Daniel J Cass, University of Sydney
Australia’s energy market is outdated. It doesn’t encourage competition and that’s holding back the transition to renewable energy. Important reforms to modernise the market are on the way, but big energy companies are seeking to use the cover of COVID-19 to prevent the change.
This is bad for consumers, and for climate action. Reform would help create a modern grid designed around clean energy, pushing coal-fired generators to retire earlier. Over time, it would also bring down power costs for households and business.
Renewable energy is the cheapest form of new electricity. It’s far better for the environment than coal and gas, and can deliver reliable supplies when backed by batteries and other energy storage.
Instead of delaying reform, Australia should be advancing it.
What’s this all about?
Regulators and governments recognise the need to modernise the rules governing the National Electricity Market. That market, established in 1998, supplies all Australian jurisdictions except Western Australia and the Northern Territory.
Reliable electricity requires that supply and demand be kept in balance. This balance is primarily provided by a system known as the wholesale spot market. Every five minutes, electricity generators bid into the spot market, specifying how much energy they will provide at a certain price.
An entire redesign of the market rules is scheduled for 2025. This should make the market work efficiently and reliably as coal retires and is replaced by renewable energy.
In the meantime, one important rule change is due to start in July next year, known as “5-minute settlement”.
Read more: Matt Canavan says Australia doesn’t subsidise the fossil fuel industry, an expert says it does
Currently, electricity is sold and sent out from generators in 5-minute blocks. But the actual price paid for this electricity in the wholesale market is averaged every 30 minutes. This means there are six dispatch periods, each with their own price, which are then averaged out when the market is settled.
This strange design has enabled big electricity generators to game the market. One method involves placing high bids in the first interval, then placing low or even negative bids in the remaining five intervals. This ensures that electricity from the big generators is purchased, but that they and all other generators receive an artificially high average price for the whole 30-minute period.
In 2017, the Australian Energy Market Commission (AEMC) decided to replace 30-minute settlement with 5-minute settlement.
The commission says the current system was adopted more than 20 years ago due to technological barriers which have since been overcome. It argues moving to 5-minute settlement would better reflect the value to consumers of fast-response technologies, such as batteries storing renewable energy and so-called “demand response” (a concept we’ll explain later).
According to the AEMC, the rule change would lead to lower wholesale costs, cutting electricity prices for consumers.
But on March 19 this year, the Australian Energy Council, which represents most coal-fired power stations and the big three electricity retailers, sought to delay the reform. It wrote to federal energy minister Angus Taylor and his state counterparts, arguing the pandemic means energy companies must focus on “critical supply and reliabilty” issues, rather than implementing the rule change.
But energy consumption has barely changed during the pandemic, the Australia Institute’s national energy emissions audit shows. So delaying the reform to deal with supply and reliability issues appears unjustified.
Despite this, the Australian Energy Market Operator has proposed delaying the change for a year. Our submission, endorsed by energy and technology leaders, opposes the delay.
Moves by regulators to delay another 16 market reforms due to COVID-19 also seem to be afoot.
Change is possible
Last week, one big rule change to the National Electricity Market did proceed as planned. It allows “demand response” energy trading from 2021.
Demand response involves reducing energy consumption during peaks in demand, such as during heatwaves. Basically, the rule means big energy users, such as smelters and manufacturing plants, could power down in these periods, and be paid for doing so.
Technology pioneers such as battery entrepreneur Simon Hackett and Atlassian chief Mike Cannon-Brookes have backed this change.
Australia has successfully used demand response to provide emergency electricity capacity and other benefits. But it’s never been unleashed in the wholesale energy market.
The rule change doesn’t involve smaller users such as households. But it’s a promising start that creates new competition for fossil fuel generators and allows energy users to help make the grid more reliable.
Read more: New demand-response energy rules sound good, but the devil is in the (hugely complicated) details
Political warfare over climate policy has held back Australia, and the electricity market, for more than a decade. But energy reform that encourages greater market competition can readily be supported by political conservatives.
The demand-response rule change is a clear example: it has been championed by Taylor and his predecessors Josh Frydenberg and Greg Hunt.
Getting future-ready
Once the health crisis is over and economic recovery has begun, Australia will need the economic and social benefits of electricity market reform even more than before.
Such reform “stimulus” would help ready the grid for the inevitable retirement of coal-fired power stations, such as Liddell in 2023.
It would also align with state government investments in renewable energy, and boost private investment in new generation (which has recently slumped) and large-scale batteries.
Electricity remains Australia’s highest-polluting sector. Around the world, electricity markets are planning the transition from high to low emissions.
Delaying reform in Australia would be a major setback on the path to our essential energy transition.
