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How to replace the National Electricity Market

September 12, 2017 - 16:43 -- Admin

There are quite a few proposals around to intervene in, or repair, the National Electricity Market. In my view, it’s much too late for that. We need to scrap the NEM and start on a new path towards a zero-carbon electricity and energy system. I’ve written down some preliminary thoughts. I’d appreciate comments and also suggestions as to how I might push this idea along a bit.

Background

(a) The National Electricity Market has failed, and requires radical restructuring

(b) The ultimate goal of energy policy should be a 100 per cent renewable supply of electricity, providing both for existing needs and for conversion to electric vehicles by 2050

(c) The goal of a bipartisan policy is currently unattainable. Policy design should be based on the premise of a change of government at the next election

Outline

The starting point would be the creation of a single Australian Energy Authority, to replace the Energy Security Board, AEMC, AEMO, AER, and the energy-related functions of the ACCC and state regulators. The authority would 

(i) determine requirements for investment in the network, and undertake auctions for power purchase agreements, in which both privately owned and publicly owned generators would be free to compete.  The agreements would encompass both generation and storage, and would seek to phase out coal-fired generation over time, before a complete transition to renewables. Bids for fossil fuel generation would be required to incorporate a carbon price

(ii) match supply and demand using an order of merit for generators and appropriate demand management,  where the decision as to which generators to use at any given time would be made on the basis of cost and reliability of supply.

(iii) enter demand management arrangements with large power users, allowing for interruptibility of supply and investment in on-site storage

(iv) set out standard retail contracts, allowing households to manage their use through smart meters, which would be rolled out with costs being spread across the network as a whole

(v) plan and, to the extent possible, undertake new investments in transmission and distribution networks, with the ultimate goal of restoring public ownership of the entire network

(vi) Regulate returns to owners of monopoly distribution assets, with  net rate of return set equal to the government bond rate, guaranteed for the life of the asset

The objective of the Authority would be the provision of a stable, reliable and affordable supply of energy while managing a transition to a zero-carbon economy.

 Comparison with the NEM

The existing National Electricity Market is unique to Australia. Wholesale prices are set on the basis of bids for five-minute periods, with a cap of $12,500 per megawatt hour (MWh).  Electricity is purchased by retailers who then supply consumers. The consumer price consists of the average wholesale price paid by retailers, the retail margin and a regulated charge for distribution and transmission.  

The objectives of the market design were to provide market signals for investment in new generation capacity, drive efficiency gains in network monopolies, enhance consumer choice through retail competition and reduce prices overall.  The design took no account of the need to decarbonize electricity supply (though this was clear even at the time the NEM was designed in the 1990s), with the result that emissions reductions policies had to be overlaid on a market structure designed primarily for coal-fired power.

None of the objectives of the NEM have been achieved. Prices have risen drastically, investment has been chaotic and inadequate and retail competition has resulted in large increases in retail margins. Despite a plethora of confusing options, retail customers face prices that bear little or no relation to the actual costs of generation, particularly at times of peak demand.

The proposed scheme would maintain competition in generation through PPA auctions. It would enhance the role of price signals to consumers by offering contracts designed to allow households to minimise the cost of electricity use.  However, instead of relying on market price fluctuations to guide investment decisions, the investment requirement would be determined at a system wide level, taking account of demand and the need for reliable supply. The use of market comparators for monopoly transmission and distribution enterprises would also be abandoned, in favor of a low, guaranteed rate of return.