Government interventions and the evolving political economy of the National Electricity Market



Dylan McConnell

12 Dec 2018

https://dylanjmcconnell.github.io/neg/

## Outline * The last 2 years ... * Political interventions * Reviews and Inquiries * Finkel and the ESB * ACCC recommendations * More political interventions! * AEMO interventions? * Future of the NEM * Will the energy-only market survive?

The National Electricity Market

a socio-technical system

"In Australia, the National Electricity Market is a ‘synthetic market’. It did not arise naturally, but was deliberately created by Australian governments using the tools of microeconomics. Every time you turn on a light switch, you are participating in a market designed and run by microeconomists."
-Stephen King, August 2010
### Political interventions: Act I * State renewable energy targets * ACT Reverse Auction Scheme * Victorian Renewable Energy Target (VRET) * Queensland Renewable Energy Target (QRET)
### Political interventions: Act II * South Australian Power Plan * Hornsdale Power Reserve * 'Temporary' State-owned generators * Emergency Powers to the State Minister
### Political interventions: Act III * "Nation building" * Tasmania as "Battery of the Nation" * "Snowy 2.0" * Commonwealth acquires Snowy 1.0 * Commonwealth now the 4th largest gentailer!

The NEG

"In general, the NEG is a stupendously complicated idea that isn't really designed to achieve anything - other than political agreement"
-Alan Kohler, August 2018
### ACCC: "Recomendation 4" The Australian Government should operate a program under which it will enter into low fixed-price (for example, $45–50/MWh) energy offtake agreements for the later years (say 6–15) of appropriate new generation projects which meet certain criteria

ACCC "Recomendation 4"

  • Have at least three customers who have committed to acquire energy from the project for at least the first five years of operation
  • Not involve any existing retail or wholesale market participant with a significant market share.
  • Be capable of providing a firm product so that it can meet the needs of C&I customers.

Retail hedge book

Political interventions: Act IV?

  • "Baseload underwriting"
  • Scope for further political interference ...
### Political interventions: Act IV? * "Default market offer" for electricity prices? * Federally: constitutionally challenging * (State: Victoria Default Offer) * Return to regulated energy pricing moves a step closer
### Political interventions: Act IV? * ALP Policy: * $10 billion top up to the CEFC * $5 billion for 'grid modernisation' * Grants for residential storage
### Re-Centralisation & Re-Regulation? #### Return of the State * State action dominating decision making and resource allocation * Much more 'command and control' than 'market led' * ACCC recommendation were more market led * Next chapter will be interesting

AEMO and Reliability

Expected Unserved Energy

See here for more: Amid blackout scare stories, remember that a grid without power cuts is impossible… and expensive

Probability of Unserved Energy

See here for more: Amid blackout scare stories, remember that a grid without power cuts is impossible… and expensive

## AEMO and the RERT * Reliability and Emergency Reserve Trader (RERT) * $52 million in total * Mostly paid for by Victorians * One event was $24 million for 390 MWh (...$62,000/MWh)
## AEMO and the RERT * Reliability and Emergency Reserve Trader (RERT) * Market wasn't at VoLL * Why wasn't the market at VoLL?? * ... Was it actually needed?
### Death of the NEG #### Components of the NEG limp on * Retailer Reliability Obligation?: * "the ESB will consult on two additional options: the inclusion of an additional trigger at T-5, and the removal of the T-3 trigger" * "proposed ability for a jurisdiction to trigger the reliability obligation as a transitional arrangement" (!!!) * Might (?) still go ahead

What does this mean for the NEM?

What does it mean for energy-only markets?

  • The market has (perhaps) been usurped:
    • Has it ever really worked to incentivise new capacity?
  • Perhaps political and institutional interventions have not allowed it to work
    • The political cost might be too high to do so

New capacity over last 20 years

Nelson, T. Redesigning a 20th century regulatory framework to deliver 21st century energy technology. Journal of Bioeconomics (2016). doi:10.1007/s10818-016-9216-9

### What does this mean for the NEM? #### What does it mean for energy-only markets? * This is not to say energy-only are "good" or "bad": * But questions need to be asked about if it is working * And if it _can_ work * And if not, to be consciously aware of this!

OpenNEM