The Energy Security Board has issued a consultation paper calling for suggestions that will help energy market regulators prepare for the exit of the coal-fired generation that supplies nearly 70% of demand in the National Electricity Market.

“The biggest resource adequacy challenge the NEM currently faces is how to maintain security and reliability through the retirement of a significant proportion of the existing fleet of thermal generators,” the ESB’s Post 2025 Market Design Consultation Paper notes. “These assets are currently relied on to balance the system at relatively low and stable cost and maintain reliability.”

Potential solutions will be sought in seven areas: resource adequacy mechanisms; ageing thermal generation strategy; essential system services; ahead mechanisms; two-sided markets; distributed energy resources integration, and; transmission access and the coordination of generation and transmission.

A primary concern for the design of tomorrow’s grid, where polluting sources are most likely to be replaced by solar and wind energy, is that higher penetration of variable renewables will lead to “output that is dictated by the weather rather than market incentives, leading to increased variability in the spot price at which the market clears”.

Further complicating affairs is an outlook for flat demand for electricity and the possibility of large loads evaporating (presumably the aluminium smelting sector).

“Large-scale exits of thermal generators are likely to lead to sharp increases in the energy price, particularly during periods with low wind and sun,” the ESB’s paper says. “Conversely, removal of large, relatively stable intra-day loads will place sharp downwards pressure on energy prices. Generators are currently unable to effectively hedge the risk that large load may exit, which could deter prospective investors or current owners from re-investing.”

The industry has until October 19 to respond to the consultation paper. A final list of recommendations is expected to be sent to energy ministers by the middle of next year.

“The ESB is proposing to consider options that … make real-time prices as reflective of the needs of consumers and market participants as possible,” the papers says.

Start at square one

The Clean Energy Council sees the ESB’s consultation as an important catalyst in the inevitable transition to clean energy and the importance of market reform to shore up renewable energy and energy storage.

“The electricity system is in a state of transition to one characterised by a much higher penetration of renewable energy. It is great that the ESB has acknowledged this new reality and is considering a market framework that will support this transition,” said Clean Energy Council chief executive Kane Thornton.

“We need a streamlined, integrated market design that delivers the right outcomes for consumers and confidence for investors. There is a significant amount of detail to work through to understand their implications and interactions,” said Thornton.

“However, we are particularly excited to see the developments around an aging thermal exit strategy, essential system services and valuing demand flexibility and integrating distributed energy resources [DER]. Harnessing DER and encouraging private investment in energy storage is crucial to support a reliable and secure energy system.”

As part of the post-2025 review, the Australian Energy Market Commission (AEMC) has also released an associated paper on transmission access reform, formerly referred to as COGATI. Previous versions of COGATI have added uncertainty and risk for investors.

Since the initiation of this work about 18 months ago, generators, developers and investors have expressed continued concern around the need for such a significant reform, particularly in light of the range of other reforms already underway, the CEC said.

“Actioning the Integrated System Plan to deliver new transmission investment, renewable energy zone development work being undertaken by the ESB and a number of state governments, and improved market information will go a long way to address the congestion risks facing investors and provide effective locational signals,” Thornton said.

“Until these are put in place, and we have sufficient experience with these new reforms, it remains unclear if a more fundamental change to access is necessary. We will need to take time to interrogate the detail of this latest iteration of the access reform proposal.”

The Energy Security Board is comprised of independent chair Dr Kerry Schott AO, independent deputy chair David Swift and the heads of the three energy market bodies: the Australian Energy Regulator’s Clare Savage, Merryn York of the Australian Energy Market Commission and Audrey Zibelman of the Australian Energy Market Operator.