Richie Merzian, Climate & Energy Program Director at The Australia Institute, contributed to this piece.
Read more: Putting stimulus spending to the test: 4 ways a smart government can create jobs and cut emissions
Daniel J Cass, Research Affiliate, Sydney Business School, University of Sydney
This article is republished from The Conversation under a Creative Commons license. Read the original article.
It is horrifying to realise we are paying people like this bloke.
He is either a total lair, or an utter idiot, or probably both. Such people should not be on the pubic payroll.
I find discussions on renewables always a bit confusing because of the intricacies surrounding the shady economics that define what any form of energy is costing the regular taxpayer. Even in this case I don’t know where to begin.
Before starting someone needs to declare what the cost of energy produced is using coal/gas and renewables without including excess regulation, taxes and subsidies. Regulations, taxes and subsidies just muddy the discussions and are used to justify bad outcomes. Give me the cost per kwhr for each as a base case and we’ll that as a basis for our discussion.
From what I remember, coal is about 1 cent per kwhr, nuclear 2 cents, wind 15 cents and solar 22 cents. Those are old numbers so some downward shifting of numbers for renewables could be justified. Then there is the cost to the system for installing intermittent and not phase friendly energy. And the cost to add baseload power to backup unreliable and not dispatchable power.
Start with the base case, work in the problems of installing unreliable (another cost level), not phase friendly power and then move to regulations designed for the purpose of denigrating fossil fuel energy and promoting unreliable renewable power ( where this article seems to be focused on).
It is at this point that renewables look attractive, or as attractive as can be made when putting lipstick on a pig.
Yes. Do 5 min. slots .
BUT bid two days ahead .
And if you do not deliver , YOU PAY someone else to deliver .
So massive subsidies for renewables is to hide the fact that they are significantly more cost effective than base-load sources??
Is that also why I haven’t ridden in a solar-powered airplane yet??
Or maybe I have but the jet engines were just loudspeakers making a tremendour roar so I wouldn’t feel guilty robbing the rich!
I’m an old finance guy who worked in the sector. A couple of comments. The rules are currently set so that renewable get first bid status even though they cannot guarantee generation. This means they are always first in the queue ahead of the real generators able to generate power on demand. One could ask why the coal or gas generators bother. Answer hedging. Retailers need certainty. Hedging gives it to them.
Second how can renewable be cheaper? A plated capacity wind generator produces “on average” 20 to 30 percent of that capacity in the year. To make up for that they pit up more windmills. Unfortunatelythe wind is still the same. Solar is the same. Totally useless at night with no storage. And when its cloudy or in winter production tanks.
Then there is the policy if demand reduction. How can a market operate properly if demand is reduced artificially? This is an artifice set up to support unreliable renewables. Its socialist thinking and doesn’t help business or society.
They call it ‘demand response’ and is so popular it is referred to as its acronym ‘DR’.
“Demand response (DR) is the voluntary reduction or shift of electricity use by customers, which can help to keep a power grid stable by balancing its supply and demand of electricity. It can help to make electricity systems flexible and reliable, which is beneficial if they contain increasing shares of variable renewable energy …”
“… DR typically involves paying some energy consumers to voluntarily cut or shift their use of power to better match supply”:
https://arena.gov.au/renewable-energy/demand-response/
As more wind and solar is foisted on consumers, more ‘demand response’ will be needed, the more payments will be needed presumably coming from other consumers.
Demand response (DR) is a euphemism for supply collapse.
Given that in Australia the maximum electricity price at wholesale is now over A$14,000/MWh, there could be some fancy profits to be made. But DSR bids are often set by the cost of backup generators, which the grid refuses to provide. It could probably do so more economically than most businesses if it were not ideologically opposed to it.
Nick,
If they achieve the 5 minute windows, they will quickly find that far from improving the economics, it makes the price swings even more extreme.
This might have something to do with that calculation?
“Reifying a classification plus a message to 2dogs”
https://catallaxyfiles.com/2020/06/20/reifying-a-classification-plus-a-message-to-2dogs/
I am sure that the Large Energy Companies are gaming the system and it needs reform, but this is quite a separate issue from the use of ‘renewable’ power. So-called ‘renewable’ power is intermittent and unreliable and makes the grid unstable. This requires the use of extra baseload power to fill in when there is no wind and at night. If it was not highly subsidised, ‘renewable’ power would disappear, leaving behind the ruins of windmills and solar farms.
As for ;gaming the system’, nothing comes even close to ‘renewables’.
Conflation. Contradiction. Deception. Ignorance. Bias. Presumption. Assumption. That’ll enough for now.
