Solar saturation: Seven changes to the electricity market needed to put consumers first

Fast-paced, efficient electrification will deliver a clean energy transition at the lowest cost to the consumer, unlocking economic benefits for communities and households while simultaneously reducing emissions. However, to realise these benefits, consumer-owned distributed energy resources (DERs) like our solar panels, household batteries and electric vehicles must be integrated into the electricity grid.  

Based on current trajectories, Australia’s energy system will have saturation levels of solar PV on all available roof space. It won’t just be on our homes, it will be on carpark rooftops, shopping centres and local businesses. It should be seen as a resource not a risk and the National Electricity Market (NEM) needs to be redesigned to help consumers reduce bills. 

Energy Ministers across Australia have taken the first step. They have recognised DER integration as a critical part of Australia’s clean energy transition and endorsed the development of the National Consumer Energy Resource Roadmap (CER Roadmap). Now, the work to design policy and governance framework for a decentralised energy system begins. 

In a decentralised energy system, the amount of electricity being traded in the central market is displaced and the amount of electricity needed to be delivered via the transmission network is less. In a decentralised system balancing supply and demand needs to happen locally. Electricity supply no longer follows demand – instead, demand must be flexible and able to follow supply – meaning more electricity demand needs to be shifted into the daytime during peak solar generation supply. 

Australia’s current energy market was designed for a time of centralised fossil fuel generation and it is failing to fairly distribute investment and operate efficiently for a decentralised system. Therefore, a decentralised energy system requires an electricity market design which values, and incorporates, these characteristics and values sources of demand flexibility. DERs are a cost-effective source of demand flexibility and the energy services that they provide need to be valued.

It’s widely recognised that the National Energy Market (NEM) is no longer fit for purpose. The energy market bodies are locked into a system that perpetuates the current regulatory arrangements. Anyone can nominate a NEM rule change and changes take, on average, two years and the administrative overheads of the Australian NEM are double those of comparable countries. 

Without NEM reform there will be an overinvestment in large-scale renewable energy and in the grid. It will lead to increasing energy costs and higher electricity bills. 

The current energy system rewards incumbents and current players at the expense of improving the system for all. There is a disconnect between technology innovation, business models, and consumer needs on one side, and the overall governance on the other. There is an absence of a comprehensive innovation and industry support plan. 

The energy market bodies need to be independent and free from commercial conflict of interest with how the decentralised energy system operates. An energy market reform process that promotes stronger oversight, promotes transparency and agility is needed. 

The NEM rules must allow for the coexistence of decentralised markets with the existing central wholesale markets and result in efficient investment. A decentralised energy system must be designed to leverage private and public investment to create an investment environment for innovation including technology, business models, and regulatory innovation. 

We’ve identified seven crucial changes that will revolutionise how the NEM operates, and bridge the gap between our evolving energy landscape and the rules that are holding us back. These reforms require a collaboration between the federal government, state and territory governments and the market bodies. 

1. Transformational vision

Develop a Future Energy System roadmap that sets out a vision for rapid electrification, mapping goals, targets, innovation, and industry support. These need to be developed through collaboration with the State and Territory governments who need to implement  their own CER Roadmaps.

2. A fair transition, with a consumer focus

Ensure all consumers benefit from the transition, not just those most able to afford the necessary changes involved. Any market reform must benefit households and communities to help build overall trust in the transition.

Resource people and communities to participate in the clean energy transition. Consumers need to be protected through a ‘best interest test’, and policies that ensure an equitable clean energy transition for large and small players. 

3. Shift to Decentralised System Operation

Conduct a review of the operation of the current energy system, and align it with a decentralised energy system operation. This includes creating an independent Future System Operator (FSO) and an integrated approach to energy sector regulation and planning that balances distribution level and large-scale transmission level investment. Local distribution markets need to be introduced that work in coordination and communication with the wholesale energy market. 

4. Rewire the NEM governance

Make a genuine commitment to good governance, transparent decision making, legitimate policy making. This would include a review of the funding models, missions, roles and responsibilities of the Energy Market Bodies (AEMO, AER, AEMC, CEFC, ARENA) for commercial conflict of interests with a decentralised energy system is needed.

The energy market bodies should have statutory obligation to deliver net zero, and adopt adaptive and agile regulatory approach including performance-based elements. 

5. Rewire the grid

Align regulations and incentives to allow the grid to evolve and integrate consumer owned DERs at scale and pace. Key to this includes the Introduction of a distribution system operators role to allow decentralised micro-grids to coexist with the central grid. Reassess in the long-distance transmission grid and increase investment into a smart distribution grid. 

6. Create markets for electrification and value DER services

6. The future is electric and the market should value and reward energy services from DERs such as energy efficiency, flexibility, and non-network alternatives. Create a market that incentivises technologies and an industry that facilitates electrification at scale. Publish data to the market and otherwise facilitate participation in markets for electrification and DER services whether they are  supply-side or demand-side resources. 

7. Create Local Renewable Energy Zones as pathway to scale and market realignment

Local Renewable Energy Zones’ (LREZ) are opportunities for innovation, manage sovereign risk and allow for energy market realignment. Each LREZ is an opportunity to test NEM rule changes in a low risk environment while also supporting technical, regulatory, business model innovation. 

Dr Vikki McLeod is expert adviser on energy market reform at Rewiring Australia.