Ensuring electricity market design creates customer value

As the National Electricity Market transitions to a more decentralised system with a mix of renewable energy generation such as wind and solar, there is concern that the existing market design may not evolve fast enough to accommodate the changing needs of the electricity system, market participants and customers.

The current market is based on a centralised system design dominated by large thermal generating units that produce constant, predictable and controllable output. The introduction of large and small-scale renewable generation to the grid and new technologies creates challenges for the market due to the variability of its output. The inclusion of distributed generation at consumer’s sites creates opportunities for commercial and residential demand-side participation in the market.

The Energy Security Board (ESB), who provides whole-of-system oversight for energy security and reliability to drive better outcomes for consumers, has identified key challenges the current market is facing. These include meeting customer needs, managing variability and uncertainty, the need for capital replacement and recognising demand flexibility and integration of distributed energy resources located on the consumer’s side of the meter such as rooftop solar.

You can read more about the ESB and why it is important on What’s Watt online.

Through the post 2025 market reform, the ESB is investigating interconnected and interdependent market design initiatives that must be considered in conjunction with each other to ensure an efficient market design. These initiatives aim to:

  • ensure the right market signals are there to stimulate investment in new generation;
  • determine if further work is needed to support the market as ageing plant retires;
  • value essential system services that are needed to keep the power system stable;
  • investigate options to introduce greater visibility and certainty of energy and system services ahead of real time;
  • investigate opportunities for owners of rooftop solar and smart appliances to unlock and receive value from their flexibility from the market;
  • introduce arrangements that enable new business models and integrate distributed energy resources technologies into the energy system efficiently; and
  • investigate options for a new transmission access and investment framework that encourages new large-scale renewable plants to be built in the right areas to minimise the need for “expensive” transmission network upgrades.

The cost of market reform is ultimately borne by customers, making it critical that the design drives the best outcome for customer value. If the market design is unnecessarily complex or inefficient, customers bear that cost through higher overall bills.

Stanwell’s top priority positions are:

  • all essential system services need to be valued to ensure they continue to be provided;
  • there are easier alternatives to the current reform proposal to encourage efficient location of new renewable generators yet minimise the need for additional transmission network upgrades; and
  • there is no need for any further initiatives to support the market as ageing thermal generators retire.

Here’s why we believe these positions will support customers.

Essential system services

The National Electricity Market works because it was built on a large number of steam turbines driving large, heavy, rotating generators. These machines intrinsically provided the resilience to allow the network to cope with and endure faults, interruptions to load, thunderstorms, and  myriad other issues, because the large, heavy generators have inertia – which means that they have a tendency to keep doing what they are doing, even when a system fault occurs, and customers’ lights stay on.

Currently, essential system services (e.g. system strength and inertia) are a by-product of energy supplied by synchronous, typically coal-fired / steam-turbine generators. These services are fundamental to maintaining power system security and reliability.

The problem is that because these services were a plentiful by-product of steam turbine generators in the market, most essential system services have historically not been valued or attracted any compensation. Without an explicit value and associated compensation mechanism, there is no investment signal to attract new providers of these services as steam turbine generators retire.

Unless new providers of these services enter the market, energy consumers would likely see more outages due to poor frequency and voltage control, leading to the deterioration of the security and reliability of our energy system. This may result in out-of-market interventions to maintain system security, such as AEMO having to direct generators on at times to maintain system stability. AEMO have had to do this in South Australia more frequently over the last two years, imposing an associated large and unbudgeted costs onto consumers.

There needs to be transparent and market-based mechanisms that provide opportunity for participation to all types of technologies, and explicitly value essential system services to ensure the continued provision of these services at the least cost to consumers.

A market mechanism would create market signals to incentivise new providers to offer these essential services.

Resolving the essential system services missing markets would rectify technical challenges in maintaining system stability, ensure a secure and reliable electricity supply, and promote competition in the market to help keep prices as efficient as possible.

Resource adequacy mechanisms

The resource adequacy mechanisms initiative considers options to stimulate investment in the energy market to promote competition in generation and maintain system security and reliability as the system transitions.

