Introduction to Market Reform

Written by Energy Action

The last several years have been tumultuous for the National Electricity Market (NEM). The Australian Energy Market Operator (AEMO) has increasingly intervened in the spot market to provide security through demand response initiatives to help manage spikes in demand.

The reliability of the transmission grid is also falling, and there has been a tsunami of renewable projects competing to connect to an increasingly congested grid. On top of all of these issues, and partly because of them, the current price of electricity on the wholesale market has remains elevated while forward prices are in backwardation (lower than today’s prices) over the next one, two and three year horizons.

With these challenges in mind, the State and Federal Governments, in conjunction with AEMO and the energy market regulator (AER), have commenced a programme of reforms for the electricity market. Some of these have recently taken effect whilst others are in the early design stage. Here we take a look at each of them and what they mean for the electricity market going forward.

The Retailer Reliability Obligation.

A problem that has been building for some time has been the gradual decrease of reliability across the transmission grid. This is a consequence of the reduction in dispatchable fossil generation coupled with the increase in renewable generation. To help to address this problem the Retailer Reliability Obligation (RRO) was introduce, which comprises four key measures:

•        Process of Reliability Forecasting

•        Process for large customers to “opt-in” (manage Reliability Obligations)

•        Management of firmness factoring and qualifying contracts

•        Management of market liquidity enhancements                                                                 

Under this scheme, should AEMO forecast system reliability to fall below a certain level, retailers can be required to enter into contracts with new dispatchable generators or load managing customers to correct the problem.

In August of this year, AEMO released its first report under the Retailer Reliability Obligation.  Using the current standard for reliability it did not identify any future issues in any location except for Victoria.

For Victoria. AEMO forecast a shortfall in reliable generation of 125 MW over the coming summer . That’s too soon for the retailers to respond by buying more capacity, however, AEMO was aware of this issue and has already secured the required capacity to counter the problem. Hopefully, the current estimates will be accurate and energy secured will be sufficient to prevent blackouts come the New Year.

While AEMO is predicting that beyond this issue, Victoria’s reliability is expected to be manageable in future years, it has also issued a word of caution in its report. The standard used to assess system reliability was devised before the current issues arose and it wasn’t designed for current circumstances. If a more realistic standard had been initially applied, we would be seeing a need for additional capacity in both South Australia and New South Wales as early as 2023, so the problem continues to remain a real one.

Co-Ordination of Generation and Transmission Investment.

This project, known colloquially as COGATI, has only just kicked off but will gain momentum in early 2020. Its intention is to address the current problems with new renewable generators connecting to the transmission grid. 

Currently there are no rules to control where new generators must be located, so rather than locating where the transmission grid has spare capacity, they instead locate in the best place for either wind or sun resources. The result has been too may new connections in the wrong places. COGATI will try to fix this by changing the rules surrounding how generators get paid for selling their output into the spot market. The intention is to have the new rules in place by mid-2022. Then new renewable generators should know which locations will be most favourable for grid connections and which will leave them with increased costs. 

Post 2025 Market Design.

This is a very large study being undertaken on behalf of COAG by the Energy Security Board (a body established by COAG and comprising of the heads of the Market Operator, the energy Regulator and the Market Rules administrator). Its remit is to look at the broad landscape of the electricity market and recommend changes to the market design to make it function better in the future.

We have already touched on some of the issues facing the market and their treatments in this article, including the need to increase reliability of the Transmission system and to better accommodate new renewables projects. However, the underlying issue remains that the market was not designed to cope with large quantities of renewable generation including much of which is embedded within the distribution system in the form of domestic rooftop solar.

Neither was it designed for large quantities of domestic batteries, something which we are likely to see increase greatly over the next few years.

Were we to design the market from first base today, and to respond to today’s and tomorrow’s conditions, we probably wouldn’t come up with the type of market rules that we currently have. The Post 2025 Market Design project will address this by asking just that question, if we did it again how would it be different? From there it will go on to recommend fundamental changes to the market design (potentially such as moving more towards the Western Australian model whereby generators are paid just for being available, not just for what they generate). Whilst this is a very big undertaking, the basis of the new rules should be known by the end of next year for a 2025 implementation.

As we can see, there are a lot of market reforms going on now or about to start. Whilst these may not have any immediate effect on electricity customers they will shape the future of the electricity industry and dictate the costs that customers will pay for power in the longer term.

The alternating current flowing through the transmission system tries to change suddenly, this inertia will resist it, and as a consequence the system will be more stable and less vulnerable to sudden, unexpected blackouts.

With coal and gas fired generation declining, inertia is falling also, so the transmission system is becoming less secure. That can lead to either blackouts, or to higher costs to customers as the Market Operator has to compensate for the lack of inertia by instructing some high cost power stations to run whereas otherwise they wouldn’t.