Australia's energy options: policy choice not economic inevitability

Executive summary A reliable and affordable supply of energy is a fundamental component to a vibrant economy. As a major source of commodities, including significant known reserves of low carbon emission energy sources, Australia is well positioned to supply the world’s future energy needs. In order for that to occur, Australia needs to examine all its energy options. The Government released a Draft Energy White paper in November 2011. CEDA considers this an opportunity that the Government should not miss in ensuring that Australia not only develops its energy resources for national economic gain but also to guarantee access to reasonably priced energy for Australian consumers. CEDA determined it would contribute to this significant debate by undertaking a year-long research project that examined Australia’s future energy options. As part of this research project CEDA published three policy perspectives that addressed Australia’s nuclear, renewables and efficiency and unconventional energy options. Recommendations in each of these perspectives were made with the specific aim of providing policy-makers with evidence-based research on the various energy sources either currently available or being actively explored and researched, often funded through the public purse. Fundamental governance decisions underpinned by strong economic policy arguments were at the centre of these recommendations. This final research report canvasses one of the more significant current debates associated with the availability of energy – the Australian electricity market. It puts forward a series of recommendations designed to enhance this element of the energy sector’s efficiency, security and effectiveness by placing consumers at the centre of the energy market and a reform agenda is proposed. Related identifier: ISBN 0 85801 284

Australian Residential Solar Feed-in Tariffs: Industry Stimulus or Regressive Form of Taxation?

Feed-in Tariffs (FiT) for residential photovoltaic solar technologies are available in most Australian jurisdictions. Financial incentives under FiT are in addition to those provided by the Small-Scale Renewable Energy Scheme which forms part of the national 20% Renewable Energy Target. Little attention has been paid to the welfare impacts of FiT on retail electricity prices and social policy objectives. Our analysis indicates that current FiT are a regressive form of taxation. By providing estimates of household impact by income groupings, we conclude that wealthier households are beneficiaries and the effective taxation rate for low income households is three times higher than that paid by the wealthiest households.Feed-in Tariffs, Electricity Prices

Vulnerable households and fuel poverty: policy targeting efficiency in Australia’s National Electricity Market

When Australia established its National Electricity Market (NEM) during the 1990s, reforms were focused on maximising economic efficiency. Little thought was given to distributional outcomes. However, by the 2010s sluggish growth in household incomes, sharp rises in electricity prices and material increases in quantities consumed through surging uptake rates of air-conditioning units led to the possibility of (hot climate) fuel poverty. In the NEM’s Queensland region, longstanding customer hardship policy pre-dated the NEM. With the benefit of hindsight, the policy was poorly configured as it focused exclusively on the aged population and was delivered by way of fixed payment. Low income households in the family formation cohort were excluded from the policy despite obvious need. In this article, Queensland’s longstanding customer hardship policy is refined using pre-existing (meanstested) welfare mechanisms in order to target low income households including families, and the payment structure is altered from fixed ($ pa) to variable (% of the bill) while holding the budget constraint constant. Changes to policy targeting produce material improvements in horizontal and vertical efficiency while changes to payment structure further enhance vertical performance, with the incidence and depth of residual fuel poverty reduced

Rooftop Solar PV and the Peak Load Problem in the NEM’s Queensland Region

Over the period 2016-2021 Australia’s National Electricity Market (NEM) experienced an investment supercycle comprising 24,000MW of renewables. One of the more intriguing aspects of the supercycle was a partial shift of investment decision-making from utility boardrooms to family kitchen tables – rooftop solar PV comprised 8,000MW of the 24,000MW total. In NEM regions such as Queensland, take-up rates have now reached ~40% of households, currently the highest take-up rate in the world. At the household level there is a distinct mismatch between peak demand and solar PV output, which tends to suggest any peak load problem will be exacerbated. When the contribution of rooftop solar PV is abstracted to the power system level these results reverse. The partial equilibrium framework of Boiteux (1949), Turvey (1964) and Berrie (1967) has historically been used to define the optimal plant mix to satisfy demand growth. In this article, their partial equilibrium framework is used to define conventional plant ‘dis-investment’ in the presence of rising rooftop solar PV and utility-scale renewables in an energy-only market setting. Queensland’s 4400MW of rooftop solar displaces 1000MW of conventional generation in equilibrium, 500MW of peaking plant and somewhat counterintuitively, 500MW of baseload coal plant – falling ‘minimum system demand’ being a driving factor. The NEM’s energyonly market and its $15,000/MWh price cap proves tractable through to a 50% renewable market share, but relies critically on frictionless coal plant divestment and bounded negative price offers

Merchant renewables and the valuation of peaking plant in energy-only markets

Merchant renewables are a new asset class. With historically high cost structures and low wholesale prices associated with merit order effects, continuity of entry has been reliant on Renewable Portfolio Standards or other policy initiatives such as government-initiated Contracts-for-Differences. But in Australia’s National Electricity Market, sharply falling costs of renewables and volatile wholesale market conditions from coal plant exits has led to a surprising number of merchant intermittent renewable investments. Adding to the merchant renewable fleet are older wind plants whose inaugural long-dated PPAs recently matured. Rolling over PPAs is possible, but not necessarily optimal. In this article, a merchant gas turbine, merchant wind, and an integrated portfolio comprising both plants are valued in the NEM’s South Australian region. Asset valuations reveal surprising results. The modelling sequence shows stand-alone gas turbine valuation metrics suffer from modest levels of missing money, that merchant wind can commit to some level of forward (fixed volume) swap contracts in-spite of intermittent production, but the combined portfolio tightens overall valuation metrics significantly. Above all, the combined portfolio is financially tractable, overcoming the missing money for a gas turbine plant undertaking peaking duties. In a NEM region where intermittent renewable market share exceeds 50%, this suggests the energy-only, real-time gross pool design may yet be deemed suitable vis-à-vis meeting environmental objectives and Resource Adequacy

