We saw something unprecedented last week.
The Australian Energy Market Operator suspended the spot market in the National Energy Market for the first time in our country’s history.
We heard politicians talking about “load shedding”, “blackout warnings”, and “regulatory intervention” as winter was biting hard in some states.
It exposed serious shortcomings and fragilities in the system.
What’s going on? Where is it all heading?
The National Electricity Market
Firstly, let’s see what we’re talking about.
The National Electricity Market (NEM) is the electricity market on Australia’s eastern and south-eastern states.
It comprises five, physically connected regions:
- New South Wales (which includes the ACT)
- South Australia
Western Australia and the Northern Territory are not connected to the market because they have their own.
How does the system work?
Let’s say you turn an electrical appliance on. Power is instantly delivered from a power station to that appliance.
It feels like it happens easily and seamlessly.
However, behind the scenes, a really complicated sequence of events has to take place in order for that power to be delivered to you.
See the graphic below.
The entities that generate electricity for the system use a range of energy sources and that “generation mix” is transforming rapidly.
According to the Australian Energy Market Operator (AEMO), if the current rate of development continues, the system may have enough renewable resources to meet 100 per cent of underlying consumer demand, in certain periods, by 2025.
It published the below graphic in December (as a snapshot in time).
The NEM is connected by 40,000 kilometres of transmission lines and cables.
And it became a single “market” in 1998.
That’s when the entire system was turned into one giant pool of wholesale energy supply.
Since then, the way power is generated and shared around the system has been subject to certain rules.
The rules remind market participants — such as energy producers and retailers — of their rights and responsibilities, and there are regulations protecting consumers from being charged too much for electricity.
And this is where things get interesting.
AEMO sits at the centre of the system
Think of the NEM as one big commodity exchange.
It’s like a single marketplace for energy producers, retailers and consumers.
Everyone knows that if you want to buy or sell electricity you go to this market to get what you want, hopefully for a good price.
But the dynamics of the market are complicated by the fact that electricity is a unique commodity.
Why’s it unique? Because massive amounts of electricity can’t be stored easily — given the current state of battery technology — so most of it has to be made for immediate consumption.
That’s what this marketplace facilitates.
It matches power supply and demand in real-time, instantaneously, by a centrally-coordinated dispatch process.
As AEMO describes it, power generators are constantly making offers to supply the market — called the “spot market” — with a certain amount of electricity for a certain price, at different periods throughout the day.
AEMO watches the bids being offered, and it decides which generators will be deployed to produce electricity at each moment, with the cheapest generator put into operation first.
The system has been designed that way to encourage generators to produce energy as cheaply as possible, and to drive efficiency gains over time.
How prices fluctuate
Now, those “spot prices” naturally fluctuate throughout the day. But they’re only supposed to fluctuate within a specific range.
That price range has been pre-determined by experts after reviewing the state of technology and the cost of inputs, and it’s periodically updated to account for inflation and other things.
However, if prices suddenly surge above the maximum allowable price in that range, AEMO can cap prices at $300 per megawatt hour to return order to the system and keep prices anchored.
That’s what happened last week.
Wholesale prices surged higher and broke through a specific price threshold — due to a combination of international and local factors, which we’ll come back to — so AEMO introduced a price cap.
And that’s when all hell broke loose.
When the price cap was introduced at the beginning of the week, some fossil fuel generators withdrew a huge amount of capacity from the market on the basis that their operations would be unprofitable under that price cap.
It’s not that those generators didn’t have the resources to supply the system. They didn’t want to supply the system at such low prices.
And that contributed to large forecast energy shortfalls in the system, which added to the sense of chaos as dire warnings were issued about possible blackouts and politicians were asking voters to switch off appliances, with fears the system would need to shed some “load” (i.e., demand).
It saw AEMO asking operators to supply electricity to the grid to avoid catastrophic blackouts.
However, AEMO eventually took the unprecedented step of suspending the spot market for wholesale electricity entirely on Wednesday.
That meant generators would be ordered to supply power to the system at a set price, regardless of the impact on their profits.
Was the system being gamed?
It was a controversial sequence of events.
According to the rules, when a price cap is introduced to the market, power generators can be compensated for the losses they’ll incur from supplying power to the system at the unprofitable, low, capped price.
However, there’s another way they can be compensated.
If AEMO has to order generators to supply power to the system — during an emergency, say — then better compensation arrangements will be available.
