NEM Suspension Introduction This paper has been prepared in response to an article published by John Quiggin, university of Queensland titled “NEM is a failed 1990 experiment. Its time the grid retuned to public hands”. In this article, it is broadly claimed that the introduction of competitive markets in electricity is a failed experience in Australia and the reforms shall be reversed the sector shall be handed over to public authorities. Australian Energy Market Operator (AEMO) suspended the National Electricity Market (NEM) on 15-June-2022 in response to an emergency situation (explained below) because it was impossible to operate the market in such conditions. This paper explains the reasons of the suspension of the NEM by the AEMO and the conditions which led to such suspension. The paper also attempts to compare the same with the design of the CTBCM to analyze whether such conditions can constrain the operation of the wholesale market in Pakistan. Part 1- Why markets suspend globally? The electricity markets may suspend the Real-Time Market if it is determined that such suspension is necessary to prevent, contain, or correct a system emergency. These extraordinary measures are taken in the situation of emergency and they are not a routine practice. These emergencies arise when competition is no longer viable in the market and exercise of market power is certain. These are very rare events that occur in emergency situations. The NEM has been suspended for the first time for all regions since its operationalization in 1998 and it was restored on 27th June 2022 after the corrective measures have been taken to address the emergency. Another instance of market suspension is the famous crisis in California electricity market. Both of these suspensions can be attributed to the flawed market design. Why was NEM suspended by AEMO? AEMO, which oversees power distribution across the country, suspended the NEM on 15-June-2022 stating that it has become impossible to continue operating the spot market while ensuring a secure and reliable supply of electricity for consumers. The conditions that let to this suspension are explained below. In NEM, prices typically average around $A80/MWh (per megawatt hour), but can vary between -$1000/MWh (where generators pay to stay online) and $15,100/MWh. Over the past weeks, wholesale prices surged due to two main factors: high coal and gas prices (driven by the Russian invasion of Ukraine) and roughly 25% of coal power stations being out of action. The coal power stations are unavailable because of maintenance as well as the sudden exit of 3,000 MW of power due to breakdowns (unplanned outages).This led AEMO to trigger a pricing “safety net” and capping prices at $300/MWh (much less than the normal cap of $15,100/MWh). This mechanism was set in place to avoid higher prices for prolonged time. Unfortunately, $300/MWh was less than the cost of generating power from gas power stations and possibly even some coal power stations. Some generators subsequently withdrew their availability from the market, leading to further shortfalls aggravating the situation further. The low-price cap also meant there were weaker price signals as to when power stations with limited “fuel” should use it. This includes some diesel generators as well as batteries and hydro. All this made it much harder for AEMO to operate the market. On 14th July AEMO was forced to direct power stations when to run and when not to run. This intervention applied to roughly 20% of demand, or 5,000 megawatts. AEMO then decided on 15th July that suspending the market will make it simpler to operate the grid during this crisis. Generators will now provide their availability and AEMO will tell generators when to run to ensure secure supply. Market prices are then fixed at the average of the past 28 days for that hour of the day - between $150/MWh and $300/MWh across the day. If generation costs are higher, power station owners will be able to apply for additional compensation, which will be later recovered from consumers. Although this is the first time it has been done nationally, AEMO has previously suspended the market in individual states such as in South Australia this year when control systems failed. Part 2- Australian Market Design AEMO operates two wholesale electricity markets in Australia: the National Electricity Market (NEM), which operates in eastern and south-eastern Australia, and the Wholesale Electricity Market (WEM), which operates in Western Australia. NEM Market statistics: The National Electricity Market (NEM) incorporates around 40,000 km of transmission lines and cables. It supplies about 200 terawatt hours of electricity to businesses and households each year. It supplies around 9 million customers. It has a total electricity generating capacity of almost 54,421 MW (as at December 2017). $16.6 billion was traded in the NEM in the financial year 2016–17. The NEM commenced operation as wholesale spot market in December 1998. It interconnects five regional market jurisdictions – Queensland, New South Wales (including the Australian Capital Territory), Victoria, South Australia, and Tasmania. Western Australia and the Northern Territory are not connected to the NEM. The market uses sophisticated systems to send signals to generators instructing them how much energy to produce each five minutes, so production is