If you have to draw up a short list of six things vital to Australia's well-being, the efficient operation of the NEM -- the national electricity market -- has to be on it.
This is because the NEM is the conduit for 92 percent of the system energy in Australian power supply today -- and electricity, in effect, is the oxygen of our national body.
Without electricity, what functions in our society? It operates everything: lights, factory and office power, water, trains, hospitals and schools, traffic control, aviation operations, food supply, retail sales, credit control, financial institutions, communications and the media.
It underpins our lifestyle and, through being low-cost, the international competitiveness of manufacturing.
In a digital economy, its reliable availability literally means everything.
Central to this reliability and security are wholesale generation, transmission and distribution -- the physical structure of the NEM. Central to the NEM's cost-effectiveness are a whole spectrum of policy and financial issues.
The story of the NEM is a tale of 20 years' planning and more planning.
At the end of 1980s the NEM was considered to be a big example of Australia "thinking outside the square" -- two decades later its shape, management and performance is subject to about the same amount of debate and dissension that accompanied its birth.
An early point I would make is that the elephant in the front room of this market is the extra-ordinary amount of time it takes to get change to occur.
Bear in mind, too, that the driving force behind the NEM was the concept of a "national grid" -- the entity set up by federal, State and Territory governments in the early 1990s to plan the market was called the "National Grid Management Council."
The Council was formed in 1991 and spent three years delving in to reform. But it was, in fact, not until 1998 that the NEM began operating as a market for generators and end-users in four States -- South Australia, Victoria,New South Wales, Queensland -- and the ACT. It was 2005 before Tasmania joined the market after construction of Basslink.
An economist I know well, and whose opinions I respect, points out that the costs of transmission so far constructed have exceeded the calculations by the Industry Commission (forerunner of the Productivity Commission) in its seminal analysis nearly two decades ago of the savings to be gained from creating the NEM.
The establishment and operation of the NEM has been under debate since the late 1980s when major business interests began pushing for it in response to perceived poor performance by the State-owned electricity authorities and to lack of co-operation on power issues between the States.
When the debate began, the network beyond Victoria and New South Wales was not connected -- the Victoria to South Australia link was commissioned in 1990, the QNI a decade later in 2000 and Basslink to Tasmania only in 2005.
It would take a long time -- far, far longer than I have available today -- to canvass the conflicting views about the NEM and what might be done to rectify the perceived faults.
At the core, however, is the fact that what has been created is not what was envisaged -- a national electricity market; in a number of important respects it is four, if not five markets, and State government involvement or influence in its operations has not faded, it could even be said to be dominant in some areas (eg retail pricing).
To this can be added a regulatory regime for networks -- half of the business of electricity supply -- that is a source of intense concern for both system operators and large users, who take a third of the power provided.
It is worth looking quickly at the five key original market objectives -- and what has actually turned out to be the situation:
In short, the NEM has the outward appearance of a national -- ie that is south-eastern Australian -- market, but it is in reality much less than what it purports to be.
Earlier this month when I asked the aforesaid economist if she thought the NEM worked, she responded: "If it was 'right' we would have prices around $35 per megawatt hour in the pool, a steady stream of baseload plants being built (not funded by the Queensland Government), rising reliability and falling network prices -- and we don't."
Let it be said that this
And yet many generators are unhappy, transmission operators are frustrated, distribution service providers are vexed by regulation, retailers are unhappy, the environmental advocates are forever fuming and large business customers, who employ more than a million Australians, seem to have only two moods when it comes to the NEM -- cross and very cross!
The preferred solutions all seem to be designed to make the system and the situation more complex -- and this is no minor thing because Australians' reliance on electric power is growing. Power demand rose almost 60 percent from 1990 to now, compared with an increase in total energy use over this time of only half that level. Most of the rise in electricity demand is in the NEM area, and it is projected to continue increasing at more than three percent a year.
The industry believes generation capacity will have to be increased from 45,000 MW today -- most of it in the NEM -- to 75,000 MW by 2030.
More than 80 percent of this demand is in three locations -- Greater Melbourne, Greater Sydney and Greater Brisbane, including the Gold Coast. These areas have 14 million people today and will have 17 million in 2025.
The price of power is going to become even more critical because measures to reduce greenhouses gases inevitably will drive up wholesale costs and the need to massively augment the network systems will impact on the other half of the electricity bill -- with potentially dire consequences for energy-intensive manufacturers who directly employ more than a million Australians and are the engine room of the economy.
