Reforming the NEM: Discussions at the First Australian Energy Efficiency Summer Study

I have just arrived back in Canberra having attended the final day of the inaugural Australian Energy Efficiency Summer Study, run by the Australian Alliance to Save Energy. I was invited to speak on behalf of the Total Environment Centre in the session entitled Watts in a NEM: Reforming the National Electricity Market for Energy Efficiency and Distributed Generation.

My presentation, Systemic Biases in the NEM: Barriers to Demand Side Participation, explored some of the barriers to greater demand side participation in Australia’s National Electricity Market. These barriers are often identified and lamented, without deeper understanding of their genesis. The presentation also made some broad recommendations for reform.

I was privileged to speak alongside experienced and interesting speakers, whose presentations have given me much food for thought.

Chris Dunstan from the Institute for Sustainable Futures presented a short summary of the recently released National Electricity Market Report Card (summary here), commissioned by the Total Environment Centre as part of out NEM campaign. The Report Card is the first comprehensive assessment of the performance of the NEM since its inception. The Report measures whether the NEM is meeting the National Electricity Objective (NEO), which is defined by S. 7 of the National Electricity Law:

to promote efficient investment in, and efficient operation and use of, electricity services for the long term interests of consumers of electricity with respect to –

- price, quality, safety, reliability, and security of supply of electricity; and
- the reliability, safety and security of the national electricity system.

Craig Memery, wind power expert and NEM advocate at the Alternative Technology Association, talked about the split incentives problem in the NEM. That is, in a disaggregated market, there are a number of actors, each with different drivers and motivations. In addition, it is not always possible for those that invest in demand side initiatives to fully recoup the benefits that they bring. For example, a householder that installs a rooftop solar PV system is not rewarded for the benefits that their system brings to the network as a whole:  distributed generation can reduce peak demand and help to defer network augmentation, but the owner is not paid for this. Craig suggests that, inter alia, a long-term, consistent and well-designed feed-in tariff, that rewards distributed generation at a reasonable level, is a solution to this problem.

The NEO, as set out above, was itself the subject of much discussion in the session. There has been a consistent thread of activism and agitation for environmental and social goals to be including within the NEO, but similarly consistent resistance on the part of the Australian Energy Market Commission, and other actors in the NEM. This resistance has been based on the belief that the NEM is an energy-only market and that non-supply goals are external to the NEM.

As such, some argue that it is time to abandon this discussion in favour of pursing incremental changes within the present framework that implement environmental and social goals. Yet other jurisdictions have successfully broadened the objectives of their electricity markets - particularly in Europe, and in the UK where a legislated objective requires the electricity system to be developed with sustainable development and future customers (inter-generational equity) in mind.

I would argue that including environmental goals in the NEM would be a significant step, both in practical and symbolic terms, to incorporating sustainability at the core of Australia’s electricity system, rather than blindly insisting that any such goals are external. This insistence means that the NEM remains static and resistant to change, rather than moving with the needs of electricity consumers as we transition to a green economy. On the other hand, I think that we should also be developing changes to the rules that incrementally improve the situation.

I was therefore very pleased to here from Anna Skarbek, Executive Director at ClimateWorks Australia. Her presentation, entitled Reforming the NEM to Unblock Barriers to Cogeneration, outlined work that ClimateWorks has carried out to date, in conjunction with Seed Advisory, toward a rule change aiming to make it easier for buildings and businesses to install and connect small co- and tri-generation plants. As the National Electricity Rules were written with large centralised power stations in mind, they are wholly inappropriate for the connection of such smaller generators.

Anna’s presentation was particularly interesting because the approach to the rule change probably represents best practice. ClimateWorks consulted widely with people in the latter stages of connecting these generation units to the grid in order to get a true sense of the problems and to find a solution that would fix them. They produced a report based on these consultations (at least one consultant’s report seems to be a prerequisite for any proposal in the NEM!). Rather than making sweeping changes that the powers that be would likely baulk at, the rule change leverages provisions already in the rules and adapts them.  ClimateWorks is also aiming to brief distribution companies of the effects of the rule change to ensure their support, or at least that they will not stand in its way. Perhaps most importantly they worked with the Australian Energy Market Commission from the outset, which can only be a good thing.

I found Anna’s presentation inspiring because I have, for some time, been thinking about proposing a rule change based on my paper regarding the failed Scale Efficient Network Extensions rule. Anna’s call for incremental change is a compelling one, and I will be looking into this in the near future.

Meanwhile, I think we must continue both conversations. We must be clear that sweeping, some may say revolutionary, change is needed to bring the dinosaur that is the NEM up to date. Yet on the other hand we must also try and push for incremental changes that will make a difference in the meantime. Electricity networks were conceived as one-way conduits for power. This is no longer the appropriate model for a post carbon world. Electricity networks must become ‘smart’ in every sense of the word: more porous to environmental and social goals, more open to connection of distributed, decentralised and embedded generation sources, more able to communicate in real-time with consumers and better designed to encourage less usage, rather than more.

In short, let us continue to call for the big changes, while also doing the best we can with the faulty system we’ve got.