Rooftop solar and EVs will dominate our grids: How do we reform the energy system around them?

The current Australian Senate inquiry into the operation of the Australian energy market is a much-needed and overdue conversation.

Australia’s energy transition has happened faster than predicted, and energy market reform is long overdue. But what can Australia learn from other jurisdictions? And why is it important to have an independent and re-regulated energy market and network operators? 

Australia’s Electricity System is Decentralising

Australia’s energy market was designed in the 1990s as a centralised system around the efficient dispatch of thirty-plus large fossil-fuelled power stations. Australians’ enthusiastic uptake of Distributed Energy Resources (DERs) (such as rooftop solar and increasingly electric vehicles and batteries) means the electricity system has become decentralised. 

The transformation of the electricity system from a centralised to a decentralised system occurs in three stages:

1. DERs contribute less than 10 per cent of total power generation
2. DERs contribute up to 40 per cent of total power generation.
3. DERs are dominant, and the system evolves into a network of microgrids either connected to a central grid or as autonomous.

Governance, regulatory, security and competency risks are associated with each transformation stage. Australia is currently at stage two, with an increasing number of locations at stage three. 

This decentralisation process is happening faster than expected. Governments and regulators need to think backward from the requirements of stage three, initiate energy market reforms and the time for reform is now.

Current regulatory direction is to extend the centralised model

While Australia’s electricity system is physically decentralising, the regulatory response is to extend the current centralised operational and market model, as evidenced by:

• Pursuit of the AEMO-led hybrid of ‘Single Integrated Platform’ operational model rather than the DNSP led and preferred ‘Two Step Tier’ operational model. 
• Progression of the Central Simulation Model as part of the Foundational and Strategic Initiatives (FASI) at an estimated cost of $1 billion.
• Proposal of the Integrating price-responsive resources rule change, formerly called ‘Schedule Lite’. 

This approach requires AEMO to have detailed information, visibility and control of the electricity down to the household level. Achieving this level of visibility and control of every appliance we own, from Cairns to Adelaide and everything in between is technically, computationally and economically challenging.

The centralised approach is the full roll out of the ‘Project Edge’ and the DER Data Hub despite questions about the its ability to scale and economic feasibility compared to a decentralised approach. It is understood that it was this reason that the Open Energy Network Project ended in disagreement and acrimony. 

The centralised vision is where consumer-owned DERs are aggregated and orchestrated to appear as large virtual power plants (VPPs) and be dispatched to the wholesale market. It is achieved by imposing third-party control over consumers’ appliances and supported by the emergency backstop mechanism. However, with little or no benefit sharing with the consumer the centralised model and the VPP business model is failing. 

What is needed?

While the centralised vision is the logical extension of today’s wholesale market structure, deep reforms are needed to support stage 3, and the decentralisation process. 

A decentralised system is technically consistent with stage 3. It is the direction that the USA and UK are taking and is supported by Australian distribution network service providers. It requires independent system operators at both the transmission and distribution levels who have visibility of the operation at their own level. AEMO at the wholesale level and a new Distribution System Operator (DSO) role at the local distribution network level. 

A decentralised system is supported by dynamic operating envelopes and local market mechanisms that incentives new business models and technology innovation. It achieves orchestration by offering the consumer an optional product with informed consent and a compelling value proposition. It requires strong consumer representation and designed from a consumer perspective.

Why the disconnect?

So, why is there a disconnect between the need for decentralised operation and the centralised regulatory reform pathway, when Australia is on the pathway to the highest decentralised energy system in the world? 

The disconnect comes down to not just leadership by State and Federal Energy Ministers but appropriate regulation, governance, and policy settings to support the transformation. 

If the disconnect persists the benefits of DERs and electrification to enhance system security, resilience, affordability, and lower emissions will not be unlocked. 

Without the reforms to deliver a decentralised system, investment will be inefficient, assets will be stranded, there will be negative system operation consequences and political fallout.

The Case for Reform of AEMO Business Model

In jurisdictions where the system operator is independent and appropriately regulated, progress towards transformation to stage three and the integration of DERs has happened much faster. 

With its current business model, AEMO cannot be considered or perceived to be independent. AEMO’s Board in setting AEMO’s overall direction, management and governance is accountable to its eight government and 93 industry members. AEMO’s budget is effectively unlimited as the costs can be recovered from electricity bills. Other than the reliability standard and reporting, AEMO does not have any requirements to meet performance targets. 

Under this arrangement, significant policy decisions have been made that have determined the direction of how and in whose interest the power system will be operated. 

Lessons from Great Britain

Faced with the similar circumstances, Great Britain (GB) and Western Australia are two jurisdictions that have successfully navigated deep reforms and implemented effective decentralisation strategies.

In 2021, the GB regulator Ofgem led a short, sharp review to assess whether the proper governance framework was in place to deliver net zero at least at cost to consumers. A key finding from the review was that an independent system operator (ISO) is critical in achieving net zero and facilitating an integrated, flexible energy system. The review argued that only an ISO would have the power to manage and plan the energy transition and focus its engineering expertise on consumer interests and the net zero challenge.

The definition of independent is to be free and perceived to be free of distortive commercial interests and acting in consumers’ interests through transparent, evidence-based decision-making. 

The review focused on the Energy System Operation (ESO), the Australian equivalent of AEMO-while they have many similarities in structure, the ESO is a regulated business whose performance and expenditures are overseen by the regulator Ofgem. 

Following the review, ESO was replaced by a new ISO referred to as the National Energy System Operator (NESO) has substantially reformed its roles, responsibilities, and business model. The NESO also has statutory obligations to deliver on GB’s carbon reduction targets. 

NESO is responsible for the operation of the electricity system and the transmission level and works in coordination with Distribution System Operators (DSO). Both the NESO and DSOs have regulated incentives to deliver stage three DER integration and smart grid capability. 

Lessons from Western Australia

Acknowledging the important role of microgrids and DERs, the Western Australian government’s strategy towards a ‘Brighter Energy Future‘ involved ‘Energy and Governance Legislation’ reforms. Project Eagle was initiated to clarify the government’s role as responsible for policy, market development, strategic planning, and overall coordination of the energy sector. 

The WA Government built on the previously modified governance and regulatory arrangements restricting AEMO to system and market operation. It has allowed the WA government to lead and facilitate rapid and collaborative progress around the decentralisation process, most notably Project Symphony. 

In assessing an appropriate governance model and regulating AEMO, Western Australia is a proven example for the rest of Australia to follow. 

Can we Talk?

Australia has met the preconditions for a review of how our energy market is governed and undertake the overdue reforms. Now is the time for government and regulators to ask the questions about how our decentralising energy system is to be regulated for the benefit of consumers. 

We need to review the roles, responsibilities, and business model of AEMO and introduce a new role of distribution system operators as trusted and independent system operators. We need to learn from reforms in other jurisdictions and the use of regulated incentives to deliver an affordable, secure and reliable decentralised energy system.