Non-firm vs priority access: On the long run average and marginal costs of renewables in Australia

Abstract

In Australia, the National Electricity Market (NEM) has experienced a rapid expansion of Variable Renewable Electricity (VRE) projects, not without obstacles. Entry frictions such as movements in Marginal Loss Factors and/or network congestion adversely impacted ∼15% of new projects. Are these the expected results in a workably functioning market, or due to market design defects? Policy advisors have sought to reform the NEM's non-firm, open-access regime. As VRE market shares increase, curtailment will increase rapidly through excess generation and/or network congestion, given the ratio of maximum-to-average wind output is 3 times, and solar PV is 4 times. But access reform focused solely on congestion and curtailment may have unintended consequences as a careful analysis of the difference between average and marginal curtailment rates demonstrates. Malalignment between market conventions and access policy may distort entry, raise consumer prices and harm welfare. Our model results confirm that switching from open- to priority access in Australia's NEM and REZ in particular damages consumer and producer welfare materially.