Written by Lucy Carpinelli Solution Architect at Evergen
What if Australia had an energy market that allowed full utilisation of renewable energy?
It’s within our reach, but we’ll first need to reform the archaic parts of our market.
Australia has some of the world’s leading solar resources, which puts us in an enviable position as we progress through the energy transition. However, our energy market is old-fashioned. Other countries have transitioned from the traditional ‘gross pool’ setup to an auction-based model, where energy can be bought and sold both day ahead and within day, rewarding the kinds of responsive assets needed to smooth out variable generation from renewables. Meanwhile, Australia persists with the gross pool model, with prices set on a single day ahead market and a limited set of barely liquid hedging instruments available on the ASX. Given the challenge of keeping the lights on in the face of variable renewable output, decreasing inertia and the mass decentralisation of generation, the market is no longer fit for purpose.
As well as shifting generation to renewable sources, the energy transition brings decentralisation; but the structure of the energy market isn’t aligned with this process. We need to be able to match small generation assets and aggregated small assets, like Virtual Power Plants (VPPs), with local demand. However, our current energy market, which services whole states with a regional price, doesn’t meet that need and creates perverse incentives, such as the curtailment of residential solar generation as traders seek to avoid negative prices. We will see increasing amounts of solar curtailment as rooftop PV continues to expand across households and businesses. If we could incentivise local demand matching to local generation, or incentivise local storage assets (such as community batteries) through discounted Local Use of Service tariffs, we would be able to make use of more solar generation. The energy market should evolve with the intent to utilise the vast renewable resource on our roof-tops.
Regulators are grappling with what the future of the energy market will look like and we will see some major changes post-2025. Currently, Australia has an energy-only market, which means generators are paid only for the energy they output. There are also relatively small amounts of ancillary services procured, such as for frequency stabilisation. We are likely to see the introduction of a capacity market, where generators are paid to be on stand-by. Capacity payments are a double-edged sword – they could help build resilience into a grid dominated by renewables, but they could also unleash new cashflows for thermal generators, extending the lifetime of polluting assets that would otherwise be mothballed.
Beyond regulators, we’re also likely to see private enterprises step up to change the energy market through their operations and through the voluntary purchase of carbon offsets. Businesses like Canva are supporting carbon abatement projects to net out their emissions. The oil and gas industry is also a big player in carbon – oil majors now sell carbon-neutral liquefied natural gas (LNG). Carbon neutral hydrocarbons rely on sourcing suitable carbon offsets, such as savanna burning in Zimbabwe, aiming to reduce forest fires. The predicted reduction in forest fires is considered to net out the carbon that will be emitted from shipping and burning LNG. This has been called out as greenwashing but regardless, there is an appetite for offset hydrocarbons and an ongoing demand for carbon products. From a market design perspective, carbon is an unusual commodity: it is both highly regulated in formal markets and also sold haphazardly, as voluntary buyers navigate a fragmented marketplace. A clear standard for carbon abatement is needed before a true marketplace can be developed.
The challenge of managing decentralised electricity, intermittent renewables and carbon pale in comparison with the challenge of incorporating hydrogen into the domestic gas market. This is a problem distinct from large scale industrial generation of hydrogen or green ammonia. We are dependent on gas for heating, especially in cooler parts of Australia. Introducing hydrogen into the natural gas supply is one way we might decarbonise heat. However there are two big physical challenges with this change, and market impacts flow from them.
The first physical challenge is the need to change infrastructure in transmission systems and people’s homes. You cannot simply take a home that runs on natural gas and switch to hydrogen, because gas-fired devices won’t work: gas stovetop, gas heater, gas hot water and the gas reticulation system that connects everything. Transitioning to hydrogen therefore has to start quite slowly. A study in the UK concluded that 20% hydrogen could be accommodated. In Australia, the hydrogen blending target is likely to be around 6%.
The second physical challenge is one of energy density and concentration. You get less energy from combusting hydrogen than you do burning an equivalent amount of natural gas. If we blend hydrogen into the gas network it’s likely that different concentrations of hydrogen will be observed at different points in the network. That means that blended gas will have variable energy value.
So how does a market for hydrogen blended natural gas work? Wholesale and retail gas pricing should reflect the value of energy delivered, making these (currently) simple trades dependent on the concentration of hydrogen. Given that hydrogen generation is likely to be tied to renewable generation, hydrogen generation could be intermittent, so the composition of blended gas could differ not only between locations, but also seasonally and even day to day. This necessitates new metering and new contracts, and potentially changes both gas trading and gas transmission rules.
In summary, the energy transition is not only a problem of engineering and financing. We need new markets to enable the full and efficient uptake of renewables and a transparent mechanism for trading carbon offsets. Regulators, consumers and private enterprise all have a role to play in devising our Energy Market version 2.0. This process must start today.