NEM 2.0 – COAG sets out for two-sided market

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The purpose of the Council of Australian Governments (COAG) Energy Council’s consultation paper is to set out a framework and invite input into the Council’s proposal for a two-sided market due at the end of 2020. It is the Energy Security Board’s (ESB) ambition to transition to a two-sided market in 2025, the NEM 2.0.  

The transition to a dynamic two-sided market is the creation of a NEM in which consumers, or prosumers rather, can trade their energy, such as that produced by rooftop PV. NEM 2.0 is, effectively, the democratisation of the energy market in Australia. 

Of course, by opening up the market to all types of energy users to actively buy and sell electricity, the market also needs access to the ‘behind the meter’ data on consumer energy demand that is currently hidden. 

“Consumers are already participating in the electricity market through their use of things like solar panels, electric vehicles and smart devices,” said ESB Chair Kerry Schott, “but this information is largely hidden, making it very hard for the Australian Energy Market Operator (AEMO) and other market participants to know whether supply will meet demand.” 

Of course, in opening up this hidden data and managing a two-way market, participants such as the AEMO can better manage supply and demand to ensure the market is less variable and vulnerable. The paper itself makes note, the twos-sided market is what is required as the industry backs away from a traditional and more centralised generation that could more easily secure itself.  

“A two-sided market will change all that because consumers are those who participate in the wholesale market on their behalf will be active in responding to price,” continued Schott. “When prices are high they can conserve their own use and supply electricity to the market and when prices are low, they can increase their use. Because this behaviour will be transparent and in real-time the information itself becomes a tool to keep the power system operating securely and reliably and can fill gaps when the sun isn’t shining and the wind isn’t blowing.” 

What’s in a Name

The paper suggests simplifying market participants into two categories – no more retailers, generators or aggregators, just simply those who use electricity and those who sell it. The beauty of this simplification is that it no longer defines participants as outdated and inflexible nouns but as dynamic verbs. 

Where there is only two types of traders, those buying and those selling, market rules can be more easily streamlined. After all, one of the dangers in redesigning the NEM is the prospect of over-complication. 

Another significant challenge on the frontier of over-complication is the prospect of designing a new scheduling system. Australian Energy Market Commission (AEMC) Chair John Pierce made the point that: “Having more traders providing information to the market about their intentions will remove imbalances between supply and demand and make the system cheaper to run. But the current scheduling system is designed for large generators end users and has significant technical requirements so will need to adapt. We need to strike the right balance between obligations on participants and the incentives to trade in the market.” 

Keep It Simple Stupid 

However, the AEMC has already made a false-start through its Coordination of Generation and Transmission Investment (CoGATI) plan which sought to introduce locational pricing and transmission rights. AEMC has conceded that it will consider changes to these transmission access rules as part of the overall redesign of the NEM after fierce criticism from the clean energy industry. The renewable energy industry pointed out that these rules were unnecessarily complicated and likely to increase the cost of capital for future generation and storage investment. 

A Clean NEM 2.0 

“A two-sided market will fundamentally change the way energy is traded to benefit consumers,” said AEMO CEO and Managing Director Audrey Zibelman. “As the energy system transitions, we have the opportunity to harness technology and establish a new market framework which empowers and rewards all energy system users…” 

What we are talking about here is the reindustrialisation of Australia. Australia has an undisputed competitive advantage when it comes to renewable energy, but with the archaic one-sided NEM we may as well be trying to reindustrialise post-Soviet Russia with the same tired old tractors. 

“The transition towards two-sided markets has the potential to bring significant benefits to consumers by rewarding them for selling energy back into the grid when it is needed the most,” said Australian Energy Regulator (AER) Chair Clare Savage. “A key success factor for these markets will be ensuring that the consumer experience is a positive one and consumers can leverage the benefits of new technology and services through products that are simple to understand and engage with.” 

A Helping Hand

The paper makes note that there are several other trails underway that will contribute to the development of NEM 2.0: 

• The Wholesale demand response mechanism rule change 

• Open Energy Networks project and AEMO’s VPP trials 

• The Coordination of Generation and Transmission Infrastructure project 

• The Electricity network economic regulatory frameworks – Grid of the Future review.

So, what’ll it be? 

The consultation paper suggests the key features of a two-sided market to be: 

• Maximise participation by requiring that all entities trading energy in the wholesale market submit bids and be scheduled. 

• Allow consumers to choose if and how they participate in the market or whether they operate through someone who does (for example through a retailer or aggregator). Technological advances and digitalisation mean that consumers will not need to monitor electricity prices, or actively participate if they choose not to. 

• Require that the party best placed to provide forecasts of quantity and price to do so. 

• Place obligations on functions and activities, rather than participant categories or technologies.

 

The Energy Council is seeking feedback on its proposal. To contribute to the discussion of NEM 2.0, e-mail: energycouncil@industry.gov.au