Energy Brief: Are Two Energy Markets Better Than One?

With Australians experiencing higher-than-normal electricity prices, the design of the National Electricity Market (NEM) remains under intense scrutiny from consumers, policymakers and regulators. The NEM is a gross pool market, which means it's primarily designed for the centralised dispatch of controllable generators. As the industry grapples with the increased penetration of variable generation and associated changes in system integrity and resilience, the Oxford Institute of Energy Studies has proposed a theory that, in this instance, two energy markets are better than one. This brief will explore that idea further.

Separation of supply

In the NEM, generators are dispatched in real-time based on their bids and regardless of technology type. The NEM, like all efficient markets, seeks to set prices based on underlying costs, allowing generators to realise their long-run marginal costs (LRMC) over time. However, compared to traditional dispatchable generators –