6 enduring challenges for competitive electricity markets

Recently I had the opportunity to read the AEMC’s Discussion Paper [copied here for permanent reference] of its “Strategic Priorities for Energy Market Development”.

This Discussion Paper proposed three strategic priorities for the AEMC:

Strategic Priority One = A predictable regulatory and market environment for rewarding economically efficient investment
(it was not stated in the title, but the text confirmed the focus was on generation investment).

Strategic Priority Two = Building the capability and capturing the value of flexible demand

Strategic Priority Three = Ensuring the transmission framework delivers efficient and timely investment

My first thought, in seeing these issues, was not one of surprise.

Rather, it reminded me of the 6 core issues I helped to uncover for market operators around the world back in 1997 as part of my involvement with the Association of Power Exchanges (the APEx).

On the tail end of my E.S.Cornwall scholarship, I ended up contracted to the Electricity Pool of England & Wales for almost a year, in the early days of the APEx organisation.

APEx had been formed about 6 months earlier, and so was still in the early stages of establishing how it was going to meet its member’s objectives – which was to facilitate the exchange of accurate, up-to-date information on electricity markets and mechanisms (including in particular, how each member was working to address common challenges).

I was tasked with assisting APEx members to compare the different mechanisms used around the world for electricity markets.

There were several initiatives that were commenced as part of this process, including both:
1)   a system of Market Maps (an idea which continued to be developed, leading to our own Market Maps for Australia’s two main electricity markets) and
2)  a listing of Specific Issues.

In the ten months of my involvement in the project, we found that there was a fair degree of difference between the various markets that existed at the time.  For instance:
1)  Some were gross pools, some were net pools (both with advantages and disadvantages).
2)  Some had a common market-wide price, some used regional prices, whilst others nodal (each with advantages and disadvantages).
3)  Some had capacity markets, some were energy-only.
4)  Some had physical forward markets, some did not.
the list went on…

Furthermore, we found that terminology was distinctly different for the same constructs in different places.

Despite all these differences, we found that there was a very distinct list of common issues which all market operators were separately grappling to deal with.

These “Strategic Issues”, as we called them back in 1997, were as follows (in no particular order):

Strategic Issue #1 – Generation Capacity Development

APEx called this “security of supply” back in 1997.

The essence of the challenge was how Market Operators could be sure that the market arrangements in place were going to be sufficient to incentivise generation companies to build sufficient new capacity in order to ensure that the supply was always available to meet demand.

It’s clear that this is the one that AEMC has nominated as its Strategic Priority One would fit neatly under this umbrella.


Strategic Issue #2 – Transmission Development and Pricing

Back in 1997, the immediate focus was on helping APEx members to share information about the approaches being taken to price transmission, and its impacts, in several respects:
1)  Use of system charges – incorporating both capacity and energy;
2)  Congestion pricing; and
3)  Transmission losses.

The objective was to understand how these mechanisms could be improved to provide for more efficient market outcomes overall, including the development of efficient network solutions.

I believe that the AEMC’s proposed Strategic Priority Three would fit neatly under this umbrella.

Strategic Issue #3 – Financial Market Development

Back in 1997, the concerns of Market Operators was that they understood both:

1)  The necessary prerequisites for a successful establishment and operation of a well functioning financial market for electricity; and

2)  The requirements that exist in the electricity market for various Risk Management products, based upon the indigenous demand/supply structure and observed price volatility.

After some false starts with earlier attempts, it appears that the NEM is achieving some results with respect to a liquid financial market.  As shown in our 2007 Issue, and being updated in our 2011 Issue “Power Trading Schematic”,  volumes traded in the financial market have continued to increase, and are now well in excess of the volume of trades on the physical market.

Hence it is understandable that the AEMC has not proposed this area as one of its strategic priorities.


Strategic Issue #4 – Ancillary Services

My recollection was that there was concern amongst Market Operators in 1997 about the mechanisms used to balance supply and demand (in terms of FCAS and also other services) in real time.

The last significant reform of ancillary services in the NEM was the introduction of a spot market for FCAS services.

This is not as much of a concern within the NEM currently.

Strategic Issue #5 – Demand Side Activation

Back in 1997, the immediate concern was more about how to implement full retail contestability – however the underlying theme revolved around how to ensure that the demand side was enabled to be an active participant in a competitive electricity market.

With FRC implemented, focus shifted to issues of Demand Side Management – including both efficiency (demand reduction) and flexibility (load shifting and curtailability).

In this sense, the AEMC’s proposed Strategic Priority Two fits neatly under this umbrella.


Strategic Issue #6 – Regulation and Governance

Since 1997, establishing the most effective structure of regulation and governance has continued to be a focus of considerable attention (in Australia, and elsewhere).

It was only 2005 when the AEMC itself was created, as a rule-making body for the NEM.

Similarly, it has only been relatively recently that the AER has taken over responsibility for regulation for a number of aspects of the electricity market.  This transition is not yet complete, with various state bodies still responsible for regulation in several ways.

Questions are being asked about the effectiveness of the AER’s regulation of transmission and distribution revenue determinations.

We note that the AEMC has not listed this as one of its strategic priorities – though we understand that such a review (if it were necessary) would probably need to be driven out of the MCE instead.


It was not as top of mind back in 1997 – but now (not just in Australia) we could probably add in the Environment, and Sustainability, as strategic issue #7.

Beyond that addition, I believe that these Six Issues remain the core, enduring challenges for electricity market operators, and policy makers, today.

About the Author

Paul McArdle
One of three founders of Global-Roam back in 2000, Paul has been CEO of the company since that time. As an author on WattClarity, Paul's focus has been to help make the electricity market more understandable.

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