The national electricity market is a failed experiment of the nineties. It’s time for the network to return to public hands.

A crisis, as the saying goes, combines danger and opportunity. The dangers of current electrical crisis they are obvious. The opportunity it presents is to put an end to the failed experiment of the national electricity market.

Having suspended the market last week, the Australian Energy Market Operator (AEMO) now tells generators when to supply electricity. It is also paying them generous compensation for the financial shortfalls they suffer as a result.

These emergency measures are unsustainable. But they provide the starting point for a restructured electricity supply industry, one that is better balanced between markets and planning.

Now is the time to create a national network that serves the Australian public and meets the challenges of a warming world. A new government owned and operated body should take control of Australia’s electricity system. And decarbonizing the grid, while ensuring reliable and affordable power, should be your core business.

string of light bulbs in the dark
The decarbonization of the network should be a key objective of the electricity reforms.
David Hunt/AAP

Privatization and bad design.

The National Electricity Market is where generators and energy traders trade electricity. It was established about 25 years ago after technological advances made it possible to connect electricity grids in all states except Western Australia and the Northern Territory.

Before the market began, each state operated its own electrical industry with limited interconnection. Back then, power companies were publicly owned. Most were also fully integrated, with one company responsible for the entire electricity supply chain, from generation to distribution to billing.

The arrival of the national network coincided with the peak of enthusiasm for microeconomic reform. So, instead of a unified national company, the state-owned utilities were divided into separate parts (generation, transmission, distribution, and retail) with the intention of privatizing them and then engaging in market competition.

What drove the trend towards privatization was the widespread view that the state-owned electricity companies had did not perform well – particularly in investment to expand access to electricity.

Reflecting this view, the industry was fully or mainly privatized in Victoria, South Australia and New South Wales. Other states opened the generation and sale of electricity to competition.

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The market was created just as the global need to reduce carbon emissions was recognized. Despite this, the climate problem was not considered in the design of the market, which was based on a mixture of coal and gas plants.

Until AEMO suspended the market last week, offers from generators determined the wholesale price of electricity in five-minute intervals. Retailers supplied electricity to consumers at prices that protected them from fluctuations in wholesale prices.

Prices were typically around 50 Australian dollars per megawatt hour. But in periods of very high electricity demand, the price can reach the market price cap, currently established at $15,100 per megawatt hour.

Meanwhile, electricity distribution (getting power to homes and businesses via poles, cables, and other infrastructure) was handed over to a set of regulated monopolies, granted high rates of return on low-risk assets.

steam emitted by a coal-fired power plant
The climatic problem was not considered in the design of the market.
Dan Himbrechts/AAP

what went wrong

The designers of the national electricity market hoped that it would lead to better efficiency and more rational investment decisions. The market was also aimed at lowering consumers’ energy bills and promoting competitive retail offers tailored to individual needs. But none of this happened.

In fact, consumer electricity prices, after falling for the better part of a century in real terms under public ownership, went up dramatically.

This was due in part to the high returns of private electricity distribution companies and the need for investment in infrastructure to improve reliability. A proliferation of highly paid vendors, managers, and financiers was also required to run the market.

Over time, the flaws in the original design led to an alphabet soup of the agencies needed to run the industry. They include AEMO, AEMC, AER, ARENA, and a host of state-level regulators. Finally, the Turnbull government created the misnamed Energy Safety Board (ESB), which sat at the head of the entire process.

All of this delayed the transition from an old and unreliable coal-based system to its necessary replacement with a combination of solar, wind and storage.

Now this ramshackle system has failed to cope with a major supply crisis. The temptation is to apply another patch and restore “normal” market conditions. the The ESB Proposal paying coal and gas generators to standby if necessary is one of those quick fixes. But a much more comprehensive reform is needed.

Read more:
Why including coal in a new ‘capacity mechanism’ will worsen Australia’s energy crisis

composite image of electrical infrastructure and numbers
The national electricity market has not achieved its main objectives.

Where to from here?

A combination of public and private investment is now needed to ensure affordable electricity and the transition to renewable power generation.

The plethora of agencies that regulate the market should be replaced by a single government agency that buys electricity wholesale from generators. This organization could then sell electricity directly to customers or supply it to electricity retailers.

The emergency purchase agreements that AEMO currently has should be replaced by “power purchase agreements”. They are long-term contracts between a buyer and a generator for the purchase of energy, in which prices, availability and reliability are set.

Within those terms, generators that consistently produce electricity at rock-bottom prices are the first to be called. This dispatch method, known as merit order, has been shown in Germany to lead to lower prices for consumers.

At the same time, the Australian power grid must return to government ownership and operation. And its guiding principle should be to move to a decarbonized energy system, instead of the “net market profit” test that AEMO currently uses when deciding where to approve the investment.

Labour’s Rewireing the Nation policy provides a starting point for reform. It should invest directly in the expanded transmission grid needed to support the transition to renewable energy.

Australian energy policy took a wrong turn in the 1990s. It’s time to get back on track.

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