Australia: more competition, affordable prices

RossBaldick.comThe Australian Competition and Consumer Commission (ACCC) recently released “Restoring Electricity Affordability & Australia’s Competitive Advantage,” a comprehensive report that analyzes the reasons for very high prices and “sets out 56 recommendations to reset the National Electricity Market, boosting competition, reducing costs and improving consumer and business outcomes.” (Click here to find the full report.) I generally agree with its recommendations and want to focus here on two issues: retail price structure and inherited customers.

First, the problem of confusing retail price structures. There are several features that complicate the comparison of retail tariffs from the various retailers in the Australian market, including the interpretation of discounts. The ACCC has recommended the establishment of requirements to make it easier to compare one retail offering to another and has recommended restrictions on third-party intermediaries. It advocates for the establishment of a “default offer rate” to which all discounted offers would be compared.

The default offer rate is likely a workable solution, but I would like to suggest a much more prominent role for government- or regulator-sponsored websites such as in Australia and, in the Electric Reliability Council of Texas (ERCOT). Part of the success of the website was due to heavy promotion from the very start of retail competition, and I believe that better promotion of government-sponsored sites in Australia would also facilitate retail competition, even going beyond the ACCC’s recommendation in chapter 14.

In the case of, retailers provide information to the website, and consumers wanting to compare rates can simply enter their zip code (post code) to see available offers and evaluate their prospective bill, according to their level of typical monthly energy consumption. It is important to understand that this website is not organized by a third-party intermediary, the likes of which have been criticized by the ACCC. This type of official comparison website, set up by the regulator in order to provide unbiased, consistently formatted, apples-to-apples consumer information, could provide the “reference bill amount” advocated by ACCC in recommendation 32.

Second, the problem of incumbents inheriting customers. That is, the successor company of a previous retailer tends to maintain a large fraction of its pre-competition customers, who may not explore cheaper retail options from the competition, thus disadvantaging new retailers – even when they offer a cheaper product. In its retail restructuring, Texas devised a pricing strategy aimed to give a short-term advantage to new retailers by establishing a temporary, artificially high price that the incumbent had to charge. In effect, this became an easy “price-to-beat” for new retailers. Once a certain number of customers switched to the new retailers, or once a sunset date had passed, the price-to-beat was eliminated.

The price-to-beat was set above expected market-based prices for retail offerings, which may seem like a giveaway to incumbents, but it actually provided an opportunity for new retailers to make an initial entry into the market and undercut the incumbents, thus weakening the significant advantage of the incumbents.

As the website shows, there are now plentiful retail offerings in ERCOT competing for customers on a level playing field. It is probably fair to say that the temporary price-to-beat strategy helped produce a vibrant retail market.

How does the price-to-beat relate to Australian restructuring? Australian retail restructuring is arguably past any initial transition period, so how could something analogous now be implemented? Here’s a possibility: Note that the ACCC report recommends that state governments take over some of the “excessive” network costs in order to allow for a bill reduction. This price reduction could be used to create Australia’s own price-to-beat. One possibility would be to allow the discount to flow first to customers of non-incumbent retailers, who would then be able to offer lower prices than the incumbents. While this might be criticized as being akin to an “introductory” credit card rate, the key issue here is to establish a more advantageous position for non-incumbent retailers using an instrument with a well-defined sunset clause. Greater competition keeps prices lower, and the regulator-sponsored website makes it easier for consumers to find those prices. A possible recipe for a vibrant retail market in Australia.

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Carbon emissions: Why can’t Texas be more like Germany?

Energiewende, German for “energy transition,” was the theme of the “Texas-Germany Bilateral Dialogue on Challenges and Opportunities in the Electricity Market” conference held in Austin in late February. The conference was organized by the German American Chambers of Commerce and supported by the German Federal Ministry for Economic Affairs and Energy, in cooperation with ERCOT.

As is well-known, Germany has invested significantly in low-carbon technologies, and their efforts have arguably led to reduction in the cost of production of solar photovoltaics worldwide. Talking at the conference about the transition to a low-carbon energy system were representatives from the German federal government and ERCOT, as well as several companies and consultancies.

I asked about the levels of carbon dioxide emissions in electricity production in Germany and ERCOT. Somewhat remarkably, given the emphasis on carbon dioxide in the Energiewende, there was no direct information about carbon dioxide emissions in any of the presentations. There was information about the shares of renewables, but different speakers had different numbers relating to the total electrical energy and the contributions from various resources.

So I did some calculations. I found about 0.52 metric tons of carbon dioxide emissions per MWh of electricity production in ERCOT and between 0.33 and 0.43 metric tons of emissions per MWh in Germany — assuming 1 metric ton of emissions per MWh of coal generation, 0.5 metric tons per MWh of gas generation, and negligible emissions from renewables and nuclear, and using the energy contributions presented by Falk Bomeke, PhD (German Federal Ministry for Economic Affairs and Energy), Bill Magness (President and CEO, ERCOT) and Arne Genz (German Federal Ministry for Economic Affairs and Energy).

