How could electricity market reforms affect your business?

Renewable energy, distributed energy, new technologies, and more engaged consumers are rapidly changing Australia’s energy network, making it more diverse and complex.

In a bid to maintain network security and reliability, as we transition to this more complex energy future, the federal Energy Security Board (ESB) has proposed reforms of the National Electricity Market (NEM).

In its Post 2025 Market Design Options paper, the ESB sets out potential reforms in four specific areas as detailed below. Timeframes for these reforms vary from immediate implementation to long-term goals.

This article aims to help you better understand the proposed reforms and potential implications for your business. For further details on the proposed reforms, visit the ESB’s website.

Being prepared for old coal retirement

Economics and government and consumer appetite are changing Australia’s energy mix. Renewables are becoming more desirable, due to the focus on decarbonisation of the energy system, and increasingly more affordable. This is changing the business case for thermal generation, like coal-fired power stations.

The ESB is focused on ensuring sufficient dispatchable resources and storage capacity are in place prior to planned power station closures, and successfully managing the exit of aging thermal generation, and avoiding price and reliability shocks to consumers.

The ESB has proposed a range of options to manage this transition, from a potential NEM-wide approach to jurisdictional investment schemes for new investment in the NEM to orderly exit management contracts to keep retiring generators running if there are unacceptable risks to the market resulting from their closure (e.g. risks to reliability, high wholesale prices).

What could this mean for my business?

A key takeaway for business customers is that this reform aims to avoid the price and reliability shock that could arise from the unexpected or early closure of thermal generation.

Backing up Australia’s electricity network security

With Australia’s changing energy mix, there is a growing system security challenge to be addressed as renewables don’t automatically provide the stability services – frequency control, inertia, system strength, and operating reserves – that the system needs. These are fundamental to the reliability of the network.

To maintain the essential system services, the ESB is considering a range of mechanisms, including a new fast frequency response market in which businesses may be able to participate.

What could this mean for my business?

The introduction of a very fast frequency response market has the potential to allow businesses to use solar PV systems, battery storage, or demand response to provide these services.

Unlocking benefits of new technology for consumers

Australia leads the world in the uptake of rooftop solar and, collectively, this renewable energy generation is the largest generator in the National Electricity Market.

However, this achievement is not without its challenges as the electricity network was originally established for a one-way flow of electricity, not the two-way flow that exists today. Through this reform, the ESB is focused on integrating distributed energy resources (DER) into the electricity network (the scheduling of more demand and supply (like solar) in the market) and addressing the technical problems associated with the changing energy system.

As currently planned, the Wholesale Demand Response Mechanism, which commences in October 2021, will allow large users to bid in reductions into the wholesale market, but smaller customers will not be able to participate. The ESB is now considering how to allow more customers to participate in the market and benefit from it.

What could this mean for my business?

More businesses may be able to participate in the energy market through demand flexibility and improved ability to compete into wholesale energy and service markets.

Connecting renewable energy to the grid

This reform relates to matching the location of large-scale renewable generators with transmission infrastructure. Large investments in transmission infrastructure will be needed to manage these increasing volumes of generation, so it’s important to make sure it’s in the right location to deliver it at least cost.

Reforms introduced in 2019 by AEMC have sought to place new generators in parts of the grid where they’re most needed, and these plans are currently being rolled into the ESB’s Post 2025 work.

A sticking point of these reforms remains the introduction of locational marginal pricing and financial transmission rights, which means that generators will no longer always be paid the same price in the same state for the electricity they generate during each trading interval. While controversial, this is the current preferred approach of the ESB.

As an immediate action, the ESB is looking towards Renewable Energy Zones (REZ) to make it more attractive for generators to invest in certain parts of the grid.

In the medium term, the ESB has proposed options for reform to transmission access.

What could this mean for my business?

In the longer term, the REZ scheme aims to deliver clean, low-cost, and reliable renewable energy. A more immediate potential impact is on businesses in these areas that may incur increased network charges if the market operator charges renewable energy generators to recover REZ costs.

If you would like more information, contact your retailer or if you are a Shell Energy customer, contact your Account Manager.