What new markets does the NEM need?

In April, the Energy Security Board (ESB) began consultation on the design of a potential ahead market for the NEM. An ahead market is simply one that schedules, or confirms, delivery of energy or other services ahead of the period for which it is needed. Overseas power markets most commonly have a day ahead market but the ESB has left open the question of how far ahead of time the market(s) would run.

Most generators – i.e. the businesses that would participate in such a market have been sceptical of the need for such a market. The main lobby group for generators in the NEM, the Australian Energy council (AEC) has recently released a report it commissioned to examine these issues in more detail.

The report, by Creative Energy Consulting argues that the case for reform has not been made by ESB. The three reasons put forward by the ESB are:

  • a lack of “firmness” in pre-dispatch bids;
  • a potential inability of the existing pre-dispatch process to schedule generation and demand response effectively; and
  • the difficulty that AEMO may have in managing security effectively through market intervention.

Creative Energy argue that “it is a feature –and strength –of the current NEM design that bids are able to be changed at any time during the pre-dispatch period, right up until just before dispatch. This allows generators to respond to changing forecasts.  If a day is turning out hotter than expected, demand forecasts rise, price forecasts follow, and generators respond by bidding in more capacity.”

They note that the opposite – a late fall in demand – can lead to withdrawal of generation and that if that generation was being relied on to provide system security then that could be a problem. But they think the answer is to set up markets for those system security services rather than try to reduce the flexibility of the current design.

Effective scheduling (i.e. confirming which generators will run for any given period to meet demand) is becoming harder with more weather-dependent generation. But an ahead market does not make the weather any more reliable. Instead other reforms such as a redesign of the scheduling algorithm, or more significantly a switch to central commitment, where AEMO makes the decision about what runs when, should be considered.

The report agrees that the current ad hoc approach to intervening in the market to fix security gaps needs to be improved. The most modest of the ESB’s proposals would do this by introducing a unit commitment for security – this would see a process run (say) a day-ahead to identify security risks and to schedule some generation early (such generation would only need to run at minimum levels and could rebid the rest of its capacity right up to dispatch as currently happens) to address this. The report notes that AEMO would need to develop a scheduling algorithm to replace its current manual intervention processes and improve the flow of information to the market about its intentions. These are presented as “no regrets” changes that could and should take place in any case.

The AEC is not the only critic of the ESB’s ahead market enthusiasm. An academic working paper by Infigen colleagues Paul Simshauser and Joel Gilmore (Paul has since moved on to become CEO of Queensland transmission company Powerlink) takes aim not only at the claimed need for an ahead market but also other ESB projects such as the post 2025 market design and the potential implementation of nodal pricing for generators on the transmission grid. Simshauser and Gilmore argue that these major reforms of the wholesale market will be counterproductive due to their chilling effect on investment. Investors will sit on their hands to see what the implications on asset values of these reforms will be, which could be a five year or more process.

Instead, they argue, the focus should be on filling in a couple of “missing markets” to ensure adequate supply of essential system services like Fast Frequency Response (i.e. over shorter time frames than existing FCAS markets and Operating Reserves (essentially spare or standby capacity that can fill in unexpected gaps in supply at short notice).

Infigen have followed through on this thesis by submitting two rule changes to set up these markets. However, they are not the only generator to look to find a more targeted solution to security concerns than the ESB’s ahead market approach. The AEMC has just issued a consultation paper on six rule changes (including Infigen’s) that also cover inertia, voltage control, ramping and system strength services as well as a unit commitment mechanism (which may have some similarities to the most modest option put forward by the ESB).

As the ESB’s process is still in high-level design mode, it will likely be next year by the time any resulting rule changes are lodged, by which time, the AEMC’s process to review the generator proposals may be concluded. It will be interesting to see if these solve enough of the security issues as to make the ESB’s ahead markets proposal moot.