We've fixed the electricity market before – let's do it again

The goal is immense: expand the grid, connect new renewable energy producers in an economically viable way while respecting indigenous and landowner rights, local communities, and the environment.

It's certainly complex, but not intractable. Innovative regulation has broken a deadlock in Australia’s energy landscape before, ushering in a tranche of new market participants. It can be done again.

The National Competition Policy Review, published in 1993 and known as The Hilmer Review, focused national attention on otherwise obscure issues like regulatory barriers to market entry.

Sparking an economic reform zeitgeist, the Review paved the way for state and federal governments and industry to agree to a National Electricity Market (NEM), designed to open competition and integrate new players and investment.

The NEM significantly enhanced efficiency and created a more robust power system, which consumers have benefited from for three decades.

Over the last 12 months, many have lost sight of these benefits due to the rapid increase in power prices. Indeed, the NEM hasn’t always been smooth sailing.

Now, the model must evolve. Dozens of public and private companies compete for grid capacity, all hungry to dispatch renewable energy. This demand will only increase as the transition gathers pace. Technology is changing rapidly and being deployed in places and ways that the designers of the 1950s grid never imagined.

The energy mix originally considered by the NEM was largely limited to coal-fired generation sources with gas being deployed when price or demand spikes occurred. This duo fit nicely into a simple dispatch algorithm to balance supply, demand and pricing each trading interval in the market every day.

Increasingly, the grid must contend with a broader mix of energy sources with more volatile characteristics, from wind and solar to hydro and hydrogen.

These renewables aren’t geographically concentrated in hubs like their fossil fuel predecessors. The market economics of such a multiplicity of sources, capacity and costs aren’t going to slot smoothly into a single neat equation.

We also need to take advantage of transmission technology such as inverters, inertia and high-capacity storage batteries allowing more efficient and less polluting power production. The grid can only accommodate this new reality if expanded and enhanced.

The game has started, and it is now difficult to change the rules with so many embedded vested interests. If serious about the transition, we must try some immediate regulatory workarounds.

Rethinking Renewable Energy Project Queues

First, let’s rethink how we queue renewable energy projects waiting to connect to the grid. The United States has eliminated its bottlenecked queue, prioritising transmission links for the most viable projects.

In each US region, renewables providers with proven technical and financial capabilities are assessed on their ability to unlock constraints. The velvet rope is unhooked for those with the greatest potential—giving them express entry to connect.

A User-Pays System

Another potential solution, already embryonically built into the NEM, is a toll road-style mechanism enabling energy producers to pay to use the network. This arrangement is currently only permitted between two regions rather than more openly across the country. Basslink can transport hydropower from Tasmania, for example, to give the mainland a top-up. Then it’s switched off again.

Extending this user-pays system beyond the interconnectors would permit companies to build transmission with a less onerous approval process and shift value risk and initial cost allocation for use of the grid to generators who export power.

These are just two examples of catalysts that could help unlock transmission, encourage more renewable energy innovators into the market and deliver faster results.

The conditions for regulatory innovation are ripe. We have political alignment among the state and territory energy ministers and urgency from the federal government to reach its 2030 goal of 82 per cent renewables in the NEM.

Technological advances and infrastructure funding, both public and private, are primed. Not since the reform-spirited 90s has there been more appetite for change.

It’s time again to take the advice offered by Professor Fred Hilmer AO and his committee in their letter to the Australian heads of government in 1993:

“We have taken a bolder stance because of the urgency of the reform task and the belief that precedents should be considered as steps forward, rather than as desirable models in and of themselves, the letter said.

“No transition without transmission” has become a cliche. Our past regulatory success demonstrates that it need not be an obstacle too.

This article was originally published in the Australia Financial Review on 1 September, 2023.