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By all means, the month of March was a tumultuous one for Australia’s normally unexciting electricity and gas sector.

On March 9, the Australian Energy Market Operator warned that New South Wales, Victoria and South Australia faced a shortage of gas supplies beginning in the summer of 2018/19. Four days later on March 13, the Grattan Institute declared that competition at the retail end of the electricity market had failed, prices across several capitals had doubled in a decade and that governments would have to step in and re-regulate if the industry failed to lift its game. The following day, South Australian Premier Jay Wetherill described the national energy market as ‘broken’ and introduced a new strategy involving legislation to enable the state to intervene within the national energy market. Coming before the anticipated release of the final report of a federal government review into energy security being conducted by Chief Scientist Dr Alan Finkel in the middle of the year, this approach was decried by critics as a ‘go it alone’ strategy, and was described by some media outlets as the National Electricity Market’s ‘Brexit’ moment.

All this raises questions about whether or not Australia’s Natural Electricity Market (NEM) and gas markets are operating as they should. Essentially, commentators express agreement on three broad matters.

First, the market is in need of reform in order to bring it into line with the current environment. Established in the late 1980s, the market has delivered reliable supply to the six states and territories in which it operates (Western Australia and the Northern Territory are not connected) in a fashion which has been geared around coal and gas. The market was not, however, set up to accommodate gains from advances in technology which have taken place over recent decades.

For one thing, Professor Ken Baldwin, Director of the Energy Change Institute at the Australian National University, said, it was not geared to accommodate the rapid growth in distributed energy sources such as wind and solar. The former of these, Baldwin says, is now the least expensive form of new plant generation. The latter, he says, will be the second least expensive in coming years.

Nor, Baldwin said, was it designed to accommodate advances in storage such as battery storage and pumped hydro. In principle, he says this could enable a small household generator with batteries to link back in to the wholesale market and provide electricity when it is needed at times of high prices in peak demand. Alas, he says, current market rules do not enable this to happen.

Finally, Baldwin said we now have opportunities for demand response management so as to enable the operation of fridges, air conditioners, industrial power plants and other facilities and appliances to respond to increases in demand in order to smooth out demand peaks and better match supply and demand. Not technology feasible at the time of the market’s establishment in the 1980s, Baldwin says there are consequently no price incentives for engaging in these strategies as retail prices do not reflect the rapidly changing wholesale price of electricity in response to peak demand. There are calls by many commentators, he says, to have a market which reflects the capacity rather than the energy which is available for the meeting of electricity demand.

“I would say that the National Electricity Market was ready for reform,” Baldwin said.

“It was designed in the 1980s as a way of bringing together several electricity markets throughout various states, but it has been clearly overtaken by advancing technology.”

Grattan Institute Energy Spokesperson Tony Wood agrees, saying that large part of the problem is that the market as it stands was in fact designed for an earlier era and not one in which renewables make up 40 percent of the market as is the case in South Australia. Wood says the problem is not so much that the market is broken or that aggressive and intermittent renewables investment are the problem but rather that renewables and renewable energy targets have not been effectively integrated into the market. He says the problem is not the market as such but rather that the market was being asked to deliver in an environment of circumstances which were very different to those which existed when it was established.

“If you design a piece of machinery to operate within Metropolitan Melbourne, but you take it out to Antarctica or the Sahara Desert, you don’t know what could go wrong,” Wood said.

“You don’t say ‘oh, the piece of equipment is crap’. You are trying to get this piece of equipment to operate in a set of very different circumstances.

“It’s the same with our market. You are trying to make sure that our market operates in a very different set of circumstances. Some people would say that we need 21st century rules and regulations so that our market can continue to deliver what we want which is basically secure, affordable electricity and also to reduce emissions.”

A second problem has been the ongoing uncertainty over climate change policy. Wind back almost ten years and had then Prime Minister Kevin Rudd and Opposition Leader Malcolm Turnbull were in something close to agreement about the need for a carbon pricing scheme. That fell apart after Turnbull was unable to garner support for the concept from his party. Prior to 2010, Julia Gillard went to an election promising no carbon tax. After she won, Australia introduced a carbon tax in 2012. That was repealed in 2013 after the Coalition won government. The Coalition also started arguing for a dramatic reduction in the Renewable Energy Target – eventually reaching a bipartisan agreement for a more modest reduction. State based Labour governments across several jurisdictions have implemented aggressive renewable energy targets of their own.

All this, commentators say, is driving uncertainty and creating what Energy Policy Institute of Australia Robert Pritchard describes as a ‘no-go zone’ for investment within Australia’s power generation sector. This is particularly farcical, Baldwin says, as companies across sectors ranging from resources to power to manufacturing in fact factor in a carbon price when making long term investment decisions – as do their financiers and investors. This reflects a belief that whilst the current government has removed the carbon price, some form of price on carbon is likely over the several decade lifespan of assets in which they are investing.

Finally, there is the gas market, where many in the industry express dismay that so little thought has been given from a policy perspective surrounding the impact of the construction of six new export LNG trains upon domestic gas supply in east-coast markets.

Going forward, Baldwin says the market needs change. In particular, he would like to see NEM objectives altered so as to include environments objectives as well as objectives relating to security of supply and least cost. This, he said, must sit within a national framework to address climate change. A price on carbon, he said, is the best way through which to achieve this.

Wood would like to see a stable, coherent and bipartisan approach toward climate change and carbon pricing market reform so as to integrate intermittent renewable capacity and policies to deal with the new set of circumstances involving so much of Australia’s east-coast gas reserves being exported rather than sold within the domestic market.

Beyond that, there are other areas where those in the industry would like change. Whilst some applauded recently announced plans for a $2 billion upgrade of the Snowy Hydro Scheme, for instance, others see it as a significant government intervention in the market which will further deter private sector investment in energy generation capacity.

There are also questions about who is driving policy. Whilst this is the purview of the Council of Australian Governments, the politically disparate nature of COAG means that driving holistic change through it is difficult. Some would like to see a single national body responsible for policy setting, though it is difficult to see this happening in the current political environment in which both federal and state governments want their say.

Australia’s national electricity market is in need of reform.

With action in critical areas, the market and the way it operates can be brought up to date into the 21st century.

 
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