Currently, existing resource adequacy mechanisms provide effective investment signals for the energy market, but not for essential system services.

Stanwell is supportive of the resource adequacy mechanisms with the immediate focus being the development of the missing markets for essential system services. We encourage investment signals to occur naturally after that, without out-of-market interventions, to reduce the use of expensive backstops such as the Reliability and Emergency Reserve Trader mechanism.

Transmission access and coordination of generation and transmission

Over the past few years more and more large-scale renewable generation has been built in remote and regional areas that are far away from load centres. This is usually because it is cheaper and easier to purchase the large areas of land required for these solar and wind developments in regional areas. However, the problem is that often there isn’t the necessary transmission line capacity in these regions to carry this additional energy to customers. This means that either existing lines must be upgraded, or new lines built, both of which increase costs to customers.

The ultimate aim of this reform initiative is to develop ways to encourage new renewable generation investment in areas that are closer to the demand (loads) which already have spare transmission network capacity available. This will help minimise the need to build more transmission lines and reduce the loss of electricity (through heat) that occurs when transmitting over very long distances, both of which increase the cost of energy to customers.

Stanwell acknowledges and accepts that new transmission will be required to connect the network of the future. We believe that the two principles below should be front of mind in this space:

  1. The costs of new transmission infrastructure should be minimised and focus on delivering the best value for customers.
  2. The investment risk for generators should not be passed onto customers through market design.

Stanwell is concerned that the latest iteration of this reform proposal lacks a clear purpose, would increase complexity to the market design and not fundamentally solve the problem it purports to address. The current proposal is a drastic market reform initiative that in Stanwell’s view is an unnecessarily costly and complex initiative.

We are concerned that the modelling and analysis completed to support the proposal overstates the benefits and understates the costs, which would ultimately be passed onto consumers.

Stanwell does not support the drastic transformation of the market as currently proposed because we believe there are simpler and much cheaper options available to address transmission access challenges.

We have suggested several no-regrets actions along these lines for the ESB’s consideration, including redevelopment of the tools that the market operator uses to dispatch generators, producing network congestion maps (to help developers choose good sites for new generation investment) , and proactively publishing indicative “do no harm” requirements across the network, all of which can be done for a fraction of the cost of the proposed reforms and keep the investment risk with the generator.

Two-sided market

The current National Electricity Market is essentially a one-sided market in which only the supply side is involved in the price-setting process – most energy users have no active involvement in the market. Creating a two-sided market means the demand side will be able to participate and respond to prices in the wholesale market.

For customers, this means you could choose to curtail your energy use during peak demand periods to potentially lower your energy costs, or supply the electricity you generate to the market.

Under this initiative, Stanwell sees potential value for customers to participate in the National Electricity Market and make energy consumption decisions based on real-time information.

We have also highlighted to the ESB it is essential that adequate consumer protections are in place for all energy users despite their choice of participation (or not) in a two-sided market.

Valuing and integrating distributed energy resources

Rooftop solar, batteries and electric vehicles are growing at a rapid rate in Australia’s energy system.

Collectively known as distributed energy resources, they may help reduce the cost of power system augmentation—the building of new transmission lines and infrastructure to connect new projects and system service providers—and subsequently, the overall cost of electricity.

Valuing these resources provides benefits for the owners of distributed energy resources, all consumers, the network and the overall electricity system.

The ESB seeks to unlock this potential by introducing the market design initiative to integrate distributed energy resources. Stanwell sees the value for our customers in distributed energy resources participating in the wholesale market and support such opportunities provided they are technically feasible and positive net benefit can be expected.

What’s next

The ESB plans to develop a final market design that is fit-for-purpose for the transforming energy market in mid-2021.

Stanwell will continue to work with the ESB and the market bodies as this reform process progresses, and advocate for solutions that address the challenges facing the energy market in the most cost-efficient and effective way possible.

We’re for a market design that will deliver safe, secure and reliable energy supply now and in the future at the least cost to customers.

You can read Stanwell’s full Post 2025 Market Design submission to the ESB online.