Get a Reliable, Renewable Electricity Market with 2 Reforms

Home Blog energy policy Get a Reliable, Renewable Electricity Market with 2 Reforms

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Renewable electricity depends of sunshine or wind, so it’s not reliable, right? So an electricity supply with increasing renewable electricity, would be increasingly unreliable, right?
Fortunately, this proposition is dead wrong!

There are two changes needed to make the National Energy Market ready for an effective transition. The first is a simple tweak of the wholesale market rules, the second is to better manage distributed energy resources.

Reliability in the National Electricity Market

Reliability is the first consideration in the design of electricity markets. The National Electricity Market like others is based on delivering a reliable system. The architecture of reliability is briefly set out below.

Customers pay a fixed retail price guaranteed by retailers. Retailers contract with generators to guarantee a fixed wholesale supply price. Generators suffer crippling penalties for even small periods of non-performance when supply is scarce.

Retailers also suffer crippling penalties if they have insufficient contracts. The fear of these penalties drive retailers to contract. In turn contracts drive generators to build extra generation (called a reserve margin) which typically around 15+% additional generation to provide good levels of reliability.

The penalties can rise to nearly $16/kWh compared with a more typical wholesale price of 10c/kWh. This compares with the retail price that you pay of around 20-25c/kWh. If you are paying more than that, visit Energy Umpire and compare.

If extreme prices of up to $16/kWh persist for a week and exceed a pre-set threshold, then prices are capped at 30c/kWh. This measure was introduced in around 1994 in the Victorian market before the National market commenced. It was designed to protect coal fired generators from bankruptcy in event of an extended plant failure. Even then this measure was dubious as it diluted the incentives for reliability and unduly favoured coal generation, now it is a serious defect.

A new capacity mechanism?

The Energy Security Board have made a number of recommendations and propose creating a new capacity mechanism as a payment for standing by ready to generate. This change could be very complex as the market was specifically designed to avoid the need for such a payment. Instead I suggest that a very simple change would achieve the objective of reliability in a primarily renewable system.

Change #1 Phase out the Cumulative Price Threshold

The price capping mechanism should be phased out as it weakens the capacity mechanism in a way that is no longer relevant to a renewable system. Capping prices after a period of extreme prices is counter productive as it

  • limits the incentive for the installation and cycling of battery storage,
  • weakens the incentive for generation to standby for wind or solar droughts,
  • distorts the allocation of scarce water in hydro storages,
  • passes through unpredictable compensation costs to electricity retailers that cannot be hedged, and
  • limits the incentive for demand management by customers.

Could removing the price cap increase prices? Essentially it would not because supply and demand would respond to this change in incentives.

Renewable Energy vs. Reliability?

Renewable Energy can be run at zero marginal cost and runs first, leaving a balance of electricity demand that is increasingly peaky. To meet this demand requires less baseload generation (i.e. coal or nuclear) and more peaking capability as the need for baseload shrinks.

Peaking capability has traditionally been supplied by gas turbines with diesel backup for use when contracted gas is insufficient, and of course by hydro electricity. Now batteries and increasingly electric vehicles can provide this service. Turning off discretionary demand (e.g. hot water, pool pumps, storage heating or cooling) can also play a role.

Change #2 Harness the power of customers

The National Electricity Market is essentially one sided; supply is managed to meet a largely exogenous demand. The market is highly sophisticated in managing the efficient supply of generation investment and dispatch. By contrast, the demand side is almost completely unmanaged. The management of these so called ‘Distributed Energy Resources’ is critical to getting value from renewable energy.

Harnessing the response of customers is more important than ever before to soak up surplus renewable electricity when it’s abundant and to provide supply and limit demand when renewable electricity is scarce.

Control technologies are available to optimise the response at the customer level. Control of distributed energy resources like rooftop solar, batteries and electric vehicles can play a major role in the wholesale market but also in relieving local congestion. Applications like electric hot water, electric storage space heating and ice storage cooling in commercial buildings could play a major role in soaking up otherwise surplus renewable electricity. For example more rooftop solar could be installed if the surplus solar energy at the midday peak could be soaked up with say electric hot water or a battery, and if a battery it could be discharged for the evening peak.

Barriers to customer participation

It sounds easy and it can be, but there are barriers:

  • Around 75% of customers are on single rate tariffs, and outside Victoria, around 75% do not have smart meters. Customers paying a single price have no incentive to manage the timing of supply or demand.
  • Distribution companies have tariffs on their books that provide a better price signal to manage use and lots of novel trials that would work even better, but they have no mechanism to implement these price structures.
  • Retailers have no incentive to switch customers to more complex tariff structures and customers are suspicious.
  • Because retailers can’t be sure of keeping customers, they have been reluctant to invest in control of the customers’ assets.

Customers have no way of comparing different tariff structures and have little interest in it. It needs to be translated into terms that the customer understands.

This is the more difficult reform, not because it is technically difficult, but because there is no party that thinks that it is their job to give effect to it. Time is short. The Federal Government are planning for the NEM to be 82% renewable by 2030.

The transition will be vastly more expensive for customers if the the supply side has to do all the work as it has done in the past. It’s time break down these barriers and mobilise the customer and the time is NOW.