High stakes in energy market design

When things go wrong with electricity they can go badly wrong. And a topic that can seem as dry as dust – energy market design and regulation – is suddenly one that everyone has a view on. 

This was vividly illustrated on Wednesday 28 September 2016 when all power in South Australia (SA) was lost. A population of 1.7 million was left without electricity. While most had their supply back within hours, it took nearly a fortnight for power to be restored to all customers.

It was a perfect storm event. It had all the right ingredients to fuel a debate that was already raging about power prices, renewable energy and the retirement of old coal generation plant.  The so-called Black System event in SA catapulted an already politically-charged debate about electricity right back onto the media and political centre stage.

Tornadoes with wind speeds up to 260 km/h had ripped through three transmission lines.  But the real damage came from a series of technical consequences that led the system to crash. 

First the faults and voltage dips on the transmission system caused protection features installed on windfarms to automatically reduce their output. The reduction in windfarm output caused a significant increase in imported power flowing through the Victoria- SA interconnector. This was enough to activate another special protection scheme that tripped the interconnector offline. By now, the SA power system was separated (“islanded”) from the rest of the country and was unable to maintain system frequency. The system went down within just a few minutes.

The failure reignited key battle lines in the wider energy market debate. Did the windfarms cause the problem? Would more reliable baseload fossil fuel power have helped? Were the politicians putting responses to climate change above energy security? But the final and full assessment of the event by the Australian Energy Market Operator kicked a few red herrings into touch and showed that there were much more complex and technical factors in play, not least understanding and managing a modern energy system that has moved from old linear lines to one that is decentralised with many more dynamic and interconnected variables.

You don’t have to be an energy geek to find the market operator’s report fascinating reading. It’s a dramatic illustration of the complexities that face those responsible for energy market design and regulation. And those challenges are the focus of a new paper from PwC, reporting on the discussion that ensued when senior executives and experts from 12 countries and four continents gathered for a PwC roundtable on market design in Brussels.

The event brought together leading players with substantial experience from both the regulatory and corporate spheres to discuss how market design can best evolve to meet the challenges of new energy systems. The Australian Black System event was examined together with the difficulties being faced in territories as diverse as South America, the USA and Europe. 

Everywhere market design faces common challenges. In a changing energy world, power systems are becoming more decentralised and, with that, comes volatility. The need to balance energy resilience with flexibility is adding a new tension to the central trilemma of reliability, affordability and sustainability.

But the contrast between the similarity of the challenges and the difference in market design approaches offers a great opportunity. What was evident from the roundtable discussion is that there should be no need to invent market design solutions from scratch. Different parts of the world have followed different evolutionary paths and have adopted different policy frameworks. There are things that are done well and things that are done badly everywhere and we can learn from them.

At the heart of the challenges faced, there is the central theme of restriking the balance between profitability and the ongoing ‘license to operate’ for energy companies. It is THE major tension as a number of governments and regulators look to intervene or re-regulate liberalised markets and it is also central to markets that have taken a more moderated approach to liberalisation.

The major pressures emerging in different markets around the world are often related to how well regulators, policy makers and companies have combined to create energy market outcomes. Deregulated markets can learn from more regulated markets and vice versa. More than ever, with power coming from multiple sources and energy systems moving from linear to decentralised structures, we should reject the old orthodoxy that there is only one direction of travel