Electricity markets have different ways of integrating the competitive generation sector with the monopoly networks sector that try to simultaneously achieve efficiency, competition and investor confidence. There is no perfect answer, and the electricity industry is not alone in this challenge with similar issues arising in gas, telecoms, rail and even road transport.
The WEM has operated to date with a form of “physical firm access”. This means that, in order to connect, each generator must have arranged not only its immediate “shallow” connection assets with the network, but also that its operation will not interfere with other generators, at least in normal network conditions.
This means that if a generator wants to connect to lines that are already in use, it may have to pay the network to upgrade them and then wait until the works are complete. This has some obvious attractions: new generators are encouraged to look for the least costly spots to connect, customers don’t have to foot the bill resulting from their decisions (at least directly) and generators, once connected, have confidence in their access to market backed up by a legal contract. This reasonably parallels arrangements in telecoms and gas.
Sounds good so far - but there’s a catch. It results in an overbuilt congestion-free network, which will eventually increase customer costs as it raises the cost of connecting a new generator. An efficiently built network does not need to be able to simultaneously carry the output of every generator, in fact it should experience some congestion.
Take an example of a peaking gas plant which, say, runs 5 per cent of the time sharing a line with a wind farm which runs 35 per cent of the time. Market prices are likely to be low on windy days, so the two generators will rarely ever get in each other’s way. And, as the wind farm’s business is the production of bulk renewable energy over time, if it were to very occasionally face some brief loss of market access when the peaker needed to deliver capacity to its customers, this would not hurt the wind farm too much. The two plants sharing a line would be an efficient outcome, much better than duplicating the line, but is not readily achieved in a market design that requires all generators obtaining physical firm access.
At the other extreme you have the National Energy Market’s (NEM) design which has no access rights. This is a bit like roads. A new generator may connect in an already heavily used location and then compete for access with other users through the dispatch process. A central planner (the network) then decides if and when its efficient to build out the resulting traffic jam, with costs recovered from customers. Whilst this certainly makes connecting new generators cheaper and quicker, it is easy to see it may lead to inefficient locational incentives and doesn’t provide generators much confidence that they can retain market access in the long term.
Economists generally agree that the best solution is halfway between the two extremes: financial access rights. Generators should be at liberty to connect where they will, and the dispatch process should determine the most efficient way to resolve physical congestion when it occurs. So far, just like the NEM. However, in the settlement process there should be a financial adjustment that debits some money from a generator without an access right and credits this to a neighbouring generator with one, so that it is not out of pocket for the traffic jam. If a new generator wants an access right, it can either locate in an unused location, buy the rights from an existing generator, or pay the network for an upgrade.
The WEM plans to move away from its physical firm access arrangements in favour of a NEM style open access regime by 2022, in order to have simpler connection and a more efficient network build over time.
At the same time the market designers are very much aware of the existing rights, both legal and implied, that the generators hold and are looking at ways to account for these. They also do not wish to lose the locational efficiency and access certainty benefits provided by the current arrangements. It is early in the reform process, but a few interesting models have been proposed.
One relates to the WEM’s capacity market arrangements, which is a key revenue source for generators, as the energy market is capped to a low level. Presently a generator needs a physical firm access right to participate, but these won’t exist after 2022. Clearly we should not be paying for more capacity than the network can carry, so we must ration capacity payments somehow when multiple generators share network capacity.
One option is “priority access” based on “first come first served”. To the extent two generators compete for access, a generator built before the reform (who therefore must have arranged firm access) will gain priority over a new generator.
The priority is however not evergreen: it has been suggested that after 10 years a new entrant would also receive priority. So, if the network has not been upgraded in the meantime, then this may mean some loss of access for the first generator. Other variations exist. One attractive one is maintaining the priority for longer but allowing it to be traded.
There is a long way to go in this process, and such reforms are necessarily complex. You can be sure that not everyone will be happy about everything. At this early stage however it would appear that the reform’s main objectives and concerns about existing rights are well placed.
The Energy Council has engaged closely with its WEM invested members in preparing a submission to the first three consultation papers.
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