Electricity Market Design Principles

The Australian Energy Council (AEC) has asked KPMG to provide advice on long-term market design principles that support a sustainable energy future for Australia and allow for the assessment of potential market design changes.1 We have also been asked to examine various market mechanisms intended to improve power system security and reliability and undertake a high level review of these against the principles.

The nature of the challenge Decreasing wind and solar technology costs, along with government emissions reduction policies, are driving the transformation of the Australian electricity sector. The sheer scale of new investment required through this transition to 2030 is shown in Figure 1. Around $23 billion of capital expenditure in generation resources alone is expected to be required in the east coast National Electricity Market and $2 billion in the Western Australian Wholesale Electricity Market. Investors, including customers investing in demand-response, require confidence in the market framework to underpin their decisions. Without confidence, capital for new investment will require higher returns or not be readily available. Policy uncertainty affects affordability – an increase in the cost of capital by 1 percent is estimated to increase the required annual revenue sought by investors by 10 percent

Market design principles How do we evolve the current electricity market design to meet these challenges? As the electricity system incorporates new technologies with different physical and technical properties, we need to consider how to evolve the market design to reflect these changes and meet the National Electricity Objective.4 Change in any market is inevitable. What is important is this occurs in a way that is well understood and provides both investors and customers with confidence to make long term decisions. A robust market design framework with established and accepted principles is a necessary part of this.

Good outcomes for consumers requires good regulatory practice Principles are one aspect to market design – how the principles are applied is equally important. Fundamental electricity market reform requires an integrated and well-structured policy development process, as illustrated in Figure 2.

Electricity is a vital input to the Australian economy. Wholesale electricity market rules can have a material impact on the efficiency of the electricity sector, as they are the ‘goal-posts’ within which market participants make investment and operational decisions. Prior to considering potential solutions and applying an assessment framework, it is critical to understand the problem to be solved and whether it is likely to persist. Not doing so risks solving the wrong problem or a non-existent problem. An effective process involves comprehensive stakeholder consultation. Facilitating industry participation in market reform processes creates a sense of ownership, which is essential for successful outcomes. Ultimately, the outcomes for consumers from market reforms will be enhanced when participants understand, adapt their behaviour and embrace the change.

Preliminary review of market mechanisms against the principles Our preliminary review of the above market mechanisms against the principles is summarised in Table 2, which also includes the constrained access reforms in the WEM. We note where development work is being undertaken on these mechanisms, the design process is generally at an early stage and therefore our findings could change.


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