It’s been a few years since we last tried to settle on an electricity market design that is needed to keep the lights on through the transition to a net-zero emissions economy. It must be time for another go.

Sure enough, we now have the NEM Wholesale Market Settings Review (NEM Review) that is charged with setting us up for a post-2030 electricity market. The NEM Review is led by a panel of well-respected industry leaders chaired by Dr Tim Nelson (ex AGL/AEMC/Infigen).

The NEM Review will report to all the state and federal energy ministers (ECMC) and comes at a critical juncture in the transition. With tons of work ‘on the go’ across governments and energy market bodies, and energy ministers having a range of state specific priorities, the Review Panel will need to manoeuvre with a deft touch to achieve concrete outcomes acceptable to all key parties.

The core function of the NEM Review

The central question for the NEM Review is whether the current ‘energy only’ spot market is largely fit for purpose, and if not, whether it is minor adjustments or major reform that will get the job done.

In networks land (where we mostly reside here at ENA) we don’t take a strong view on the finer details of market settings to incentivise investment in new generation and storage infrastructure and its efficient operation. Given that long-term planning for the energy system is consistently showing an ongoing need for a range of generation types, including new gas generation to operate in the rare but essential role of backing up renewables and storage, we suggest that technology neutrality in any recommendations is critical to long-term success. The resulting market frameworks will need to facilitate investment in:

• generation infrastructure with high upfront capital costs and low short run operational costs, such as wind and solar
• storage infrastructure with high upfront capital costs and short run operating costs that are based on the opportunity costs of short-term market outcomes, such as battery and hydro storage, and
• generation infrastructure with material upfront capital costs and significant but variable short run operational costs, such as new gas or renewable gas or liquid fuel generation projects.

Getting this core function right and navigating to an outcome that can achieve a workably efficient, as well as a secure and reliable energy system, will be the main goalposts for the NEM Review Panel.

The other 90 per cent

Beyond the market frameworks for reliable, secure, efficient energy supply (no pressure), there are many other aspects of the energy system that interact with the wholesale market for energy and must also be considered in scope. These include the areas the Review Panel has called out for consideration, such as the consumer interactions with the market (including customer energy resources, or ‘CER’) and essential system services.

We welcome the NEM Review’s focus on supporting customers to engage in the wholesale electricity and related markets. As the Panel considers these interactions, we should also recognise the value of engaging customers and CER to help improve physical network utilisation and the efficient delivery of networks services, as well as the critical importance of ensuring system security and grid reliability. Distribution network service providers (DNSPs) are already working towards the orchestration of CER to help improve physical network utilisation and the efficient delivery of networks services. This includes through:

• evolving network pricing to incentivise consumption at times of low network utilisation (increasingly experienced in the middle of the day due to increasing solar PV penetration) and dissuade consumption at times of network stress
• shifting network-controlled load to times of low network utilisation (which are also generally coincident with times of lower priced energy in the wholesale electricity market, due to the proliferation of solar PV), such as hot water or air conditioner load that is under the control of distribution network businesses
• implementing dynamic operating envelopes and more flexible connection arrangements with large and small customers to manage networks within their technical operating envelopes while maximising the benefits to all customers that rooftop solar PV generation provides by reducing electricity wholesale market prices, and
• testing flexibility markets to efficiently procure additional demand flexibility, from CER as well as commercial and industrial customers, to provide additional incentives for demand response that avoids the need for increased future capital expenditure.

Australian distribution networks are geographically as well as demographically diverse. They also have different tools available to them to manage their networks, due to local energy market structure factors. Accordingly, the efficient mix of tools to operate the network will vary by region, and DNSPs engage with their customers on an ongoing basis on the efficient approaches to provide network services in their area. Strong incentives for operational efficiency and collaborative engagement between networks and their customers are the bedrock of improving customer outcomes over time.

While the NEM Review is progressing reforms for the wholesale market, other reforms are needed to better support distribution networks to play a more significant role in the delivery of efficient energy services to customers, including through:

• allowing DNSPs to establish and operate local energy hubs, including connecting more renewables within the distribution network, for all the community to benefit from.
• better utilising the extra capacity of batteries connected directly to the local grid and get more of them connected, making sure all customers benefit
• providing incentives for commercial operators to install more solar panels on existing rooftops and share it with the local community
• classifying kerbside EV chargers as a distribution service to allow networks to put more chargers in more places and improve equitable access to charging while reducing range anxiety, and
• syncing resources to the grid in a coordinated and flexible way so that the benefits can be shared with the community.

Another area of critical interaction with the evolving wholesale electricity market is the provision of essential system services to maintain power system security. While significant progress has been made developing enduring and robust approaches to deliver essential system services, it is important that these frameworks continue to evolve under current governance arrangements as the markets for the supply of these services mature.

One matter that could improve the efficiency of the essential system services framework is to ensure that the regulatory investment framework (the RIT-T) is fit for purpose and delivers the right mix of equipment for the power system. This includes the right mix of network synchronous machines and market provided or ‘non-network’ solutions, including retiring coal units or future gas turbines that could also operate as synchronous condensers. In short, the electricity market frameworks should ideally evolve in a way that provides greater certainty on what non-network assets will be able to provide system services in the future, so that transmission businesses are not forced to procure a greater than efficient level of network assets to provide those services.  

Cost allocation in essential system services arrangements could also be improved. The cost recovery arrangements for essential system services and other arrangements on the power system are increasingly applying market facing costs to TNSPs which are borne as cash-flow risks. For example, the costs that a TNSP faces of procuring non-network services to provide system strength include both the relatively stable/predictable availability component and the highly volatile and unpredictable enablement component that is based on the cost of the making the relevant service provider ‘whole’ in the electricity wholesale market while they are providing the service. The transmission revenue recovery process is not suited to the recovery of unpredictable and volatile costs, and these cash flow impacts can have flow on effects on financing costs and expenditure programs.

Other potential changes would only add to those cash-flow concerns, such as the AEMC’s recent draft determination on transmission loop flows, where following the connection of Project EnergyConnect there is a potential for significant and uncertain negative settlements residue to be borne by TNSPs, impacting cash-flow until they can ‘true up’ the final cost in subsequent years.

While this may all seem like a ‘grab bag’ of unrelated issues, the thread that ties them together is that they all interact in some way with an efficient wholesale electricity market and are all necessary elements of a well-functioning energy system. We look forward to continuing to work with the NEM Review Panel on their important work.