GenInsights21 report highlights NEM complexity and risk

Electricity transmission towers against golden sky (NEM capacity)
Image: Shutterstock

According to Global Roam’s recently released GenInsights21 report, Australia’s energy transition is rocketing along, bringing with it complexity and risk.

The 600-page report provides an analytical “deep dive” into historical generation performance in the NEM, and what this means for future challenges. According to Global Roam’s Paul McArdle and Greenview Strategic Consulting’s Jonathon Dyson, the report highlights three key challenges.

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“The level of variability and uncertainty is increasing across multiple aspects of both the market and market arrangements, as well as across the power system itself,” GenInsights21‘s authors wrote.

“This variability is in turn resulting in subsequent downstream effects, some of which are understood at the time, some are not. Therefore, as we moved through summarising this work, we have started to identify whether it is increasing or reducing the variability. Not all variability is bad (and in fact variability is a driver of market outcomes), but as the management guru Peter Drucker said, ‘If you can’t measure it, you can’t manage it’. We like to be more explicit: ‘If you can’t measure it, you can’t improve it, and you sure as heck can’t optimise it!’

“With the increasing variability, the level of risk inherent in this energy transition is large and increasing, which means that concerted, objective focus will be required for years to come to ensure the transition occurs as smoothly as possible. With growing risk comes increasing risk premiums. These risk premiums take many forms: at a physical power system perspective, they result in additional headroom and safety margins, and within a market context, they result in ‘safety nets’ and ‘contingency measures’. Either way, the risks materialise somewhere—but in complex systems, it is often difficult to predict the impacts in advance.

“The complexity of the physical and financial systems is increasing with many layers of complexity in the electricity grid operating across a wide variety of timescales (from sub-second level out to seasons and years). Countless times we see discussion and commentary on the number of megawatts installed, total percentage used at a particular point in time, yet without reference or understanding to price, price signal or financial outcome. Similarly, the electricity market (and its subsequent outcomes) should not simply be seen as another financial investment class, where the cheapest deployment of capital wins the day.

“The primary purpose of an electricity market1 is to provide for efficient dispatch of electricity to meet the long-term needs of energy users and does this by providing a clear price signal for the locational wholesale supply of electricity,” the report states.

“There are many designs for price signals and there is no single ‘one size fits all’ mechanism. And whilst the current NEM is challenged in ways potentially not contemplated when designed in the mid-1990’s, the performance and reliability of five-minute dispatch (and now five-minute settlement), is a testament to the many people who helped shape it over the years. Electricity markets are mathematical representations of the physical power systems they interact represent. They should speak the same message, but occasionally do not.

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“Through our day-to-day involvement helping many wholesale participants, the authors continue to ask ourselves ‘are there other significant challenges that are unresolved—and how are these impacting the variability, cost and/or risk to participants in the NEM?’”

To purchase a copy of the GenInsights21 report, click here.

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