The case for decentralised electricity markets

The National Electricity Market is a framework designed for centralised electricity generation and distribution, and as such is a concept not easy to align with the notion of energy security – it is a fact born in proof recently that the current system facilitates many single points of failure with no redundancy. What we need is a complete rethink of electricity generation and distribution that reflects the current and future realities of a rapidly decentralised generation system rather than reinforcing and reinvesting in the old system that was designed in the 1950s to suit large-scale, centralised, coal-fired generation. This submission argues that a decentralised market should be adopted for the general consumer which mirrors the market mechanism encountered within an embedded network. It also argues that such a model would allow for competition in the largest cost component of our electricity bills: the distribution network. Transferring or taking ownership and placing it back in the hands of local government would allow for the adoption of a local electricity market that would support and encourage independence from the transmission network through investment in large-scale renewables coupled with battery and pumped-hydro storage. The concept of centralised generation and energy security are not compatible and do not reflect the emerging trend of small and large-scale localised generation.

Prior to the 1950s, electricity distribution and generation was largely decentralised, with the networks built, owned and operated by local governments. The advent of state government legislation to centralise and normalise the grid was a sensible policy in the day of massive pollution in city centres, along with the necessity for the large-scale industry to have access to reliable, consistent power sources. In short, it made sense at the time to take the distribution networks from the local governments, and allow the state bureaucrats to engineer a significantly better solution. It also supported the drive to build a new generation of massive coal-fired power stations near sources of coal, and deliver the electricity remotely over new large-scale transmission networks. As demand was centralised through the expanding grid, it became an easier and more predictable environment in which to predict demand and provide sufficient capacity at various stages of the day or year. The centralisation of electricity generation, transmission and distribution was an important policy at the time and allowed the electricity market to develop into what it is today – but it does not reflect the new reality.

Coal-fired generation has always had one major drawback from a technical perspective and that is the fact that you cannot “ramp-up” or “ramp-down” production in line with the rapidly changing demand from consumers during the course of a day. So to support the coal-fired generators, a market was established that put incentives to use electricity at night through substantially reduced tariffs – an effort to smooth out demand and increase predictability for generators. Today we have demand and capacity pricing for large electricity consumers which heavily penalises peaks in demand. The consumer pays for the capacity of what they have used as a peak for 12 months – in other words, it acts as a major financial penalty to have a spike in demand, which is in line with what the coal-fired generators need – predictability in demand. The NEM reflects the needs of the coal-fired generators – large, predictable demand – it is not designed for nor does it reflect the future needs of the network.

When the NEM was established, the concept of mass rollout of rooftop solar, wind farms and the like was not even considered a possibility – and it is correct to say that the planning of energy policy has not evolved in line with this rapid advancement of technology both on a state and federal level. What we have seen is predictable from an economic standpoint: a majority of the wind generators set up in South Australia because that’s where modelling showed they would achieve their best return on investment. Money flows to where it will be returned fastest – a simple law of economics. For the stability of the grid, this has been a bit of a disaster as has been documented repeatedly, despite the misinformation surrounding the felling of transmission towers in the South Australian storms in September 2016. It is true to say that wind and solar installations cannot provide consistent, baseload power in isolation. It is also true to say that “baseload” coal or gas-fired generators could not have ‘saved the day’ in South Australia late last year. As well, you could point to February 12th 2017 in NSW, where there were a series of rolling blackouts enforced despite the almost complete reliance on coal-fired generation in that state.

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