matched to consumer requirements (spare capacity is kept ready for emergencies), and the current energy price can be calculated. NEM infrastructure comprises both state and private assets managed by industry participants. WEM Like the NEM, the WEM is an electricity market that enables wholesale electricity sales between generators and retailers, large-scale customers, and demand side participants. The market supplies energy to south-west WA and operates on the Southwest Interconnected System (SWIS). There are approximately 88 WEM Participants, including Market Generators, Network Operators and Market Customers. The WEM has an additional capacity market, the Reserve Capacity Mechanism (RCM), which ensures that there is sufficient generation capacity in the SWIS. NEM Market statistics: The Southwest Interconnected System (SWIS) incorporates over 7,800 km of transmission lines. The WEM supplies about 18 terawatt hours of electricity each year. A total of $500 million was transacted in 2014-15. There are more than one million customers in the WEM. 5,798MW of registered generation capacity, including 513 MW of nonscheduled generation. Part 3- Comparison of Market Design with CTBCM Market Design: Market WEM NEM Gross or Market Net Pool Architecture Price Based Day Ahead (STEM) Net Pool Real Time Markets Price Based Gross Pool Day Ahead Scheduling Cost Based CTBCM Gross Pool Real Time Markets Real Time Market to primarily Settle Imbalances Products • Energy • Capacity • Energy • Ancillary Services • Energy • Capacity Market Index / Marginal Price Hourly Ex-ante DayAhead and Ex-post Real Time price 5-Min Ex-post Real Time price Ex-post Real Time Hourly price Contracts Financial Forward Contracts. Financial Forward Contracts. Derivative Markets Forward Contracts Market Structure ISO Model ISO Model System Operator and Market Operator are separate entities Part 4- Can this happen in CTBCM? From the market design perspective, there are many differences in NEM and CTBCM. NEM is energy only market in which there is no capacity obligations concept. The generators are free to bid their prices and can have an option to not participate in the market if prices are unfavorable. Whereas in CTBCM, there is no such freedom to generators. Each market participant has to contract sufficient generation in advance to supply its peak demand. The dispatch of generation plants in CTBCM is also based on actual variable cost of generation. The generators through central dispatch are mandated to follow the instructions of system operator based on increasing variable cost. It is worth considering that AEMO only suspended NEM market, and not WEM, in which capacity market exists. Unlike CTBCM, NEM has 5-minute dynamic pricing. All the participants must sale/purchase from the market at this price. They are allowed to enter CFDs and derivative market to hedge this price but do not have physical bilateral contracts. In CTBCM, the parties must have signed bilateral agreement and they must buy the imbalances from the market only. This will make our tariffs much static, and they will not change considerably due to hourly price fluctuations. In CTBCM, for all regulated consumers the tariffs will be set by the regulator, the tariffs of generators selling to the DISCO will also be determined or approved by the regulator. So, there will not be substantial fluctuations in end consumer tariff in CTBCM. Moreover, the regulator has set the cap on all suppliers to not to charge any consumer above the regulated tariff given by the Regulator. Prices rise in the regulated monopolistic regime because there is no competitor in the market and the fuel costs are 100% pass through. If we examine the tariff of B1 and A1 categories in Pakistan for the last [] years, it can be analyzed that tariffs increased almost [%]. On the other side, in open market competitive forces tends to reduce prices. In conclusion, our design protects the consumers and in particular the regulated consumers through regulated procurements & capacity obligations. The price-based design of NEM is heavily tilted towards incentivizing the generator at the expense of the consumers. Part 5- Privatization The Author also criticizes the privatization of utilities, it is to clarify that privatization is separate decision and have not related to market implementation. There can be privatization without wholesale market like the privatization of K-Electric. Worldwide there is many examples of success and failure of privatization. It depends on the culture, political environment and the term on which privatization is done. So, it cannot be concluded that privatization will result in failure. Part 6- Conclusion As explained above, the market design of NEM and the CTBCM are entirely different and hence such emergency situation can not arise under the CTBCM regime. It is also important to mention here that it is a global trend that whenever any emergency arise in the markets, opinions are voiced to criticize the markets and blaming the reforms without understanding the core reasons and identifying the flaws and suggesting measures to correct it. It shall be kept in mind that the same markets have functioned well and have delivered economic efficiencies over a number of years. It is pertinent to mentioned here that the said article is a personal opinion and not the decision of government or regulating authority.
