ECD Solutions — January-February 2018

INSIGHTS 2018 11

Any potential solution will undoubtedly need to:

• reduce system and pricing volatility allowing business to predict-
  ably plan their energy costs;


• provide appropriate signals to facilitate rational investment in
  base load and renewables to meet future demand;


• stabilise the macroeconomic conditions necessary to maintain
  and attract sustained investment in energy and industry (both
  traditional and digital economies).
  It is clear, in my view, alternative policy solutions have not been
  fully explored due to the nature of the National Electricity Market
  (NEM) and a failure to undertake a review or refresh of it in order
  to adapt it to the evolving demands of our society.
  In simple terms, the current NEM (due to its lightly intercon-
  nected and sprawling network) permits material regional pricing
  differences based on regional characteristics. While this in itself
  leads to some disparity and volatility in the market, that volatility
  is exacerbated by two distinct characteristics — state and territory
  sovereignty and secondly, the NEM in Australia (unlike many other

OECD jurisdictions) being an ‘energy-only’ spot market, in which

electricity generators are paid for the energy they produce but not

the capacity they make available. Both of these factors go to the

heart of the reliability problem Australia now faces. As the contribu-

tion of renewable technologies to Australia’s energy mix continues

to grow, the NEM in its current form presents challenges for suc-

cessful and sustainable integration. For example, the current policy

and contractual arrangements do not necessarily favour based load

so having the appearance of favouring renewable energy. This, in

fact, is the consequence of the energy only market. Ultimately, it

disincentivises base load generators to stay in the market and deters

market entry by new ones. Renewables, on the other hand, have had

the benefi t of the RET to sponsor their market entry. This results

in a type of asymmetric system where the baseload necessary for

a reliable and secure system is absent and that does not help the

sensible development of renewables either.

There are two possible solutions (one proven and one prospective)

and both have a common feature — a capacity payment mechanism.

Energy policy

©stock.adobe.com/au/Simon Kraus