Small market reforms for big market challenges

Creating the National Electricity Market in the 1990s required the deliberate and active support of participating state and federal governments. Reforming it requires the same.

Perhaps the most meaningful indicator of the fading political interest in sustaining a functioning national electricity market is the petering out of the work of the Energy Security Board (ESB).

The Board today released its long-awaited Post-2025 options paper outlining potential reforms for a market  increasingly disrupted by accelerating renewables investment and the “promise without delivery” of new supporting technologies like batteries and hydrogen.

The resulting halfway-house market conditions are less than ideal: canyoning wholesale prices running increasingly negative on sunny days but still infrequent, heavy reliance on old high emissions generators. Price-indifferent corporate and residential investment pushing more renewables into the market, lengthening queues of new battery, gas and other potential firming projects needing governments to underwrite their gap to commercial viability.

Reliability isn’t being sustained by smart market reform, but by governments throwing cash at the oldest coal fired generators to keep them running a bit longer.

The 1990s design doesn’t really look like a sustainable market any more. The creation of the ESB to help implement the Finkel recommendations evolved into a more extended role of co-ordinator of the three energy market agencies (AEMO, AEMC and AER) and as an expanding role to repair the market for the 21st century.

The idea of a unifying Board was at the recommendation of the Finkel Review into the future security of the energy market.  This, in turn, was created in the political backdraft of the state-wide blackout in South Australia in September 2016, which in turn was caused by the combination of a freak storm and some rookie management of a high renewables grid by AEMO, the market operator.

The ESB has already been reviewed and granted a year’s extension to try and finish its Post-2025 market design. That’s no small undertaking. The lack of depth and breadth in today’s options paper suggests there is limited support from governments to rely on the market, and back a suite of complex reforms to try and fix it. They’d just as soon prefer to keep making their own local announcements and investment projects.

The ESB’s headline suggestion is to beef up its Retailer Reliability Obligation, requiring all electricity retailers to always demonstrate they have a full suite of electricity supply contracts from both renewables and firming generation. The RRO has always been an intellectual solution to a practical problem, making it cumbersome, if not impossible, to implement.

Retailers are struggling with the hollowing out of their customers value with increased deploy of distributed energy like rooftop solar PV, but still needed to provide back up power. A beefed up RRO looks more and more like a cumbersome reserve capacity market. It doesn’t look like the solution to the multiple challenges faced by the market.

The ESB has also signalled there may be a need to tighten the obligations and management of old coal generators as they approach the end of their operating life, and for suppliers of ancillary services to formally commit to providing these services in the future, to enable better planning by the market operator.

The immediate ESB solution for rampant rooftop solar PV generation may be allowing networks to build more batteries and unspecified tightening of technical standards. The real problem is rooftop solar PV is most popular in marginal electorates, and state governments won’t go near any more constraining solution that risks any sort of political fallout.