The Australian energy market is broken and the structure of the market enables market manipulation which means the energy consumer is screwed.
Within the market there are four key participants – Generators, Networks, Retailers and Customers. The market rules have enabled the creation of large vertically integrated generation organisations that hedge their investment by owning large customer books. This operating model effectively offsets any risk these organisations have from market volatility (that we are currently witnessing). The market has also removed all price risk from the network businesses by implementing structures that almost guarantee them an income regardless of what happens in the rest of the industry.
Interestingly in recent weeks there has been no buzz about large retailers facing doomsday outcomes from the volatile market. While dozens of small retailers, who are fully exposed to the wholesale energy market are heading towards administration. Amazingly in an attempt to stave off financial collapse many of these small retailers are actively contacting their customers encouraging them to churn to one of the large retailers. Many will argue that these small retailers should have put strategies in place to offset their risk, however the large retailer owned generators are the ones who make the necessary financial products available in the market and have significant influence over the price of these market instruments.
Meanwhile customers who have invested in solar PV and batteries are largely gamed by the market which sets a feed in price for the energy (currently market offers typically sit in a range of $40-$80 a megawatt hour) that is not adequately linked to the wholesale market price. With the wholesale market operating well above the fixed price feed in level in recent months consumers have been forgoing up to $150 a megawatt hour. So while competing generators access incredible $/mWh prices these investors are frozen out of the market.
And let’s not forget our network friends, who instead of working out ways to make smart investments to enable more renewables into the low voltage parts of our grid, are dreaming up ways to limit the economic return of distributed energy generation by introducing complex mechanisms like Dynamic Operating Envelopes and other capacity limiting mechanisms restricting the amount of renewables.
The solution
To move towards a net zero future we need to electrify everything, whilst also transitioning away from hydrocarbon based power generation. This means that we will need to deliver renewable generation capacity somewhere between 200% and 500% of current generation capacity depending on which model and which commentator is making the claim. Regardless of the scale of the renewable build out, it will certainly be a generation and storage fleet of much greater capacity than that operating in Australia today.
As we create our future energy infrastructure we have the opportunity to change the market model and establish more effective boundaries for market participants so that the risk and reward is more evenly shared and innovation of technologies and business models are encouraged and able to flourish. We should not assume that the market structure that exists today will be relevant in the net zero energy market of the future. We need a 50 year view of that market so as we adapt the market transitions with technology and the new business models that arise.