A highly efficient power pool -- as efficient as the best in the world -- is a critical tool in managing these pressures on the final electricity cost.
This has been known for years. Here is what the International Energy Agency said seven years ago after reviewing Australian energy policy: "The NEM is not yet strongly integrated; the amount of electricity traded is comparatively low and prices can differ across regions, particularly when transmission constraints emerge. During periods of peak demand, the network can become congested and the NEM separates in to its regions, potentially exacerbating reliability problems and the market power of regional utilities. Solutions comprise more transmission interconnection, new generation and demand-side measures."
The agency could have added that a real market would not outlaw supply scarcity, as the NEM governments have caused to occur through reserve powers, intervention on the demand side and mandated supply of "green" power.
One could go a step further and say that the conflict of interest between the State governments was a key part of the original problem that led to the drive for the NEM and it has not gone away. The governments just play their hands better (or worse) these days.
For my money, if you had to pick the greatest example of this, you need look no further than the need for a transmission link between New South Wales and South Australia and the way the then SA Government saw off the concept in order to protect the value of local generation assets it was about to sell. What we have, therefore, is a link between two States (Victoria and SA) that share weather patterns -- when it is extremely hot, with summer storms, and demand in these States is at a peak the link is often downgraded.
Logically, if you want power prices to fall in South Australia, you build a good transmission link to NSW -- but this does not pass the existing regulatory test, which to my mind means that it is the test that is faulty.
Earlier I mentioned the importance of the financial aspects of the NEM. I am not qualified to lecture on financial issues, but this much is obvious even to a layman: The NEM is a relatively small market compared with some overseas. To gain commercially viable scale among generators and retailers there should be only a few suppliers. This, of course, creates counter-party hedging risks, raises premiums and ultimately customers prices.
Looking back, it seems obvious these issues were not envisaged when the NEM was conceived, but they are understood today -- and yet la donna immobile: the market lady does not move. Or at least not to the extent that remedies the problems in a timely fashion.
One cannot canvass the NEM issues without acknowledging the continuing fuss over perceived market power, especially by generators. Again, a book could be written on the claims and counter-claims involved here, but can I toss this thought on the table: generators can only stay in business if they cover their cash costs, and that includes fuel costs and debt servicing. Is it astonishing, therefore, that generators like to keep available capacity to a level that allows them to cover their cash costs?
When the new-minted Rudd Government runs its much-hyped 2020 "summit" in April, will it, I wonder, have on its agenda the need to deliver the country (or at least its south-eastern part) the power market that all and sundry pledged to design and deliver when our Prime Minister was still the senior aide to the Premier of Queensland?
When the distraction of the summit is out of the way, will the Government look at the the NEM issues in the light of the need to address greenhouse gas emissions and draw conclusions that go beyond emissions trading and an expanded MRET to ensure that the market plays its role to the full in keeping down power bills, especially for trade-exposed business?
Pinching and bending a tag from Ancient Rome, who will reform the reformers, one might ask?
My point, in conclusion, is not that the NEM is a bad market -- it isn't, compared with other efforts around the world -- but rather that, in order to cope with the social and economic environment in to which Australia is now moving apace, we need an exceptionally good market that will provide the right climate for the investments required to sustain a viable, secure and comparatively low-cost electricity industry for the next 20 years, and longer.
The annual system energy requirement in the NEM today is of the order of 194,000 gigawatt hours -- and the supply industry is forecasting that this will reach almost 230,000 GWh in 2016. That is not a far horizon -- like 2030 or 2050, a safe perspective for politicians proposing what may turn out to be Mission Impossible for greenhouse gas emission cuts -- but round the next bend.
The problems inherent in not having an exceptionally good NEM in the face of this demand for power -- as I pointed out at the start of this talk, the oxygen in our national bloodstream -- are going to become more and more apparent, even to ordinary voters, well before 2016, I think. Given the situation here in NSW, the State electorate here may be dwelling long and hard on the problems as early as the next election in 2011.
The efficiency of the NEM, as I have indicated, is linked to a number of other critical social, economic and environmental issues high on the national agenda for the next decade -- and an almost inevitably bumpy road ahead may well turn out to be even harder for all Australians to traverse if this market cannot be quite swiftly made best in its class.
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