In the past week, as our energy system has entered uncharted waters, I keep hearing about the collapse or failure of the National Electricity Market (NEM).
That’s all very worrying but it’s not the collapse I am most concerned about. What we have seen taking place, both as a result of the way the system is designed and the behaviour of some actors within it, presents a clear and present danger that consumer trust and confidence in our system will collapse.
And that’s a massive problem.
Because make no mistake, the NEM will be back up and running in a week, maybe two or three. But consumer trust and confidence? That is going to take a little more time.
How did we get here?
AEMO suspended national trading at 2pm on June 16, a first in the history of the NEM. We wholeheartedly support this action for a number of reasons.
Prices had breached the level that had been written into the rules to protect consumers from excessive prices. We know that there were forces driving this escalating spiral. Some of them were unavoidable, like the war in Ukraine, floods in New South Wales and Queensland coal mines and coal-fired generators being offline due to faults and maintenance.
But it is difficult to see how these factors alone could have resulted in such skyrocketing prices. It’s at least possible there was some risk mitigation going on from generators. What that equates to, unfortunately, is passing the risk off to consumers.
It also looks distinctly possible that we saw some pretty opportunistic behaviour. Generators could have been making handsome profits in the days before the price cap was triggered. Should they not have been able to absorb some losses once it was? Was all of this behaviour within the rules that govern the NEM? It’s hard to know from the outside. We will only be able to establish this after the fact, by the Australian Energy Regulator (AER) investigating compliance with the National Electricity Rules. And it may be that we will need the stronger investigative powers of the Australian Competition and Consumer Commission to uncover whether margins were excessive.
What led to this point?
It appears that once the price cap was triggered, generators were concerned that they might have to make supply available that was below their costs. They didn’t trust the rules that the Australian Energy Market Commission (AEMC) would apply. Instead, with more than 70% of generation available and in a position where they could have been expected to bid – both private and publicly owned generators waited to be instructed to dispatch. It seems they were more comfortable with the costs being recovered under these Australian Energy Market Operator (AEMO) arrangements.
And so we landed on an absurd situation. It was like setting a fire alarm off to bring in the fire brigade all while knowing there wasn’t really a fire. AEMO kept notifying of expected power outages and finding that there was power being made available for it to dispatch.
The chaos came to a peak when on Tuesday throughout the day AEMO had to “find” 5 GW of power supply, all in real time. Sensibly they called a halt and suspended the market, so that they can reliably operate the power system . AEMO have said that they will review daily for each NEM region,
and that when conditions change, they will resume normal operations. If the previous experience in South Australia is any guide, this could be two weeks.
What happens next
Suspending the market provides opportunity for a hard reset. That’s true with regard to the short term issues that were seen to be endangering the power supply but it’s also an opportunity for the longer term.
We now have the opportunity for AEMO, together with the AEMC and the AER to engage with generating companies to find a sensible solution. Frustratingly, the companies could have initiated this themselves on Monday. Instead, they held consumers hostage for 3 days, raising the very real fear of homes and businesses being without power in one of the coldest winters we have experienced.
That’s important, but it’s not enough. If we untangle the present set of perverse incentives and sub- optimal behaviour and get the market running again, without making any structural changes to prevent such a ‘perfect storm’ happening again, we will have missed an important opportunity.
The task now also falls to Energy Ministers. They will need to decide together on a better way to manage what is a complex set of problems without simple immediate solutions.
The most damaging thing about the past few days has been the impact we expect these events will have on consumer confidence and trust in the market and its actors. Right now, and even more in the future, we will be asking consumers to play an increasingly active role in the energy system.
We will want to find ways to harness the consumer energy resources in their homes and neighbourhoods. We’ll be asking them to spend money changing how they power their heating, their cooking, their transport and mobility. We’ll be asking them to take resources that are their own and make them available for the benefit of their neighbours and the system. We’ll be asking them to alter the habits of a lifetime and shift some activities to times of day when energy is cheaper and more abundant. We’ll be asking them at times to think collectively, opting for shared storage at a local level or other more communal forms of living and using energy.
All of these things require trust. They require the granting of social licence. And when consumer trust and confidence in the system drops we know there is a strong chance Australians will respond by disengaging from that system. Who could blame a consumer who, having witnesses the shambles of the past week, responded by taking steps to remove themselves from the grid as much as possible? To insulate themselves from decisions of others that – from a consumer point of view – cannot be seen to have consumer interests foremost in mind.
To get to a net zero energy system where electricity is affordable, clean and abundant we need a lot of consumer cooperation and goodwill. That’s why the problems of the past week must be addressed in a serious and enduring way.
Rebuilding trust starts with an ironclad commitment that while there are challenges, the power will always stay on. If they have confidence, consumers can take the action they need to reduce energy use where they can, and take the pressure off reliability. They can take action within their own homes and lives to feel that they are in control of their bill (as opposed to the only way they can retake control being to isolate themselves from the grid).
We also need to assure consumers that keeping energy affordable will be front of mind for all in the system. High prices are here for some time, and its critical that there are both short, medium and longer term policy measures are available that take the pressure off energy costs.