Nov 19 2020

NEM “fixes” look more like fissures

The National Electricity Market (NEM) has held up well under the pressure of the COVID-19 pandemic. Workforces and supply have remained safe and retailers have gone to even greater lengths to support customers who are doing it tough.

The only ongoing risk facing the NEM is political, as well-meaning governments compete to try and ‘fix’ a market that isn’t broken with various complex and expensive solutions.

Most electricity consumers have little awareness of the complex beast that is the NEM. That’s a good thing and an indicator of the success of its design which has seen it keep Australia’s homes and businesses humming for more than 20 years, at (mostly) reasonable cost.

But the transition to a more renewables-dependent future has seen a rush of government effort to either accelerate or slow that transition. The latest ‘fixes’ have included Victoria stepping in to require the Australian Energy Market Operator (AEMO) to introduce a “big battery” near Geelong, and NSW’s unveiling of its ambitious plan for its customers to underwrite a very large amount of generation and storage through the NSW Electricity Infrastructure Investment Bill.

Prior to that the Federal Government threatened intervention if energy companies do not commit to 1000 MW of new generation in NSW by April next year. This is despite the NEM meeting the state and federal governments’ recently tightened reliability standards to a level well above that which the NEM has long considered an acceptable balance between cost and benefit.

Why has this occurred? Probably the main culprit is the fact that we do not have the long-hoped for national, bipartisan climate and energy policy. A bipartisan policy in which investors and state governments alike could have confidence would have been a constructive guiding light for market participants.

Instead, rapidly changing policy settings over the last 10 years have challenged investor confidence and increased governments' concern about the lack of investment in dispatchable generation.  At the same time, coal-fired power plants begin to approach their natural expiry points and consider when they should close.

With solid and predictable policy in place the market would likely work as it should. But the environment is febrile and political fear about higher prices, even when they occur as the market design intended, is very real. Some of this stems from the aftermath of the closure of the Hazelwood Power Station in Victoria in 2017. Although prices did increase for a period following, in order to signal to investors to move to build new generation, they have since come back to pre-closure levels. The fact that this is entirely consistent with market design, and that Hazelwood was a unique example of a plant exiting with just nine months’ notice, is conveniently ignored.

Equally, concerns over the potential for an electricity supply shortfall are readily addressed by the market’s existing reliability mechanisms which include a three-year notice period of any future generator closures.

Politicians are obliged to “do something” if there is a perception of an issue. But when they all decide to do something at about the same time and in an uncoordinated fashion it is not just confusing, but counterproductive.

Go-it-alone and uncoordinated actions in an increasingly interconnected energy market carry risks, and consumers end up paying the tab.

We would do well to recall the events of 2004. In 2004, after outages hit NSW and Queensland, their governments were desperate to avoid further blackouts and so lifted network reliability standards considerably. In retrospect this just ended up gold-plating the networks and customers suffered bigger power bills for years as a result.

In 2020 NSW’s electricity roadmap would see that government intervene to develop a very large quantity of new capacity - renewables, storage and gas – without proper regard for whether consumers actually need it.  It achieves this by taking on the risk from all these generators through a “put option”. This means generators keep the upside if their investment is profitable but socialise their losses if it goes badly.

The government then recovers those losses from NSW customers through a network levy. This cannot be good news for customer bills.

The Energy Security Board, AEMO and other regulators have been trying to steer a path to a national market for the future based on integrated planning and market incentives for years now. That path gets steeper with every state or federal government random intervention.

While the industry will do what it can, it cannot guarantee that efficient outcomes for consumers and lower prices will be the result if the NEM’s market fundamentals continue to be ignored.

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