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Independent report shows value in a new pricing structure for the National Electricity Market
18 Jan 2018 | Archive
Research commissioned by the Australian Chamber of Commerce and Industry has shown the National Electricity Market (NEM) might benefit from a more sophisticated pricing structure, following in the footsteps of several leading European and North American markets.
The report, undertaken by global engineering and infrastructure advisory company Aurecon, investigated a range of options for regional boundary definitions and pricing structures in the NEM, to explore potential cost and other benefits for energy users.
Since its implementation in the late 1990s, there has been little to no reform to the NEM, with wholesale market prices continuing to be set purely based on state boundaries, in contrast to all other traded commodities.
The report found that to date, policy developments had not considered a fundamental review of the NEM’s regional pricing structure as one of the measures that could assist the market transition to a low carbon future, with increasing penetrations of intermittent renewable energy.
Australian Chamber CEO James Pearson says the report found nodal pricing – where prices were determined at the substation level but could be aggregated into regional pricing hubs – might be a more efficient method of setting prices across the NEM.
Mr Pearson says transitioning to a nodal pricing system could promote short-term use of the existing network by delivering electricity from the lowest-cost generators to customers that valued it the most.
The report also found a nodal pricing system would promote investment in generation and network infrastructure where it was most valuable in the system.
“By crossing a state boundary prices can vary significantly, and the Australian Chamber believes a more efficient pricing system spread across nodes and regional hubs, rather than state borders, is likely to benefit all energy users in the longer term,” Mr Pearson says.
The three-part report found blanket restrictions on unconventional gas exploration drilling activities in the Northern Territory, Victoria and New South Wales were delaying investment and adding risk to existing and future ventures.
With supply shortfalls in the domestic east coast gas market forecast over the next five years, encouraging further exploration was critical to providing security of supply in the medium and long term.
The report also recommends renewable energy be developed in regions where it is most cost-effective, with state-based schemes only likely to increase the underlying cost of energy and the cost of meeting reliability services, where those schemes do not reflect a state’s competitive renewable resource advantage.