Existing market design and its challenges

Why we need the post 2025 project

The National Electricity Market (NEM) has been in place since 1998. It brought together electricity industries in Queensland, New South Wales, the Australian Capital Territory, Victoria, South Australia, and Tasmania to drive greater efficiencies and a better utilisation of resources. It has served the nation well. But much has changed in the way we generate, consume and share energy that has implications for the way our energy services are supplied.

Addressing these implications is the core of the post 2025 project.

Penetration of variable renewable energy resources is increasing

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Source: ESB June 2020

Operating the transforming power system

Australia’s energy system is unlike any other around the world. Geographically, we’re an island continent with the world’s longest interconnected system, the national electricity market (NEM), which spans over 5,000km across our east coast.

This energy system delivers energy to Australia’s low-density population of around 25 million. The combination of large distances and low population means the challenges we face around system frequency, voltage control levels, and inertia, are highly unique compared with the global energy sector.

Much of Australia’s energy infrastructure was built from the 1950s and onwards, meaning our traditional generation resources are rapidly approaching the end of their 50-year technical and economic life.

More recently, declining costs, technology advancements, government policies and incentives, along with shareholder and consumer preferences are driving record investment in wind and solar generation, contributing to record-low wholesale energy prices.

AEMO’s 2020 Integrated System Plan (ISP) forecasts 63% of today’s coal-fired power stations will retire by 2040. The generators will be replaced by more than 30 gigawatts (GW) of wind and solar projects, 6 to 19 GW of firming generation, such as battery storage, pumped hydro and gas, along with rooftop solar PV to provide up to 22% of total energy capacity.

Historically speaking, in the 1990s it would take over 6 years to build a 200-megawatt power plant within our power system. If we fast forward to today, it now only takes 9 months to build a 200-megawatt solar plant, complete with approvals.

The pace and change in generation mix is already having significant implications for the future operation of synchronous generation units, which provide the bulk of essential power system security services. This is posing emerging operating challenges in some markets to deliver a secure, reliable and low-cost outcome for consumers.

Australia leads the world on a per capita basis in rooftop solar photovoltaic (PV) penetration at greater than 20%, with more than 2.5 million systems and 15 solar panels installed every minute on average. Penetration rates are already as high as 50% in some parts of the distribution networks in South Australia and Queensland.

Despite the growing number of connections and increased reliance on electricity, growth in electricity consumption has been in decline. Energy efficient buildings and appliances, along with the continued growth in the uptake of solar PV systems, are together contributing to record low electricity consumption and demand required from the grid.

While this can result in lower consumer costs, reverse power flows from distributed energy devices – without visibility to identify and manage – can also result in difficulties in voltage variability, which can in turn degrade power quality and adversely impact machines and home appliances.

Observed minimum operational demand in the NEM is now approaching at-risk thresholds for maintaining voltage, system strength, and inertia within secure limits. With continued rooftop solar PV installations pushing out the need for grid-scale supply (both synchronous and non-synchronous), minimum operational demand is creating real-time power system operating and planning issues.

In addition, a large proportion of rooftop PV inverters predominantly early adopters of the technology don’t have the capability to ‘ride-through’ electricity disturbances, further adding the risk during minimum demand periods of solar exports switching to demand spikes on the grid.

AEMO’s 2020 Electricity Statement of Opportunities confirms that most NEM regions now experience minimum operational demand in the daytime (SA 2016, QLD 2017, VIC 2018), with all regions expected to by 2024-25. In South Australia, minimum demand is forecast to reach close to zero by 2022-23, a world-first for a jurisdiction of its size.

As part of AEMO planning responsibility in the NEM, AEMO has recommended investment in new transmission infrastructure in the 2020 ISP to enhance the sharing of excess renewable energy and network services between states. This would help manage the emerging risk of minimum operational demand.

The decentralisation of large-scale and residential renewable generation is completely changing our approach to managing the complex and integrated characteristics of the power system to deliver a secure, low-cost outcome for consumers.

The Energy Security Board’s recommended four areas of reform address the critical needs of the energy sector: making sure we have the right mix of resources to keep the lights on; ensuring those services essential to maintain the system’s secure operation are available when needed; improving access to the grid; and providing for the integration of distributed energy (or behind the meter) resources into the overall market.

Australia’s unique combination of geography, population and influx of new generation resources means that some of the challenges our energy system is facing are years ahead of our global counterparts. The transition presents technical challenges, but also opportunities for innovation to benefit consumers with the right infrastructure, regulations and markets.

What’s changed

1998 2021 IMPLICATIONS
Families and businesses were considered as just ‘consumers’ of electricity. Except for large industrial loads, customer relationships with energy retailers or local network businesses was limited. Consumers concerned about affordability, responding to new tech opportunities to take control of energy consumption and bills, driving rapid uptake of distributed energy resources like rooftop solar, smart appliances, and metering.
  • Value for money is paramount in any change.
  • Focus on integrating customer-owned resources into the energy system in ways that are fair for all.
  • Accommodate different customer needs and wants.
  • Need a better mix of cost reflective price signals, enhanced communications and complementary regulatory measures to help incentivize investments and support system needs.
  • Future-proof regulatory design to allow for new models such as virtual power plants through a two-sided market while relevant consumer protections remain in place.
Relatively few, predominantly large thermal generating units Increasing decentralisation of generators with more energy produced by variable renewable or small scale resources which have potential to drive down both emissions and generation costs.
  • Need to enable development and integration of new system services to manage the impacts of thermal generation exit and increased uncertainty and complexity associated with weather-driven generation.
  • Ensure dispatch mechanisms can be optimised for delivery of energy and system services.
  • Create sharper price signals for providing all services needed for reliable, secure supply to provide forward price signals for investment
  • Put in place any backstops needed to support reliability and security if the market does not deliver within operating standards.
  • Create price signals so new generators locate in places that better use existing and future transmission, helping reduce grid congestion.
A mostly established transmission network. New transmission needed to connect the new generation as the mix changes along with fast response storage and other technologies to come.
  • create price signals so new generators and batteries locate in places that better use existing and future transmission, helping reduce grid congestion and support timely and efficient capital investment.
  • Providing market participants tools to manage the risk of congestion.
Established distribution networks that were one directional with very few behind the meter, distributed energy resources in homes or businesses. Rapid uptake of distributed energy resources and other behind-the-meter services by consumers of all types.
  • Increased collaboration is required at the interfaces of local and wholesale systems, to ensure the system operator can balance resources at the wholesale level, and distribution networks can coordinate and optimise the use of local resources and flexibility on their networks.

What happens next

The post 2025 market design project is a pathway to a fit-for-purpose market design for the NEM and, rather than having an entirely new design introduced at a single point in time, we are planning for the transition to happen through timed phases. 

Final recommendations on all reforms will be made by mid-2021 and required legislation and rules then developed and introduced over time.