"Mike Jonas,

Australia’s retail electricity price has gone through the roof and is still climbing. This is a proposal for how to bring it down again. Something like this proposal already operates in many other countries, so this is not a step into the unknown. Actually, I would claim that over the last few years the Australian system has been forced further and further into a dark hole, and this proposal is for a large step into the light. Although large, the step is simple, rational, and inexpensive.

The Basic Principle

The basic principle behind this proposal is:

The purpose of the electricity grid is to meet demand at minimal cost.

This is very important, and the present disastrous situation is in large part because this basic principle has been discarded. Note that there is no mention in the basic principle of any need to pander to the needs, wishes and vagaries of electricity suppliers. The suppliers’ only purpose is to meet demand profitably, and the proposed system’s only purpose is to enable that at minimal overall cost.

The Present System

The present system uses an auction mechanism to match supply to demand. Each supplier submits bids to supply certain amounts of electricity to given regions for upcoming 5-minute trading intervals. The Australian Electricity Market Operator (AEMO) runs a dispatch auction every 5 minutes, and accepts bids cheapest first until they have enough to match expected demand. From this, they set a spot price for all accepted suppliers and all users. This system is known as the National Electricity Market (NEM).

As currently operated, bids can be submitted day-ahead (or earlier) but remain re-biddable up to dispatch. This fuels volatility, because effectively there is just one short-term 5-minute-based system. It has been observed that: “… regional electricity markets in Australia are characterized by relatively low levels of annual, weekly and intra-daily seasonal patterns, but are by far the most volatile markets in this study.” [1].

The Proposed System

The proposed system is based on the fact that most demand is fairly well known in advance – AEMO know roughly what tomorrow’s demand will be, they just don’t know exactly how it will pan out minute by minute. So if AEMO can cater for most of the demand in advance, then they only need to be flexible for the relatively small part of demand that varies. The proposal is: There should be a binding day-ahead auction, by region, for specified quantities of electricity for specified periods of the following day.  The specified periods would range from an hour to the full 24 hours. In other words, AEMO can work out its expected requirement by region for each part of the following day, and lock supply in for most of that. The next day’s 5-minute auctions then only need to deal with variations in demand, not the whole of demand.

Variations of this proposed Day Ahead Market (DAM) system are used by many countries [2], and significantly reduce volatility – “We also find that electricity markets organized as day-ahead markets exhibit a significantly lower overall price variation compared to markets with real-time trading.” [1]. For suppliers, a day-ahead market also increases certainty. Businesses can plan better with certainty, and this factor alone will, in time, reduce overall cost [3].

The present system already has mechanisms for handling situations like a successful supply bidder failing to deliver, expected demand failing to materialise, and organisations trying to game the system by eg. cartel operation or withholding supply. All of these mechanisms can continue. Some new provisions might be needed for the day-ahead market, such as deviation charges [4] and ‘gross’ bidding [5]. The present system also allows suppliers to have backup arrangements with each other, and these can continue too. So, for example, a solar company could put in a bid for several hours’ supply to a nominated region for the next day, and protect themselves by having a backup agreement with a gas company in case there are more clouds than expected.

The point of this proposed system is that it matches the market mechanisms more closely to the patterns of demand. In other words, it aligns the market with the basic principle as stated above.  No kind of supply is favoured or penalised. Wind and solar companies, for example, whose supply is unpredictable, can still participate fully by getting backup agreements. The main difference from the present system is that suppliers become more responsible for variations in supply, allowing the market operator to concentrate more on meeting demand.

The processing logic for the day-ahead auction is far from simple, but it isn’t new – it has already been done. The USA’s PJM, for example, optimises diverse bids into a least-cost 24-hour plan [6], and typically clears about 95% of the next day’s demand. This forward-clearing approach has delivered estimated 10-20 % system-cost savings through better planning and lower volatility.

Oh, and one more thing: there are no government subsidies or mandates in the proposed system. Removal of those, in time, cuts overall cost too.

Implementation

It really should not take long to get the proposed system up and running.

cont.