Home' Future Building Australian Infrastructure Review : Volume 8 Number 1 Contents futurebuilding 71
Dr Kerry Schott AO
dispatched. The price received by generators for the energy
being dispatched is the highest price accepted by AEMO as
part of the bidding process – prior to distribution.
For example, when bidding, AEMO knows how much
needs to be supplied over any interval of time, and it takes the
cheapest bidders until the requirements for those time intervals
have been met. Generally, the most expensive bidders are gas
and coal generators. The system we have has traditionally
worked well; however, this is increasingly no longer the case.
The NEM is an energy-only market, meaning that it is based
entirely on the price of energy. When electricity is scarce, the
price increases significantly. When the NEM reaches capacity
and there is a shortage of supply, the high prices are sustained
for long periods of time. This approach is supposed to encourage
new plant, repairs, maintenance and upgrades.
To protect market participants against price volatility, there
is a cap, meaning that the price of electricity cannot rise above
a particular threshold. There is also a price floor, which is, in
effect, set by the lowest bidder in the market.
How the NEM has evolved over the years is quite
interesting. The system has always had excess capacity
and has worked efficiently as a result. When there is excess
capacity, there used to be a competitive bidding process by
the generators, which kept electricity prices quite low. Until
recently, consumers enjoyed good outcomes, and there was
no need for additional capacity in the markets, except for gas
peaking plants, which provide power at the peak periods of
Network businesses, such as Ausgrid and TransGrid, are all
regulated by the Australian Energy Regulator (AER). Network
businesses are in the market to transport electricity in a highly
regulated environment. Whilst they have contributed to the
higher prices consumers pay, they are not a major driver behind
the current market volatility.
There are three major contributors to current market
► high consumer prices
► uncertain emissions reduction policies
► future levels of reliability and security being called into
The ESB is extremely concerned about this summer. AEMO
has already put out a warning to Victoria and South Australia to
ensure that they have enough power for the summer months.
Similarly, New South Wales will have reliability issues when the
Liddell Power Station closes in 2022.
Australia has several management issues to deal with.
The first is the increasing proportion of wind and solar power
in the market, alongside the retirement of older coal and gas-
powered generators. For example, the Hazelwood Power
Station shut rather unexpectedly, catching everyone by
surprise. Similarly, more coal and gas power plants will retire
over the next 20–25 years.
Past lessons have taught us that as change occurs in the
electricity market, politicians become very concerned about
the ‘lights going out’, and can overreact. Public servants still
tell the story of then New South Wales Premier Neville Wran
demanding that more power plants be built while he was in
London during a series of rolling blackouts in New South Wales.
That is how Mount Piper, Eraring, and Bayswater, which are
the big power plants in New South Wales, came into existence.
These plants added to the overcapacity in the market, largely in
New South Wales and Queensland.
One of the issues that we are facing is the risk that we will
have another overreaction, which is why the Finkel Report
is important. It provides us with a blueprint for a very orderly
energy transition to get from where we are now to where we
need to be.
On the price front, what happens with wind and solar is
interesting. When the wind is blowing or the sun is shining,
renewable generators bid their price into the market at a marginal
cost, close to zero. As the level of renewables increases and is
bid into the market, this is first accepted for dispatch, as it is bid
in at a comparatively lower price to traditional generation. The
market still requires coal and gas-fired plants to provide system
inertia and be available when the sun does not shine, or when
the wind stops blowing.
As noted earlier, we have a situation whereby a fleet of
renewables is coming into the market at the same time as a fleet
of coal and gas-fired plants is retiring; however, we still require
a portion of that fleet to keep the system stable. The converse
impact on prices is that they bounce around from being very low
when all the renewables are running, to extremely high when
the renewables are not running. This occurs when coal and
gas generators are bidding into the market and trying to make
enough money to cover all the intervals in which they have not
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