A crisis, as the saying goes, combines danger and opportunity. The dangers of the current power crisis are clear. The opportunity it presents is to end the failed use of the national electricity market.
After suspending the market last week, the Australian Energy Market Operator (AEMO) is now directing generators to supply electricity. It is also giving them a hefty compensation for the financial shortfall resulting from it.
These emergency measures are not permanent. But they do provide the starting point for a reorganized power supply industry – one that is better balanced between markets and planning.
Now is the time to build a national grid that serves the Australian public and meets the challenges of a warming world. A new government-owned and operated body should take control of Australia’s electricity system. And making the grid carbon-free, while ensuring reliable and affordable energy, should be its core business.
Decarbonizing the grid should be a major goal of electricity reforms. dave hunt/you
Personalization and Bad Design
The National Electricity Market is where energy generators and retailers trade electricity. It was established about 25 years ago when technological advances allowed electricity grids to be connected in all states except Western Australia and the Northern Territory.
Before the market was introduced, each state operated its own power industry with only limited interconnection. At that time, power companies were publicly owned. Most were also fully integrated, with one company responsible for the entire power supply chain, from generation to distribution and billing.
The advent of the national grid coincided with the peak of enthusiasm for micro-economic reform. Therefore, instead of a unified national enterprise, state utilities were divided into separate parts – production, transmission, distribution and retail – with the intention that they would be privatized and then engaged in market competition.
The trend toward privatization was a widespread view that state-owned power enterprises had not performed well – particularly in investing in increasing access to electricity.
Reflecting this approach, industry in Victoria, South Australia and New South Wales became fully or mostly privatized. Other states opened up electricity generation and retail to competition.
Read more: What is a grid anyway? Making sense of the complex beast of Australia’s electricity network
The market was constructed as the global need to reduce carbon emissions was being recognized. Despite this, the climate problem was not considered in the design of the market, which was based on a mix of coal and gas plants.
Until AEMO suspended the market last week, generator bids set the wholesale price of electricity at five-minute intervals. Retailers supplied electricity to consumers at prices that protected them from fluctuations in wholesale prices.
Prices generally sat around $50 per megawatt hour. But in periods of high power demand, the price could reach the market “price cap,” which is currently set at $15,100 per megawatt hour.
Meanwhile, electricity distribution – getting electricity to homes and businesses using poles, wires and other infrastructure – was handed down to a set of regulated monopolies, which were awarded a high rate of return on low-risk assets. .
The problem of climate was not considered in the design of the market. Dan Himbrechts/You
what went wrong
The designers of the national electricity market hoped that this would lead to better efficiency and more rational investment decisions. The objective of the market is to reduce consumer electricity bills and promote competitive retail offerings tailored to individual needs. But nothing like this happened.
In fact, consumer electricity prices – after falling in real terms for the better part of a century under public ownership – rose dramatically.
This was partly due to the need for private electricity distribution companies to make higher returns and infrastructure investments to improve reliability. There was also a need for a proliferation of highly paid marketers, managers and financiers to drive the market.
Over time, the failures of the original design gave rise to the alphabet soup of agencies needed to run the industry. These include AEMO, AEMC, AER, ARENA and a slew of state-level regulators. In the end, the Turnbull government created the misnamed Energy Security Board (ESB), which was at the helm of the whole process.
All this delays the transition from an outdated and unreliable coal-fired system to its needed replacement by a combination of solar, wind and storage.
Now, this dire system has failed to deal with a major supply crunch. The temptation is to slap on another patch and restore “normal” market conditions. One such quick solution is ESB’s proposal to pay coal and gas generators to be on standby if necessary. But much more comprehensive improvement is needed.
Read more: Adding coal to new ‘capacity mechanism’ will make Australia’s energy crisis worse
The national electricity market has failed to achieve its major objectives. Shutterstock
where from here?
Securing cheap electricity and the transition to renewable energy generation now requires a combination of public and private investment.
The plethora of market regulating bodies should be replaced by a single government agency that buys bulk electricity from generators. This organization could then sell electricity directly to customers or supply it to electricity retailers.
The emergency purchase arrangements currently in place in AEMO should be replaced with “power purchase agreements”. These are long-term contracts between a buyer and a generator to purchase energy, in which prices, availability and reliability are set.
Within those conditions, generators that consistently produce electricity at very low prices are the first to be called. This remittance method, known as a qualifying order, has been shown to lead to lower prices for consumers in Germany.
At the same time, the Australian electricity grid must be returned to government ownership and operation. And its guiding principle should be to move to a decarbonized energy system, rather than the “net market profit” test that AEMO currently uses when deciding whether to approve investments.
Labor’s Rewiring the Nation policy provides a starting point for reform. It should invest directly in the expanded transmission networks needed to support the transition to renewable energy.
Australian energy policy took a wrong turn in the 1990s. It is time to get back on the course.
Read more: In an energy crisis, every watt counts. So yes, turning off your dishwasher can make a difference