A pivotal time for our energy future

Australia's National Electricity Market (NEM) is at a crossroads. Decisions made today about policies and market design will shape our energy future and play a major role in our economic prosperity for decades to come.

If Australia gets this right, we have the potential to secure abundant, low cost, reliable, zero carbon energy. We can be a global leader in clean energy, supplying the world with green metals, fertilisers, and fuels.

But any missteps risk wasting a once-in-a-generation economic opportunity.

It is in this context that TSI welcomes the National Electricity Market wholesale market settings review being undertaken by a high calibre expert panel. You can read our recent submission to the review in full here.

So what should be the focus for energy market policy and design in Australia?

First, do no harm: the energy-only market has served us well

The NEM is an energy-only market, meaning the only direct return on investment in generation capacity comes from revenue earned in the wholesale ‘spot’ market. There is no separate market where owners of generation capacity can earn revenue for providing capacity, as exists in some other jurisdictions.

The energy-only model remains a critical feature of the NEM, even as the market evolves to feature more variable renewable energy and consumer energy resources. It ensures real time dispatch of the lowest-cost electricity available, providing the right fundamental incentives for investment.

Some concerns have been raised about price volatility under the current design, including negative pricing. However, price variability is not always a negative and can play an important role in investment signals.

During daytime sunshine hours, when abundant solar PV energy is available, electricity is sometimes negatively priced. This sends two key signals to the market:

• First, it sends a signal to the market that more investment in generation of this type is not valued by the market and will not earn a commercial return from spot prices (setting aside other payments outside of the spot market).
• Second, it sends a positive signal to the market about the opportunity for investment in technologies, such as batteries, which can take advantage of negative daytime prices through energy storage, for use at other times when prices are high.

The arbitrage opportunity for battery storage in the NEM is unlikely to persist indefinitely. As more battery capacity comes online, negative pricing events will become less frequent, and competition for stored energy during peak evening demand will increase, driving prices lower.

Rather than abandoning the energy-only model in favour of alternative market models, we should recognise its strengths and focus on complementary measures to support system reliability.

A hands-off role for government with clear rules to promote investment

The federal government’s Capacity Investment Scheme (CIS) is the primary tool driving new renewable energy and storage capacity investment in the NEM. If it works as intended, it will result in a huge wave of renewable energy and storage capacity by 2027. The expert panel has been tasked with looking at options beyond the CIS.

As described above, the energy-only feature of the NEM has served us incredibly well. However, its effectiveness – particularly the price signals the market generates – has been undermined by various government interventions.

We would be better served by government prescribing clear, predictable rules and then allowing market forces to guide investments.

In the case of policies aimed at promoting investment in renewable energy, government should set clear criteria for access to government support. This criteria should act automatically rather than requiring the bureaucracy to make decisions on a case-by-case basis. This approach would provide greater certainty for investors, speed up investment decisions and reduce the risk of government misjudgements, where investment levels end up significantly above or below the amount required.

Beyond 2027, whatever replaces the CIS should be a framework requiring limited active decision making by government, clear rules for eligibility and market-led investment decisions.

Addressing rare and unusual periods of energy availability issues

Much has been said about energy reliability in a renewables dominant energy system and a great deal of it is misguided. In short, solar, wind and hydro power are highly complementary technologies which, when combined with geographic diversity and interregional transmission, can provide a very high degree of energy availability.

However, there is a need to design measures to address the need for sufficient capacity during unusual and infrequent periods of low renewable energy production. As these periods are highly unpredictable but potentially high impact, a separate instrument to those described above may be necessary.

TSI does not favour a capacity market, where generators are paid based on their capacity to supply the market, in addition to what they actually generate and supply. Experience of capacity markets elsewhere shows that they tend to impose high costs on energy users and are not well suited to the kinds of unpredictable and infrequent shortfalls in supply we face in the NEM.

Building new capacity that will only be used in rare and unpredictable circumstances presents a challenge. Since these assets would generate revenue only sporadically, we may need alternative models to ensure sufficient backup capacity is available when needed, such as:

• Government ‘purchasing’ mothballed or retired capacity, to be activated only in strictly and clearly defined circumstances
• Limited direct government investment in capacity that will be drawn upon only in clearly defined circumstances.

Mechanisms like these will require careful design and safeguards to avoid overuse.

Superpower industries can help with the energy transition

As work by TSI has shown, Australia has a comparative advantage in the global clean energy transition, with an abundance of renewable energy resources and the minerals needed to power a clean energy future. Realising this opportunity in full can see Australia contributing to reduction in up to 10% of global emissions and generating revenue exports 6-8 times as large as current fossil fuel exports.

The development of energy-intensive superpower industries – such as green iron, aluminium, fertilisers and fuels – presents an opportunity to build an energy system so large that current price variability will be overwhelmed by the sheer scale of supply feeding into the grid from multiple major sources. This can be viewed as a new form of very large and influential source of demand-side participation in the market. Many of these industries will be capable of ramping production up and down in response to energy price signals so that sources of generation will be able to be diverted to supply the market in response to high prices.

TSI will be undertaking further work on this concept in 2025 which we look forward to sharing.

We need a pathway to pricing carbon

For over a decade, carbon pricing has been a politically contentious issue in Australia. This has left us leaning heavily on second and third-best policy solutions to reduce emissions. Our ambition should be to use the most efficient tool for reducing emissions: a carbon price.

Currently, green production technologies can’t compete with fossil fuel alternatives that do not pay for the costs they impose on society through emissions and contributing to climate change.

Without a price on carbon pollution the cost of action falls to taxpayers. If Australia does not play its part in global efforts to reduce emissions we face increased risks of damage caused by increased frequency of extreme weather such as floods and fires.

While the NEM review will not look at implementation of carbon pricing, we believe it should at least lay out a pathway towards a comprehensive, economy-wide price on carbon.

Conclusion: A Critical Moment for Australia’s Energy Future

The choices we make about the NEM today will shape Australia’s energy future for decades. If we get it right, we can secure ample, low-cost, reliable energy for decades to come. In doing so Australia can contribute significantly to global emissions reductions while unlocking a new era of economic prosperity.