Wind, solar and storage prompt re-design of Australia’s energy market

The Energy Security Board is advancing its plan to potentially completely re-write the design and the rules of Australia’s National Electricity Market, and has called for submissions from interested players to be made by the end of this month.

Australia’s market design has been set in place for more than two decades, when coal and gas set the rules of the market.

But they are considered to be out-of-date and not reflective of the dynamic changes occurring in the market, as wind and solar become clearly the cheapest forms of bulk energy, and the market looks for the right incentives for storage and other dispatchable generation, and to deal with the big shift from centralised to distributed energy resources.

Changes to the current market rules have been slow, laborious, piecemeal, and ferociously opposed by incumbent interests determined to reap the rewards of incumbency for as long as they can.

Initiatives such as the introduction of a 5-minute settlement period – to reduce market rorting by coal and gas units and encourage battery storage, demand response and other fast-responding technology – were strongly opposed and have taken years to be implemented.

Now the ESB, in one of the most significant projects undertaken in Australia, on a par with the Australian Energy Market Operator’s Integrated System Plan, is proposing a review, if not a rewrite of the rules and the overall market design. It wants them in place by 2025, but it wants them to be agreed on by  mid 2022.

So there’s no time to be lost, and interested parties should file their submissions within four weeks, under a tight deadline unveiled quietly by the ESB earlier this week.

The ESB is headed by Kerry Schott – although it seems deputy chair Clare Savage is playing the driving role in this program – and includes  AEMO,  the Australian Energy Market Commission, and the Australian Energy Regulator.

It released an issues paper on the subject earlier this week, which doesn’t reveal too much of how it is thinking, apart from noting the need for change and to keep up with new technologies.

But it does say that its focus is on reliability. It is generally agreed, although by no means unanimously, that an “energy only” market, the one we have now in the NEM, is no longer fit for purpose and won’t work well in a world dominated by wind and solar and their near zero marginal cost production.

The most talked about alternative is a form of “capacity” market. But these designs have also failed when applied poorly, resulting in an effective subsidy for existing fossil fuel generators in Europe, or, even worse, being so generous and poorly targeted that they cause peaking plants to be built that are never switched on, as has occurred in Western Australia.

Most experts are hoping for something in between, what some describe as a “flexibility” market that reflects the fact that – in a world dominated by wind and solar – flexibility is the key. Well designed, this will not discriminate against new technologies and investments such as battery storage, pumped hydro, solar thermal and hydrogen.

AEMO chief executive Audrey Zibelman noted on Friday, in an interview with ABC Radio National’s Breakfast program that the market needed to provide a price and a value for “dispatchable” generation.

In the past, AEMO has noted how poorly the market values the assets and services of batteries such as the Tesla big battery in South Australia. AEMO is also keen on new transmission lines to transport the cheap energy generated from wind and solar to where its needed in the grid.

The ESB paper notes that Australian energy market is changing rapidly, and the pace of change (despite the lack of a federal energy policy) is not expected to slow down.

“The need to consider whether the overall market and regulatory design is fit for the future must be evaluated,” it notes. “At a minimum, the post-2025 project will put in place a holistic view of the future development of the market and avoid the risk of simply layering incremental changes and potentially producing an inefficient outcome.”

Thankfully, it looks like it will take keen note of the work of AEMO in its ISP, and particularly its various scenarios that will lay out a 20-year planning blueprint for the grid.

These include the improbable and catastrophic “slow change”, though business as usual, technology and consumer led fast-change scenarios, all the way to the “step change” required to actually meet climate targets and exploit cheaper new technologies to the full. The latter will likely require political and policy vision.

The ESB is asking which of those scenarios it should be focused on. Anyone suggesting slow change or business-as-usual should be taken out and invited to audition for Sky News.

The ESB notes that it will also look at other influences, such as the electrification of transport and potentially other sectors of the economy, and the rate of rollout of distributed energy resources. And it will look at potential “market shocks” such as the unplanned outage or exit of some thermal (coal and gas) generation capacity.

It will look at what’s happened overseas, although it also notes that Australia – being an island – does not have the luxury of having inter-connectors to other markets. Instead, it is an island composed of five linked state grids, and one major isolated grid in W.A. and smaller grids in other remote regions.

Interestingly, the ESB also canvasses a shift to decentralised technology, and particularly how consumers – with greater connectivity – might make more active decisions about the value they place of the services they receive from retailers and the trade-offs they are prepared to make.

For example, cheaper electricity in exchange for a different (lower) reliability standard. “Digitalisation of energy consuming devices provides significant opportunities for lowering energy costs to consumers,” it notes.