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Environment

Sep 13, 2017

How to fix Australia’s energy crisis: scrap the National Energy Market

The objective of NEM's replacement authority would be the provision of a stable, reliable and affordable supply of energy while managing a transition to a zero-carbon economy, writes economist John Quiggin.

There are quite a few proposals around to intervene in, or repair, the National Electricity Market. In my view, it’s much too late for that. We need to scrap the NEM and start on a new path towards a zero-carbon electricity and energy system. I’ve written down some preliminary thoughts. I’d appreciate comments and also suggestions as to how I might push this idea along a bit.

Background

(a) The National Electricity Market has failed, and requires radical restructuring; (b) The ultimate goal of energy policy should be a 100% renewable supply of electricity, providing both for existing needs and for conversion to electric vehicles by 2050; and (c) The goal of a bipartisan policy is currently unattainable. Policy design should be based on the premise of a change of government at the next election.

[Will keeping coal-fired power stations online really solve our energy woes?]

Outline

The starting point would be the creation of a single Australian Energy Authority, to replace the Energy Security Board, Australian Energy Market Commission, Australian Energy Market Operator, Australian Energy Regulator, and the energy-related functions of the ACCC and state regulators. The authority would:

  1. Determine requirements for investment in the network, and undertake auctions for power purchase agreements, in which both privately owned and publicly owned generators would be free to compete. The agreements would encompass both generation and storage, and would seek to phase out coal-fired generation over time, before a complete transition to renewables. Bids for fossil fuel generation would be required to incorporate a carbon price;
  2. Match supply and demand using an order of merit for generators and appropriate demand management, where the decision as to which generators to use at any given time would be made on the basis of cost and reliability of supply;
  3. Enter demand management arrangements with large power users, allowing for interruptibility of supply and investment in on-site storage;
  4. Set out standard retail contracts, allowing households to manage their use through smart meters, which would be rolled out with costs being spread across the network as a whole;
  5. Plan and, to the extent possible, undertake new investments in transmission and distribution networks, with the ultimate goal of restoring public ownership of the entire network; and
  6. Regulate returns to owners of monopoly distribution assets, with  net rate of return set equal to the government bond rate, guaranteed for the life of the asset.

The objective of the authority would be the provision of a stable, reliable and affordable supply of energy while managing a transition to a zero-carbon economy.

Comparison with the NEM

The existing NEM is unique to Australia. Wholesale prices are set on the basis of bids for five-minute periods, with a cap of $12,500 per megawatt hour (MWh).  Electricity is purchased by retailers who then supply consumers. The consumer price consists of the average wholesale price paid by retailers, the retail margin and a regulated charge for distribution and transmission.  The objectives of the market design were to provide market signals for investment in new generation capacity, drive efficiency gains in network monopolies, enhance consumer choice through retail competition and reduce prices overall. The design took no account of the need to decarbonise electricity supply (though this was clear even at the time the NEM was designed in the 1990s), with the result that emissions-reductions policies had to be overlaid on a market structure designed primarily for coal-fired power. None of the objectives of the NEM have been achieved. Prices have risen drastically, investment has been chaotic and inadequate and retail competition has resulted in large increases in retail margins. Despite a plethora of confusing options, retail customers face prices that bear little or no relation to the actual costs of generation, particularly at times of peak demand. [What’s the real reason for electricity price hikes?] The proposed scheme would maintain competition in generation through PPA auctions. It would enhance the role of price signals to consumers by offering contracts designed to allow households to minimise the cost of electricity use. However, instead of relying on market price fluctuations to guide investment decisions, the investment requirement would be determined at a system wide level, taking account of demand and the need for reliable supply. The use of market comparators for monopoly transmission and distribution enterprises would also be abandoned, in favour of a low, guaranteed rate of return.

*This post was originally published at johnquiggin.com

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7 comments

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7 thoughts on “How to fix Australia’s energy crisis: scrap the National Energy Market

  1. Decorum

    “The existing NEM is unique to Australia.” What are the essential differences with the NZ setup?

    1. johnquiggin1@mac.com

      Public ownership of most monopoly assets and dominance of gentailer model of vertical integration, strongly deprecated here.

  2. Tabot Retemt

    Fix depreciation allowances. As I understand it, network assets may be revalued to new replacement cost every year and then depreciated – even assets that are decades old.

  3. Roger Clifton

    Suggestion: focus the plan on the word, “carbon”, fossil carbon. The enemy is carbon in the greenhouse and the cure is non-carbon energy. These are scientific facts and can be used to persuade the most conservative of voter to back any new plan.

    Ditch the words, “renewables” and “coal”. They are only hero and villain to a minority of voters. By using these words you are guaranteed to fail. If you mean non-carbon energy sources, then say non-carbon. But the religious concept that the world is running out of minerals will certainly be resisted by our conservatives. Coal usage will be suppressed as a matter of course as we reduce carbon emissions towards our targets.

    The NEM system was designed around a baseload provided by steam, and will continue to be. The next logical emissions reduction will be achieved by providing baseload with gas-powered steam. It needs the market system to protect it from short-term (less than half an hour) disruption by intermittent generation. If wind and solar are required to negotiate their own backup and storage, they will be able to compete with steam on the NEM market as fast-responding dispatchables.

  4. K

    For Heaven’s sake will you people please stop calling it the “National” or “Australian” Energy Market! It is the South Eastern Energy Market at best. There is a whole half of the country that is not connected to it!

  5. DF

    The Reserve Bank was given responsibility for interest rates, so as to depoliticise them and to take their manipulation out of the political contest. Why not do the same with energy policy? Create a statutory authority that is beyond the short-termist influence of politicians so it can focus on the larger short, medium and long term energy needs and means of delivery in Australia.

  6. John Hall

    Nationalize all essential services. Then we know exactly who to blame. All the problems in Victoria arose after Kennet sold off our gas, electricity & water to the highest bidders. Labor followed through by leasing off the Docks. What next?

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