deliver a timely energy transition within their jurisdictions.

#4.    Reorganise the market to internalise coordination problems

Despite all the talk about the non-linearity of the emerging electricity system, market structures and regulation remain firmly bound to the structural separations put in place 30 years ago (generation, transmission, distribution, retail).  That structure just doesn’t work anymore.

It is now appropriate to view the electricity system as consisting of just two subsystems around which markets, regulation and governance should be reorganised in each jurisdiction.  This would see a single bulk supply provider (BSP) transacting with a net demand purchaser (NDP) at the ‘door of the substation’ (or strictly speaking, the Transmission-Distribution Interface or Bulk Supply Point).

A BSP would be responsible for coordinating and aggregating everything above the substation to ensure delivery of stable, high voltage power to the transaction point.  An NDP would be responsible for coordinating and aggregating everything below it – that is, net of bi-directional flows between distributed generation, storage and consumers.  Policy would be implemented through targets imposed on each entity.  A balancing and settlement system would operate where the two entities transact.

#5.    Avoid unrealistic expectations about consumers

It would be unwise to repeat the mistakes of the original NEM reformers and overlook the demand side of the market. It would be just as unwise for today’s regulators to continue designing markets that presume ‘rational’ consumer participation and penalise everything else.  The community will withdraw its political support for such markets if it concludes the energy transition is unfair.

#6.    Mobilise SWAT teams to solve technology gaps

There are known technology gaps in the design and operation of the emerging electricity grid. Other gaps will emerge. These gaps will inhibit a timely transition and impose costs on consumers.  Rapidly deployable research teams – with access to sufficient funding, intellectual resources, leadership, and freedom from bureaucratic friction and industry capture – are needed.

Some of these reforms are less contentious than others. Some are more easily implemented than others. Some require more imagination than others.

How these reforms would be implemented, individually or jointly, and coordinated nationally, needs careful consideration. What is clear, however, is that a new National Energy Transition Agreement is required to reflect newly designated roles and responsibilities, and institutional and funding arrangements.

(Further detail can be found in the papers I’ve posted on LinkedIn).

Ron Ben-David is a former chair of the Essential Services Commission in Victoria, and now sits on numerous advisory boards.