by Greg Williams, Senior Economist - Strategy and Economic Analysis

Is a household that generates and sells more electricity than it consumes still a consumer? Is a big battery a generator or a consumer? Why is the distinction important?

Ever since power grids were formed in the first part of the last century, electricity connection points (that is, where generators and consumers are located and electricity flows are measured) have had to be registered as either a generator or as a consumer. Electricity is generated, measured (and rewarded) at the connection point of generators. The electricity flows through the poles and wires and is used by electricity customers, which is measured (and paid for) at the connection points to their homes and businesses. The amount customers pay must be sufficient to recover all the costs of the electricity network (for example, transformers, poles and wires) and generation.

Toward the end of the last century, electricity markets were created in many countries, including Australia. This allowed generators to compete in a wholesale market where generation is bought and sold in real time, to reduce costs and pass on those savings to competitive retailers buying electricity for and providing services to their customers. Other than that the model didn’t change – generators continued to generate and sell electricity to consumers – so there was no review of the way connections were registered in Australian electricity markets (the Wholesale Electricity Market that services Western Australia and the National Electricity Market that services the eastern and southern states).

This registration system had the benefit of being convenient and simple but, in truth, it was always a little too simple. This is because a generator is not always generating electricity and when it is not doing so, the facilities needed to house and operate the generating units -- for example, lights, monitoring and IT equipment, heating and cooling et cetera --  consume electricity just like any other consumer. Nearly all generators also consume electricity, but their consumption is instead classified as ‘auxiliary load’ - consumption that is considered essential to operate the power station - whether or not any electricity is being generated or not.

The designation of a connection point as either a consumer or generator is important because specific obligations and the allocation of various costs are tied to this designation, rather than being tied to the act of generating or consuming electricity there. While the registration of electrical connections has always been flawed for this reason, it has been workable while:

• consumption by generators is directly associated with facilities to operate the generation; and
• generation operated by consumers has been employed principally to reduce the cost of electricity being consumed at the site.

However, it is becoming increasingly difficult to maintain this binary distinction as parties want to co-locate facilities consuming and generating electricity behind a single connection point for a variety of reasons. At any moment in time, batteries might be consumers or generators of electricity and consumers both large and small are investing in solar PV panels to generate renewable energy beyond their own consumption levels and export their excess electricity to the wider community. For example, Ikea Australia last year announced that it would install solar panels on its Adelaide premises, which would be coupled with an onsite battery.

This is why the Australian Energy Market Commission and the Energy Security Board is considering a future-focussed model for registration called the trader services model. The trader services model is an integral part of a long-term project to move the electricity market further toward a two-sided market. The AEMC is considering steps in this direction right now as part of its rule change for integrating energy storage, a proposal that was made by the Australian Energy Market Operator.

A trader services model of registration would not require connection points to be designated as either consumers or generators of electricity. Instead, the connection point would be recognised as the interface to the market for supplying or consuming electricity and ancillary services. Anyone responsible for a connection point would incur obligations, costs and rewards according to the services traded (both buying and selling) at this interface. They could appoint themselves as the financially responsible market participant or contract with a trader (eg retailer) for all the services bought and sold at the connection or they could split the services between different traders (eg one for selling electricity and one for buying it). Existing protections for small customers under the National Energy Retail Law and Rules would still apply, and new services would also be subject to appropriate protections for consumers. 

We think this change is important as it will help accommodate the transition to a low-emission system, open up the market to more consumers and businesses that want to innovate in the way they interact in the electricity market, and help to reduce prices for everyone.