So, were power generators deliberately gaming the system last week to lock-in better compensation, by forcing AEMO to order them to supply power?
The Australian Energy Regulator (AER) suspected so.
On Tuesday, AER chair Clare Savage sent a letter to power generators noting how some of them had withdrawn capacity from the market when the price cap was introduced.
Ms Savage said she suspected their behaviour “may be motivated” by “seeking to avoid” the compensation scheme offered under the price cap “in favour of” the compensation they’d get if AEMO ordered them to supply power to the system.
She also said that behaviour would be against the rules and warned that AER would be reviewing how everyone behaved.
Is the system broken?
The episode has raised serious questions about the design of the NEM.
Industry experts have been warning for years about the system, both about its market design and the lack of investment it has received to shift the system to renewable energy in an orderly way.
Last week, South Australia’s Energy Minister, Tom Koutsantonis, told ABC radio that profit-maximising generators were “acting rationally” under the rules, which just exposes the system’s shortcomings.
“The Australian Energy Market Operator is compelling participants in a market to trade, ’cause they’re refusing to, and the commodity they’re refusing to trade is an essential utility in electricity,” he said.
“Anyone in Australia listening to this would think we’ve all gone mad.
“This is not like a hot summer, where everything is on and it’s just getting hotter and hotter and demand increases and then something breaks which means we have a blackout.
“This is: ‘We are not participating because you’ve capped our prices, so we’re pulling out.’
“Every player is acting rationally under the rules but, when you look at the rules collectively, it’s a fiasco,” he said.
South Australian Premier Peter Malinauskas also slammed the state of affairs.
He said Australians had suffered repeated failures from policies “that seem to be obsessed with market ideology rather than outcomes for users”.
Mr Malinauskas said the system was broken, and South Australia would be pursuing state-owned power generation via what he said would be the world’s largest hydrogen electrolyser.
“The simple fact is that we’re in a First-World country that is energy rich, and the fact that we’ve now got Australians being told that they should turn off porch lights to keep the system going, I think is somewhat of an embarrassment,” he told RN Breakfast.
What’s the state of energy prices and markets?
The suspension of the spot market is unprecedented, and it has created confusion in supply chains.
However it has occurred in a very uncertain energy environment, too.
As my colleague, Daniel Mercer, wrote last week, across the east coast — but particularly in Queensland and NSW — a shortage of power supply has run headlong into spikes in demand this winter as people increased their energy use during a cold snap.
That shortage of supply has multiple causes.
Along the eastern seaboard, a number of coal-fired power stations are currently offline. They include generating units at AGL’s Bayswater and Liddell coal plants in NSW and Loy Yang A asset in Victoria, and the Queensland government’s Callide C power plant.
Australia’s largest coal-fired power plant, the 2,880-megawatt Eraring plant in NSW owned by Origin Energy, has been struggling with a shortage of coal supplies.
Some of those outages were expected — power plants are periodically taken offline for maintenance — but others weren’t.
Then look at international markets.
Russia’s invasion of Ukraine and the fallout in global energy markets has put a rocket under world coal and gas prices.
And the tragedy of gas prices on Australia’s east coast, which have been deliberately linked to global prices — with no reservation policy for Australian households — has been well-documented.
Energy experts say that, in this volatile environment, some questionable behaviour from generators may warrant investigation.
Where are we headed?
On Thursday night, New South Wales Energy Minister Matt Kean was given emergency powers to force coal companies to provide coal to NSW electricity generators to ensure some capacity remained online.
However, it was only a temporary solution.
In the longer-term, the AEMO says, “significant investment” in renewable generation will be needed as coal-fired power stations ar retired from service.
And here’s where things could be heading.
AEMO says the NEM will have to be expanded to incorporate new “Renewable Energy Zones” and “Offshore Wind Zones”.
It has identified where many of those zones are located.
An it says those zones are high-quality resource areas where clusters of large-scale renewable energy projects could be developed using economies of scale. (See its map below.)
It shows the areas in Australia that could house large-scale renewable projects to feed energy into the market.
Researchers from the Australia Institute say it’s important to realise that the technological shift away from coal to renewable energy for electricity generation is also a spatial shift.
That means electricity generators will be built in parts of rural Australia that have not hosted energy utilities at this scale before.
It says those communities will host billions of dollars worth of new electricity infrastructure as a result.
This month, the researchers released a report that discusses the issues involved.
It would be one step towards fixing a broken system.
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