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Energy markets give everyone a headache

Does anyone understand the national electricity market?

For a start, it’s not national.

Western Australia runs its own system, as does the Northern Territory.

Still, the NEM is one of the world’s longest interconnected power systems – from Port Douglas in tropical far north Queensland to South Australia’s Eyre Peninsula and the bottom tip of Tasmania.

Trading in and supplying around 80 per cent of Australia, its generators and retailers bid to buy and sell electricity – usually without blackouts, bill shock or being suspended.

That said, there is something called sudden “load-shedding”, which is a technical term for a planned blackout. By deliberately turning off some customers, the mechanism is a way of avoiding longer blackouts and protecting the grid from damage.

As fail-safes go, however, it was overwhelmingly overridden by Wednesday’s sudden and unprecedented decision by the Australian Energy Market Operator to suspend and take control of the market from unco-operative operators.

Under the shock arrangement, compensation will flow from taxpayers to big generators to make up for loss of revenue from selling into an otherwise lucrative market.

Elsewhere, it may surprise that Australia’s “national” energy laws don’t actually belong to federal parliament.

A quirk of history means they sit with South Australia – and any legislative changes must first be agreed by other state and energy ministers and wrangled over by an army of officials.

After years of legal renovation, the current version of the national electricity laws is more than 250 pages long, while the national gas laws run more than 330 pages.

Albeit less gargantuan, yet another set of legal rules regulates the selling of energy to millions of consumers.

Then there’s a so-called “social licence” to operate.

Power is no doubt an essential service, especially amid the coldest start to winter in more than 100 years in some parts, while summer heatwaves can also be killers without affordable and reliable air conditioning.

Yet this social licence is not legislated – it’s apparently just nice to have, along with voluntary codes of conduct for companies.

Inside the market, there are firms who are generators and others who are retailers. Then there are the big three “gentailers” – ASX-listed AGL and Origin Energy and Chinese-owned EnergyAustralia – who do a bit of both.

And if it wasn’t complicated enough, energy derivatives are traded on the Australian Stock Exchange as a form of insurance against price volatility.

The futures contracts provide retailers with a consistent price, while for generators they can provide a steady stream of income.

So, who is the regulator looking out for the economy and households amongst all of this?

Well, that’s complicated too.

There’s a squad of senior energy officials on the case through all seasons, disasters and governments, and not usually in the public eye.

The Australian Energy Market Operator (AEMO) oversees the market, pulling the levers on supply and demand, while the Australian Energy Regulator (AER) monitors and enforces relevant “national” laws.

The Australian Energy Market Commission (AEMC) is the brains trust for new rules and market development.

Powering the economy and, of course posing a challenge in a world trying to pollute less, the electricity industry is Australia’s biggest carbon emitter.

To address this, an Energy Security Board has, by bringing the regulators to one table, been working on a low-emissions grid since the comprehensive 2017 Finkel Review of the electricity market.

And then there’s the agency assigned to look out for households and businesses, the Australian Competition and Consumer Commission (ACCC).

Some say the NEM and its tentacles are broken.

The Electrical Trades Union reckons it has been sounding the alarm for years and wants another independent review.

“Trying to deliver essential public services through profit-motivated, tax-avoiding multinational energy corporations, has failed shockingly,” union leader Michael Wright says.

Others want fixes.

Australian Energy Council CEO Sarah McNamara says there has been a “combination punch” of shocks.

“Global energy shortage, increased exposure to spot prices, cold, wet weather and unplanned, prolonged outages,” the head of the industry organisation says.

“Is the NEM broken? The short answer is no.”

“The long answer is recent events have revealed the need for some simple but important repairs.”

For example the automatic price cap triggered in the national electricity grid hasn’t changed for 20-odd years.

Some generators made a commercial decision to withdraw supply, adding to the fragility of a network where AGL’s capacity ageing coal-fired power stations are on the blink.

AER chair Clare Savage says the country is not being held to ransom by operators as some critics claim.

“Generators are trying to find legitimate ways to cover their costs,” she says.

“It’s very challenging for generators to be expected to bring supply online that’s costing them $400 a megawatt hour if they’re only going to be paid $300.”

There are clear rules for how energy generators and retailers must behave.

After a stern letter, AER, AEMC and AEMO have met with energy bosses to remind them of their obligations.

Penalties up to $10 million can be awarded by the Federal Court for each breach.

“If they have generation available, they need to be bidding it into the market,” Ms Savage says.

“There is a process for generators to cover their costs, so I don’t think that’s an excuse,” she said.

AGL’s largest shareholder and potential saviour Mike Cannon-Brookes says Australia hasn’t done enough to transition to renewables and there’s no quick fix.

“That’s like, I had cake for 30 years and I suddenly want to be fit tomorrow. Well, that’s not going to happen,” he says.

But as people get spooked by headlines about blackouts and gas shortages, it’s important to know the difference between the wholesale market and the retail market.

The wholesale market is where retailers and very large industrial or manufacturing customers get power.

In the retail market, which supplies millions of Australian households, there’s a limit known as the safety-net price cap set each year to ensure consumers are protected from unfair price hikes.

Even so, many households are facing double-digit price rises for power.

Minister for Climate Change and Energy Chris Bowen says the problem is there hasn’t been enough investment in renewable energy and battery storage.

“Yes, you can say the wind doesn’t always blow and the sun doesn’t always shine,” Bowen says.

“The rain doesn’t always fall either but we can store the water and we can store renewable energy if we have the investment.”

Meanwhile gas has been on the ACCC’s agenda for years, with a dozen reports warning about supply and prices.

Elsewhere, federal Resources Minister Madeleine King is backing the controversial Narrabri gas project in NSW and says the output should be sold in Australia, not exported.

Mr Cannon-Brookes is adamant new gas fields are not the solution, anywhere.

“Do we need more gas extraction? No, that’s absolute bull****.”

Aiming for 2026, Narrabri developer Santos will need state and federal approval to extract and pipe the gas.

In Victoria, Premier Daniel Andrews says he won’t overturn his state’s ban on coal seam gas exploration.

Instead, he wants a domestic gas reserve.

“It is just wrong, it makes no sense to me, that households and businesses are competing against the world for something that’s ours,” he says.

Federal, state and territory ministers have agreed to proceed “at pace” with a capacity mechanism, effectively a roll call of subsidised assets.

The mechanism is not new, although most of us don’t know what it is.

Regulators have been working on it for months.

But ministers rejected the last version, dubbed “Coalkeeper” by some in 2021.

Capacity mechanism 2.0 is due within days, Mr Bowen says.

What happens next?

Nobody knows. Nothing like this has ever happened before.

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