Demand response “creates new competition for fossil fuel generators”. Well if ever there was twisted logic, this is it. Demand response involves users switching off when their needs could be supplied by fossil fuel generators if only the rules hadn’t been changed to prevent their needs being supplied by fossil fuel generators. IOW “creating new competition for fossil fuel generators” means closing fossil fuel generators so that consumers have to use something else and have to close down when it isn’t available. What a warped interpretation of “competition”.
In reality it is just cover for inadequate grid investment in peaking and backup capacity for renewables.
Riddle me this Batman, why when green energy was voluntarily available in the city of Canberra, was the price of green energy much higher than standard grid energy. The scheme proved so unpopular that over the next few years the left wing Canberra government dropped it and just integrated it into the overall price. Everyone paid more.
Let’s instead have real choice – All individual households in Australia should be able to elect, on an annual basis, the source of their electricity, and hence the price.
As for businesses, just how good are you going to feel when the business you work for says that due to savings available under a “demand response”, we are shutting down the workplace. Off you go, enjoy the afternoon off without pay.
It gets to the point where if businesses can’t make things work they shut down altogether. Not just for an afternoon. Basically any business that can’t justify operating with backup generators has an incentive to move somewhere where they have reliable power supply at reasonable cost.
I did wonder whether the author didn’t have an r in his name. It would have made more sense.
Seriously? How do such unsubstantiated articles get published as a serious contribution to the challenges facing the Australian electricity grid? Perhaps the author would like to actually study the implications of intermittent generators disrupting the grid. “Renewables are cheaper” is just plain wrong. Australia’s Chief Scientist Dr Alan Finkel reported the levelised cost of solar in 2020 as A$ 91/MWhr without backup, and A$172/Mwhr with 12 hours backup. New coal A$76/MWhr.
What Daniel is saying is that introducing renewable energies has increased the cost of energy and has created a whole new set of problems. On that basis, it is not modernising but stupidising Australia’s energy supply that has made manufacturing of many products uneconomic and created unemployment for many people who once were proud to have the job they did and, were able to feed and clothe their families.
Where have all the workers gone?
Long time ago…..?
Where is Australia’s car industry now?
When will they ever learn?
The demise of the car industry in Aus was largely due to their own, unionised, stupidity. Should someone be paid AU$110k to build a car in Aus? It’s why cars were 4 times as much to make here as opposed to Asia and 2 times as much as in the EU zone. GM Holden and Ford were making cars, very badly, that no-one wanted to buy. Even though I do try to buy locally made, I would never have bought an Aussie made car.
The reason they want 5 minute increments instead of 30 minutes is because wind and solar cannot provide 30 minutes of reliable power.
Ideally renewables would like to see millisecond settlement intervals.
The Conversation should be renamed Pravda
Dear Mr. Porter,
With full respect please allow me to say “no”. I come from an East-European country, and before 1990 we had to read (as part of the communist indoctrination) in the school Pravda. Your statement should be corrected on the following way: The article from Mr. Daniel J Cass, University of Sydney is like an article from Pravda. The comments to this Pravda-article would have never been published in Pravda, and the authors of the comments would be on the way to work camps in Sibirien. If Mr. Biden and GND will win in November, we (the authors of the comments) all will be sent also to green (communist) correction facilities.
“Where have all the double-glazing salesmen gone?” (Long time gassing)
This is not a question that kept me awake at night.
But I have just revisited this question now that I’ve realised what the answer is.
“They’re selling solar panels and green energy!”
Double-glazing did have benefits. For a start you were replacing typically 30 – 50 year old wooden window frames that had poorly fitting panes of glass. Certainly true the UK IIRC. But Everest wasn’t the best!
From what I heard, Anglian and Everest were the acceptable face of double-glazing.
But there were countless other ‘dodgy’ ones whose salesmen were nothing but skilled con-artists who would turn-up on people’s doorsteps and give them the full patsy treatment. Before they came to their senses, the gang had been through, and their genuine heritage windows had been replaced by nasty plastic jobs that were only held-in by a single undersized screw. Then the extortionate invoice would arrive . . . .
Looking at solar panel sales websites, I found that most of them promised “solutions” without prices, quality assurance or even brands – but they all seemed to expect the prospective buyer to ‘ask for a quote’. This is exactly the same tactic used by fly-by-night double-glazing salesmen.
Can these Mensa candidates name a single place where the addition of renewable energy has actually cut energy costs? (With the exception of remote islands that have to import diesel fuel to run the generator, from this list.)
The renewable energy industry is like the deodorant industry.
Both are peddling solutions to problems most people didn’t realise they had.
To flog the product, they’ve first got to flog the problem.
Which is where alarmist scientists come in handy.