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Designing the energy market of the future

Jay Dean
11 June 2021
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Australia’s energy landscape is changing, with renewable energy on the rise. Ten years ago, 100,000 Australian homes had rooftop solar; now over two million do. The National Energy Market (NEM) is projected to cut 60% of the current thermal generation resources (fossil fuels) over the next 20 years. All this change means the current energy framework, with its tools, market arrangements and regulatory system needs to evolve.

Australia’s Energy Security Board (ESB) has recently been looking into how Australia maintains a reliable, efficient and affordable source of energy through this period of change. Here are a few of the key points from their recent report, Post 2025 Market Design Consultation Paper – September 2020.

Resource adequacy mechanisms and ageing thermal generation strategy.

Our energy supply resources are shifting. Over the next 20 years, up to 50 GW of new, large-scale variable renewable energy will join the NEM (think solar and wind power). This is on top of existing and already committed projects. 16 GW of thermal energy generation will be decommissioned, and the transition will be supported by up to 19 GW of new flexible and dispatchable energy.

Reliable energy supplies must be achieved through both timely entries and exits to the energy market of various power sources. Timely entries (such as a new wind farm connecting to the grid) mean that new resources are contributing to the system as they are needed and that overall costs are minimised (ie, there’s no investment until it’s actually needed). Orderly exits, mainly of thermal energy resources, will ensure reliability and security, that price jumps are kept to a minimum and that those working in thermal energy are given sufficient notice.

The Board made several solutions put forward to maintain adequate resources. This included robust, real-time incentives to encourage timely entries, and strengthening retailers’ reliability obligations. According to the report, other options being considered include “changes to notice of closure requirements, regulated or negotiated arrangements with thermal plants, and contingent scenario planning”.

The ESB consulted with a number of industry stakeholders. Overall sentiment was that there was too much uncertainty around Government policy and that there’s a need to bring into line the needs of the National Energy Market with policies and programs that incentivise investment. The Clean Energy Council, Tesla, Flow Power and Infigen Energy believed encouraging new and increased entry, rather than prolonging the operation of existing capacity was the way forward.

Essential system services and scheduling and ahead mechanisms.

The Energy Security Board has been investigating several mechanisms to maintain a stable national energy supply through these big changes. The first of these was the development of a fast frequency response service (a mechanism that can quickly increase or a decrease power supply in two seconds, to fix a supply-demand imbalance). This consideration was generally met with support from stakeholders. Several groups (including Energy Queensland, the Clean Energy Council and Alinta) thought that this would increase incentives for investment and development of battery storage. As a whole, stakeholders wanted ‘co-optimisation with inertia’ as the long-term goal. (Explaining inertia is probably a whole article in its own right, but this link does a pretty good job.) A few stakeholders were worried that a spot market for fast frequency response would be overly complex, meaning a contracting approach could be the best short-term solve.

The second solution was further developing an operating reserve (an operating reserve is the generating capacity available in a short period if there’s a cut to the supply). Given generally positive stakeholder feedback, from groups such as Origin Energy, Tilt Renewables and AEC, the ESB will continue investigating this solution.

Improving how the NEM deals with small generators.

The NEM manages energy supplied by both large wholesalers and smaller units, such as residential rooftop solar systems. Small units contribute significantly to the NEM, but the NEM doesn’t manage them in the same way as larger wholesale generators (to the detriment of the smaller suppliers). A key finding of the ESB’s report was that as the amount of smaller renewable energy suppliers increases, it becomes more important that the NEM improves how it deals with them.

To continue unlocking the potential of the demand side, the ESB made several recommendations:

• The cost of energy should be kept at a minimum for both residential customers and businesses, while still ensuring that demand can be met efficiently.
• The current rules should be changed to make it easier for consumers to be rewarded for shifting their demand or their load ‘shape’. This would make it both more cost effective for the supplier and help the system overall by reducing the strain at peak times.
• Finally, it’s important to look at new ways to make access to solar hardware more widespread in the general population.

Strengthening relationships between end users and aggregators.

The ESB’s report also discussed implementing a ‘trader-services model’ (covering arrangements between end users and the aggregators that supply them power). There were several principles put forward to service the interests of both parties and the National Energy Market. One of these was that any agreements between end users and aggregators would be subject to consumer protections and regulations.

So how does all of this affect the average person?

Well, going forward, there will clearly be an element of volatility over our energy supplies. This leads to the question: how can you mitigate your position (particularly if you run a business)? At Energy Partners, we think the answer is solar. It builds your energy independence, minimising your risk. More than that, if you supply energy to the grid, you become part of the solution. The accumulative resources of the solar energy industry, from manufacturers, installers, large scale providers and residential homeowners, are playing a massive role in moving to more sustainable energy resources.

Also, with all this change going on, the ESB is clearly looking at ways to increase the use of renewables. As we move to a system that is supplied by millions of small energy generators, the Board is looking at ways to make it more rewarding, more affordable and easier for solar generators, and how to give end users more control.

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