Are We Actually Running Out Of Electricity?
The National Electricity Market AKA the NEM was just suspended across the country for the first time ever to prevent generators from refusing to sell electricity.
It’s a bit bloody cold at the moment and now we’re about to enter an electricity shortage. So what exactly is happening with the electricity market and why are we being told to ration power in the middle of winter?
Earlier this week the Australian Energy Market Operator AKA AEMO suspended the National Electricity Market. This market is where electricity, which is always being generated, is sold at a variable price to retailers like Energy Australia who pass it on to us.
It was suspended to stop generators from simply refusing to sell because they weren’t going to be profitable under the recent price caps set by AEMO. The Market has been suspended before for individual states, but never across the whole national market.
But first let’s back up.
How Does The Electricity Market Work?
The NEM is the wholesale electricity market where power generators are paid a market price for the electricity that they generate. All states except for WA and the Northern Territory are part of the market.
If we flash back to Economics 101, the market operates around a common pool of available resources, in this case electricity, which is called the “spot market” and this determines the “spot price” which is based on supply and demand across the grid and is updated every 5 minutes.
This is the wholesale price of electricity, which is sold to retailers, who then sell to us. It’s typically around $80/MWh (per megawatt hour) but it can go from negative $1000, where generators actually pay to run, up to $15,100.
AEMO manages this market with Energy Ministers being the key decision makers for the whole thing and it’s now suspended.
Why Did AEMO Suspend The Market?
A few days ago AEMO set a price cap of $300/MWh which limited how much money generators would get for their electricity, the normal cap is $15,100. This was in response to basically everything getting more expensive.
But that price is currently less than what it costs generators to make electricity, meaning they wouldn’t make any profit from being in the market. So they withdrew. And just like that we had an energy shortage, not because we ‘ran out’ of electricity but because it became unprofitable for generators to provide it.
On Tuesday AEMO actually forced generators to meet demand and now they’ve decided to suspend the market completely. So instead of the usual market situation AEMO will tell generators when to run and prices are fixed based on averages from the last month.
What Happens Now?
AEMO will continue to monitor the situation and there’s also been talk of a kind of insurance for the energy market called a capacity market. That’s where retailers, and by extension consumers, can pay generators a certain amount of money to be available in times of high demand. This is because coal power generators can’t turn on and off like a light switch they take days to ramp up and cost a lot of money.
A capacity market has been in place in Western Australia for almost 20 years but it’s been criticised as a way to keep funding fossil-fuel generators instead of pushing for renewables.
Australia’s energy policy has always protected fossil fuels and Australia’s politicians have tried to make “cheap coal power” synonymous with energy security. But after decades of propping up coal at the expense of renewables we’ve had this impending problem with energy security that we’re clearly experiencing now.