Merchant utilities and boundaries of the firm: vertical integration in energy-only markets

Resource adequacy in energy-only markets is of continual interest to policymakers due to risks posed by incomplete markets. In Australia, resource adequacy has historically been navigated via energy retailer investment commitments in peaking plant capacity. This in turn has been driven by the National Electricity Market’s (NEM) very high Market Price Cap (AUD $15,000/MWh). The NEM is now rapidly transitioning with sharply rising levels of utility-scale variable renewable energy, world-record uptake rates of rooftop solar PV by households, and ongoing coal plant closures. Ironically however, investment commitments in peaking plant capacity by the NEM’s energy retailers appears to have stalled. This raises the question as to whether the energy retailer model of investing in peaking plant, a pattern which has dominated energy-only markets, has somehow broken down. If so it raises questions of the suitability of the energy-only market design. In this article, peaking plant dynamics are tested using historic NEM data. Specifically, investments in a stand-alone generator, a stand-alone energy retailer and a merged entity are simulated over 16 years of trade under both project finance and corporate financing structures with a focus on credit metrics. Results reveal the canonical merchant peaking plant remains too risky as a stand-alone project financing in an energy-only market. But energy retailer incentives to commit to on-balance sheet financed peaking plant remains, with transaction cost synergies of 13% and investment grade credit quality being contingent on integration

Renewable Energy Zones in Australia’s National Electricity Market

Australia’s National Electricity Market operates in one of the world’s longest and stringiest transmission networks. The 2016-2020 investment supercycle, in which 13,000 MW of renewables were committed, is slowly revealing the limits of network hosting capacity for renewable plant. In this article, side-effects arising from the supercycle are analysed. The majority sources of renewable investment failure relate to deteriorating system strength, viz. associated connection lags, remediation and curtailment costs. Although a multi-zonal market, the NEMs locational investment signals remain visibly strong. A change to nodal arrangements may refine dispatch efficiency but the bigger policy problem is rapidly diminishing network hosting capacity for new renewables, imperfect regulation and regulatory lag associated with augmentation. Markets participants seek to move faster than regulatory frameworks allow. Renewable Energy Zones (REZ) are examined through both i). a consumer-funded regulatory model and ii). a renewable generator-funded market model. A ‘super-sized concessional mezzanine’ facility is presented as a critical element of REZ capital funding. It forms the means by which to optimise market-based REZ transmission augmentation and moderate sponsor risks of transient underutilisation

Missing money, missing policy and Resource Adequacy in Australia’s National Electricity Market

From 2012-2017 more than 5000MW of coal plant exited Australia’s National Electricity Market (NEM). The average plant exit notice period was 5.2 months. Exit at scale peaked just as imbalances in the market for natural gas emerged. Compounding matters were Variable Renewable Energy (VRE) plant entry lags due to policy discontinuity in prior periods. By 2016/17, the culmination of coal plant exit, gas market imbalances and VRE entry lags produced more than 20 Lack of Reserve events across the NEM, three blackouts including a black system event in the South Australian region. Spot and forward electricity prices rose to record levels, viz. $90-$130/MWh compared to an historic average of $42.50. In this article, the lead-up to these abnormal trading conditions are traced back to policy decisions a decade earlier in the markets for electricity, natural gas and renewable energy. Lessons for other energy markets undergoing transformation include i). transparency over lumpy plant exit decisions, ii). climate change policy stability, and iii). clear policy limits to gas export capacity vis-à-vis domestic supply

Price discrimination and the modes of failure in deregulated retail electricity markets

In Australia, as with Great Britain, governments have shown rising concern with the health of competitive residential electricity markets. A core concern is the practice of price discrimination and the rising dispersion of prices. The State of Queensland implemented Full Retail Contestability in 2007, but held a regulated price cap in place until 2016, when it finally deregulated its residential electricity market. Almost simultaneously, the two jurisdictions that pioneered retail price deregulation, Great Britain and Victoria, were questioning their prior policy decision. Queensland makes for a fascinating case study because Southeast Queensland comprises a fully deregulated retail market while Regional Queensland is a regulated monopoly – with common input costs across both zones. Consequently, a regulated monopoly with a uniform tariff and 640,000 customers forms a very large control group, which can be directly compared to the competitive market of more than 1.3 million customers – making such analysis globally unique. Analysis of Queensland market conditions concludes the policy is welfare enhancing. To be clear, rising electricity prices are a problem, but price discrimination is not. The deregulated competitive market is, perhaps unsurprisingly, better at regulating the overall average tariff and consumer welfare has been enhanced by $184 million per annum – with some consumer segments very materially better off. However, certain modes of failure remain, viz. an inter-consumer misallocation problem and lack of transparency vis-à-vis the anchoring of discounts – known as the “discounts off what?” problem. Resolving the inter-consumer misallocation problem is relatively straight forward via ensuring energy retailers (voluntarily) move vulnerable customers onto a Benchmark-equivalent or suitably discounted tariff. Due to the non-linearity of tariffs and the rising mix of discrete metered loads, the latter can be best solved by producing a weighted average of Standing Offers, and using this as the benchmark

Is the NEM broken? Policy discontinuity and the 2017-2020 investment megacycle

The recent history of Australia’s National Electricity Market (NEM) from 2012-2017 has been problematic with sudden coal plant closures, a tight domestic gas market and sharply rising electricity prices. The supply-side response that followed from 2017-2