Can we use markets to fix the National Electricity Market?

On Friday afternoon The Australian Energy Market Commission (AEMC) casually dropped a couple of requests to amend the National Electricity Rules. The changes proposed by coal-fired generator Delta Electricity are anything but trivial.

They follow a similar rule change proposed by Infigen Energy back in March which seek to reverse the pervasive trend of the electricity market shrinking under the growing weight of increased political and technical intervention.

Intervention has become a steamroller that will be hard to stop. The Federal Government is now lining up to underwrite multi-billion dollar asset out of market, this time a second undersea transmission line, the Marinus Link, linking the mainland with Tasmania.

The Delta and Infigen rule change proposals cut to the very heart of the technical challenge of trying to balance more and more spinning plates of intermittent renewable capacity on top of the exisiting, and still necessary, slow moving coal fired fleet.

The problem with big renewables in Australia is simple: we are trying to force a jittery, clean, cheap and partial electricity supply (wind and solar) onto a lumbering, high emissions but dependable and full service 20th century generation technology (that’s coal).

As solar and wind generators increase in scale their output surges and ebbs with the wind and sun. As a zero marginal cost source of generation (they have no fuel and almost no labour costs) renewables will almost always bid first into the grid, unless prices fall below zero.

As more renewables go in to the grid there are more often periods of high renewable generation and lower demand. These result in renewables forcing conventional coal and gas generators off the grid. While these events typically elicit cheers from activists on twitter, they pose a serious technical problem.

Because most of what Delta calls System Security and Reliability Services (SSRS) – frequency and voltage control, inertia,  system strength and operational reserves – are provided by the coal and gas generators being pushed out of the market by big renewables.

To date these events have been solved by The Australian Energy Market Operator (AEMO) intervening into the market to direct sufficient firm generation to stay on and ensure enough capacity is on to ensure sufficient provision of these ancillary services. The directed generators are compensated at above market rates for this services.

As has been seen in South Australia in recent years, the frequency of these events has been increasing: AEMO directed firm generators to stay on or switch on 153 times in 2018-19, up from 99 times the previous financial year. That is a lot.

The Energy Security Board (ESB) wants this mess cleaned up. In a recent paper it said the “unpredictable nature of such intervention represents further distortion to the market and could cause further disruption to participants’ operational planning and therefore potential costs to consumers”.

To address this situation in South Australia four synchronous condensers (giant flywheels) are currently being installed by ElectraNet in South Australia. These flywheels replicate most of the physical properties of large synchronous generators needed to provide SSRS. They are regulated assets, meaning they will turn on when directed by AEMO and were approved by the Australian Energy Regulator in 2019.

Delta is proposing a different pathway for the eastern states as they also absorb increased levels of renewables.  Delta argues the real problem is that the current market design is incomplete, and needs two renovations: a new day-ahead market for capacity commitment to address operational reserve and system security and an expansion of the range of the Frequency Control Services (FCAS) market.

The idea is simple enough: rather than watch as a windy, sunny Sunday drives firm generators out of the market only then to be recalled by AEMO, a day-ahead market is established for the capacity required and firm generators bid to provide the service in advance of the problem, rather in reaction to it.

This shifts responsibility from AEMO to the market, reduces cost and allows novel, innovative solutions to provide the necessary services rather than increasing short term intervention followed by a non-market based investment (that’s the synchronous condensers). Condensers may be the most efficient solution, but they would need to compete in the day-ahead capacity market.

The delta and Infigen rule changes are important not only for their idea of expanding the scope of the market rules to fix technical problems, but because they seek to actively reinstate markets as the primary agency through which all services are delivered. These will be popular with pro-market  advocates and are likely to be resisted by those who prefer to retain the power to intervene.

They run against the growing tide of  governments and agencies seeking to direct outcomes whether it is in day to day grid management or hand picking and pushing forward projects irrespective of their actual commercial merits. The idea should be that most efficient decarbonised  grid wins.