Imagine a world in which your home appliances are orchestrated by a computer that also controls your heater and air conditioner, as well as the generation and storage of electricity produced by your rooftop solar and battery storage systems (including your electric vehicle).
Imagine also that this enables you to change your hourly energy use in direct response to electricity price variations driven by shifts in network demand and generating capacity – even enabling you to feed electricity into the grid from your solar system and batteries to maximise your income when prices are high.This is not an imaginary world – the technology already exists to do this right now. However, we currently have a National Electricity Market (NEM) where such capabilities are not incentivised or encouraged.
The slow evolution of the NEM is just one of many examples where developments in science and technology have exceeded the imagination of our governance systems – whether regulatory or parliamentary – to keep pace with technological change.
At the COAG Energy Ministers’ meeting in December 2015, I made a plea to bring the NEM into the 21st century. In the communique from the COAG meeting on August 19 this year, it looks like things are now moving in the right direction. While designed to serve us well in the 1990s, the NEM has now been overwhelmed by recent advances in technology, and fails us on several fronts:
- Consumers are not given a clear price signal that reflects the value of electricity at a particular time of day to encourage them to reduce consumption when there is extremely high demand. Although some retailers do charge slightly different rates for on- and off-peak electricity, many still charge a flat rate
- High peak demand also increases the cost of electricity network distribution (poles and wires) that needs to cope with the highest expected peaks. Failure to use price signals that reflect peak loads and thus help curb peak network demand has contributed to over-building of poles and wires and unnecessarily high overall electricity costs, comprising over half the retail price in some jurisdictions
- On the supply side, the current market regulations do not incentivise micro-generators (with or without storage) to play into the wholesale electricity market. With the phasing out of high rooftop-solar feed-in tariffs, retailers now simply pay small-scale producer/consumers (pro-sumers) a modest price around the average wholesale level that does not reflect the much higher wholesale prices at times of peak demand or the savings from not having to expand network distribution capacity. (In the ACT, the feed-in tariff is around 40 per cent of the retail price). This removes the incentive for pro-sumers to contribute to meeting peak demand.
We sometimes forget that all components of a system require innovation from time to time.
If the NEM is not reformed in these respects, we will miss the opportunity to harness both micro-demand management and micro-supply at the business and household level to address extreme demand peaks and to thereby keep the burgeoning costs of electricity in check.
More importantly, following the South Australian blackout, without reform we won’t have a NEM that can be nimble and address shocks to the system – including threats from extreme weather events.
While dealing with a myriad of small pro-sumers may present technical and economic challenges to the NEM, there are also ways of aggregating distributed generation that could mitigate such challenges: virtual power plants formed by aggregating small distributed energy sources over a larger geographic area to provide economies of scale as well as resilience through diversity; community solar farms which can provide economies of scale for domestic investors; and microgrids serving communities which can control their own demand and supply via one or two connection points to the grid – such as at ANU.
We sometimes forget that all components of a system require innovation from time to time, and that this process must be relentless and continuous in order to derive the greatest benefit for individuals, and collectively for society. With the announcement at the COAG Energy Ministers' meeting on 7 October of a review of the NEM by Chief Scientist Alan Finkel, there is hope these prospects may now become reality.
Professor Ken Baldwin is Director of the ANU Energy Change Institute