ERCOT per capita consumption of electricity is about double that of Germany, and the emissions calculations indicate that electricity generation in ERCOT emits more carbon dioxide per MWh, resulting in significantly more emissions of carbon dioxide per capita in ERCOT compared to Germany. Clearly, Germany has worked toward reducing its carbon dioxide emissions and has done so without an abundant endowment of low carbon resources.

In contrast, Texas has an astonishing endowment of natural gas and renewables. Although cities such as Austin and San Antonio have set targets for renewable integration, Texas policy has, largely speaking, been indifferent to carbon dioxide emissions. Imagine how much lower emissions would be if Texas policy was re-oriented toward a low carbon future.

Click here to download all of the presentations.

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Comparing the US and EU electricity markets

Electricity markets have been restructured in many countries around the globe. There is a variety of different designs, and the differences can significantly affect our ability to handle new challenges, such as integrating high levels of renewables. What are the key differences between the US and EU electricity markets? I was able to pursue that question in depth during my research sabbatical at the Florence School of Regulation (FSR) last fall. It was one of the issues addressed in an online debate I had with Daniel Dobbeni, founding president of the European Network of Transmission System Operators (ENTSO-E). Below you can watch the full debate (55:12), hosted by FSR director Jean-Michel Glachant.


The definition of seams. Seams, we agreed, include the technical transmission limitations between regions (for example, between countries in Europe and between ISOs in the US) as well as the regulatory and market differences between these regions. Mr. Dobbeni observed that the long-life of electricity system assets together with the history of development in European countries have played an important part in forming these seams, but that they are evolving with the advent of system changes, including renewables. He advocated for removing the seams, and I agreed.

I argued for a consistent architecture to be applied across as large an area as possible, observing that such consistency was perhaps even more important than, for example, whether or not the market design was nodal (as in the US) or zonal (as in the EU). I mentioned that there were still significant seams at the day-ahead level in the US, particularly in the west, and to a lesser extent in the east, where there are several large ISOs with seams between them. There still remain significant technical seams due to limited transmission between the west, the ERCOT part of Texas, and the east. In the EU, the EU Pan-European Hybrid Electricity Market (EUPHEMIA) has removed seams due to market differences in the day-ahead level across many countries through so-called “market coupling” between the regions.

Mr. Dobbeni observed that seams should also eventually be removed in the intraday markets, which are in place in Europe but not the US, and that he was concerned about the technical difficulty of market coupling in balancing markets. I discussed what I understand is the fundamental philosophical difference between US markets and EU markets: in the US, the real-time market is the “final” market; in the EU, the day-ahead market plays most of this role, with the so-called balancing market at least historically being more akin to the deployment of ancillary services in a US-style market. Moreover, I commented on the need to reach geographical scale to enable real-time management of congestion issues such as loop flow.

Mr. Dobbeni emphasized that congestion management was being complicated by the increase in renewables. In addition, he observed that congestion management across borders was particularly complicated and that US-style ISOs that spanned borders were able to consider overall issues in a way that was difficult for the EU-style markets at the country level. He advocated for the enlargement of regions beyond member states, enabling balancing beyond individual states, with which I definitely agreed!

US RTOs and some larger European countries, I observed, are likely at a large enough geographical scale to effectively balance renewables. We agreed that reducing the effect of technical and regulatory borders between regions was desirable to help with balancing renewables, but that it might be difficult to imagine, for example, amalgamating PJM and MISO in the US for various political reasons. Analogous difficulties apply in the EU.

In response to a question from a listener, Mr. Dobbeni mentioned the organizational differences between the EU and US: in the former, the TSO owns assets and operates the market; in the latter, there is a separation of ownership of transmission and operation of the market.

A question was posed about interconnectors, and I responded that building transmission across borders in the US was a challenge, and that this posed particular difficulties in building transmission between renewable-rich regions and population centers in different states. In the EU, security of supply is particularly important in the context of interconnectors between countries, whereas this is less pressing in the US.

We also recognized that energy prices are not bringing forth new capacity, and that prices are more uncertain than in the past. Consequently, even though we both were skeptical about capacity markets, there is evidently a problem. Mr. Dobbeni observed that, while there was overall a very large generation capacity in the EU, there are regional variations in capacity and many uncertainties in the long term. Restructuring in the US, I added, had focused on the generation-side. Now we need more participation by the demand-side in the market as part of the solution to the market providing the right amount of capacity. I also emphasized that the next five years will be the test of the ERCOT energy-only market.

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