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Is the NEM broken? Policy discontinuity and the 2017-2020 investment megacycle

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  • Simshauser, P.
  • Gilmore, J.

Abstract

The recent history of Australia’s National Electricity Market (NEM) from 2012-2017 has been problematic with sudden coal plant closures, a tight domestic gas market and sharply rising electricity prices. The supply-side response that followed from 2017-2020 was an investment megacycle – 12000MW of plant commitments comprising $20+ billion across 105 projects – most of them Variable Renewables. Problems emerged including entry lags, connection delays, system Frequency careering outside normal bands, failing system strength, rising Frequency Control Ancillary Service costs and increasing Operator interventions in the security-constrained dispatch process. Market institutions were caught out. Yet instead of identifying and addressing urgent problems, a suite of market redesign proposals emerged which focus on future investment and Resource Adequacy. In this article, we analyse recent NEM performance and find all pressing issues relate to realtime power system security, not Resource Adequacy, and reflect a Rate of Change problem stemming from record levels of simultaneous (asynchronous) new entry. Resolution requires establishment of ‘missing markets’ to restore power system resilience. Fundamental market redesign is a distraction – it may well become necessary but there is no united agreement as to why this is the case nor when it is required. As it stands, no reform proposal comes even close to resolving the NEM’s existing, and pressing, problems.

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  • Simshauser, P. & Gilmore, J., 2020. "Is the NEM broken? Policy discontinuity and the 2017-2020 investment megacycle," Cambridge Working Papers in Economics 2048, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:2048
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    Cited by:

    1. Paul Simshauser & Farhad Billimoria & Craig Rogers, 2021. "Optimising VRE plant capacity in Renewable Energy Zones," Working Papers EPRG2121, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
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    3. Simshauser, P., 2021. "Renewable Energy Zones in Australia’s National Electricity Market," Cambridge Working Papers in Economics 2119, Faculty of Economics, University of Cambridge.
    4. Apergis, Nicholas & Pan, Wei-Fong & Reade, James & Wang, Shixuan, 2023. "Modelling Australian electricity prices using indicator saturation," Energy Economics, Elsevier, vol. 120(C).
    5. David P. Brown & David E. M. Sappington, 2023. "Load-Following Forward Contracts," The Energy Journal, , vol. 44(3), pages 187-222, May.
    6. Mwampashi, Muthe Mathias & Nikitopoulos, Christina Sklibosios & Konstandatos, Otto & Rai, Alan, 2021. "Wind generation and the dynamics of electricity prices in Australia," Energy Economics, Elsevier, vol. 103(C).
    7. Yasir Alsaedi & Gurudeo Anand Tularam & Victor Wong, 2021. "Impact of the Nature of Energy Management and Responses to Policies Regarding Solar and Wind Pricing: A Qualitative Study of the Australian Electricity Markets," International Journal of Energy Economics and Policy, Econjournals, vol. 11(3), pages 191-205.

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    More about this item

    Keywords

    Renewables; energy markets; investment cycles;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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