Wholesale Market Settings Review – A Shared Vision Is Required

A key focus for the Australian Energy Council (AEC) and indeed the energy industry on the East Coast right now is the Federal Government’s review into the National Electricity Market (NEM) wholesale market settings. The review, chaired by Tim Nelson alongside fellow expert panel members Paula Conboy, Ava Hancock and Phil Hirschorn, is focused on ensuring the wholesale market settings can deliver sufficiently firmed energy supplies as renewable generation becomes a dominant energy source and coal-fired generation transitions out.

This review is incredibly important. Energy markets globally are grappling with this very issue – how to ensure there is enough low-emissions energy in the system to meet demand at a reasonable price, when our lowest emitting energy sources are weather-dependent and thus, highly intermittent.

The good news is, renewable energy can deliver the majority of low emissions, low-cost energy supply most of the time. In Australia, rooftop solar systems across four million households now generates more energy than we need at certain times.

So what this review will focus on, is ensuring there are other energy sources we can rely on when the wind isn’t blowing and the sun isn’t shining.

This means we will also need a range of weather-independent energy sources that are either:

• only required for a few hours each day (such as when rooftop solar output is reducing as the sun sets, but energy demand increases as everyone turns on their aircons on a hot summer evening); or
• for certain periods of the year where wind levels are typically low (for example, for one to two weeks in the colder winter months when energy is required to heat homes in the south-east corner of Australia).

To ensure reliable energy supply during these times, these weather-independent energy sources must be able to switch on and off quickly and without too much warning. This is often referred to as ‘dispatchable’ energy. The types of generation best suited to this mode of operation are typically gas plants, battery storage and pumped hydro. And we can’t forget about demand-side mechanisms such as demand response, load shifting and load shaping (through virtual power plants which can harness home batteries and rooftop solar, for example) that when coordinated effectively, can respond very quickly.

In addition, these sources need to recover sufficient revenue during the times they are being used to make the investment in these generation types worthwhile. Plus, they need certainty that this revenue will be realised over the life of the assets.

This is the challenge with the current energy-only market settings. It is designed to compensate generators only when they are dispatching energy into the system and it can be difficult to predict wholesale energy prices more than three years ahead and in an increasingly weather dependent grid, making a business case for investment in dispatchable generation difficult. There is a growing risk generation sources that may only be needed for small amounts of time may not be dispatched frequently enough to recover their costs in an energy-only market, particularly one dominated by low-cost renewables.

The  expert panel’s challenge is to consider that as coal fired generation is phased out and replaced by intermittent renewable generation, what changes are needed to the wholesale market to adequately incentivise dispatchable energy supply at least cost, without significantly increasing our emissions profile.

Easy right?

But we have been here before. We have admired this problem from many angles, many times across many governments.

What needs to be done differently this time to make the changes stick?

Ultimately, the decision on the next round of market reforms rests with the State and Federal governments, via the Energy and Climate Ministerial Council (ECMC). For the review to be successful, the expert panel will need endorsement from ECMC for a commonly agreed set of recommendations that (ideally) can be implemented across all NEM jurisdictions.

We all want this process to be successful. So how can we as an industry support the expert panel and, ultimately the political decision-makers, to achieve a commonly agreed and consistent approach to wholesale market reform in the NEM?

There is an enormous opportunity on the table to work collaboratively to deliver the transition for the benefit of consumers, however we need to be better aligned as an industry and be more willing to work together to find the best solutions for the market and for customers.

The AEC welcomes the review panel’s proposed iterative and collaborative approach. I am a firm believer in the power of collective wisdom, and that we are more likely to discover better solutions if we can get together in a room and constructively debate the options on the table.

To achieve this however, we all need to be working towards a common vision of what the future wholesale energy market should look like. To this end, the AEC has been working with members to develop a set of guiding principles that we are using to determine what any changes to the wholesale market should ultimately deliver.

There will be pros and cons to any proposed market changes and to this end, no solution will ever be perfect. So rather than focusing on all the aspects of various design options that might not work, the AEC’s current approach is to focus on design options that are most likely to deliver a future wholesale market that works for market participants and most importantly, for customers.  

In this way, these guiding principles are helping us to define what we want the future wholesale market to look like, and so it becomes a lot easier to identify design options that are most likely to deliver on this future vision. 

At this stage of the process, these principles focus on the need for a future wholesale market that:

• provides appropriate signals for investment in flexible, dispatchable energy sources;
• ensures a liquid secondary contracts market;
• effectively manages wholesale price volatility for customers;
• efficiently allocates market risks;
• limits regulatory complexity; and
• provides a transparent view on investment pipelines to build confidence among government, policymakers, and industry in the security and reliability of the system.

There is more work to be done and as always, the devil will ultimately be in the detail, however, starting with a shared vision of the future wholesale energy market creates a positive and constructive space to consider the most likely solutions.