The Road To Energy Abundance

The law of supply and demand says that, all else being equal, demand declines as supply increases. If you plot these counter trends on a price-quantity graph, they intersect at an "economic equilibrium", where the price the market is willing to pay meets the price suppliers are willing to take: the market-clearing price.

If you restrict supply or increase demand, you have scarcity, and prices tend to rise.

These market forces incentivise private capital to create supply to meet demand, driving much of the social and economic development around the world. Capitalist nations must wield the power of the market towards national goals. For example, by subsidising suppliers to bridge the gap into new markets aligned with goals, and imposing duties on suppliers that threaten those goals.

Some 30 years ago the electricity market^[1] in Australia was put largely in the hands of the private market. Regulators were assigned the role of tweaking incentives to ensure it mostly headed in the right direction, albeit under the powerful and efficient force of private enterprise. But one of the peculiar features of electricity is that there isn't actually any wiggle room between supply and demand. The system must actually meet demand every minute of the day, or the system fails for everyone.

So the market regulators devised a highly regarded scheme to ensure the market was still competitive. In the wholesale market, suppliers competed mostly with each other, and the market operator dictated the demand they must meet. The operator collects all the supplier bids, and figures out the cheapest combination that meets the immediate demand, and that also keeps the whole system running. The demand side, representing big loads and energy retailers, buys what they need at the price set by the market. The operator then uses these purchases (and other signals) to predict what the demand will be in the future.

Since these mechanisms are complex, and quite obscure to the average electricity user, there also exists a retail market. Retailers participate in the rapidly moving wholesale market, but on-sell electricity to individuals at a steady, promised price. In other words, they hedge against future electricity prices on behalf of individual customers.

The landscape looks very different these days, and many suppliers on the market are also capable of demand (think batteries). And instead of a supply side dominated by large players that would prefer not to turn off at all (eg. coal power plants), there are now many that turn off regularly (eg. solar plants).

But perhaps the most significant change is the prevalence of very negative pricing. Although the concept is strange, commodity markets are no stranger to negative prices - for example oil prices turned negative in 2020 when oil in motion (being produced or shipped) began to pile up as demand dramatically stalled. For physical commodities, a lack of demand does not just mean prices hit the floor - they fall through it! That's because someone still needs to stockpile it. When you have a backlog, this can be a real hassle, and buyers would prefer not to have it, even for free.

For electricity the mechanism is similar. Except instead of the hassle of stockpiling, you have the danger of upsetting the system balance. Supply must always meet demand. Not too little, but not too much either. If there's nowhere for the electricity to go right now, then it is a threat to system stability and suppliers must pay to supply it. So when supply is high, prices can go negative very quickly.

Negative prices aren't inherently bad. And they do just what you want from a market - dangle a big carrot in front of investors to take advantage of them. As the market shifts to capitalise on the opportunity, it tends to self correct. But when they persist, economists sit up and take notice.

If a market tends away from scarcity, and it's a basic necessities good, then market forces start to break down. The pressure of competition starts to work a little differently, and the market may well begin to operate in a local minima - working to optimise but never quite making the leap to the new optimum. Particularly if there has been a fundamental shift to the unit economics. Some would say that the rise of suppliers with practically zero marginal fuel cost more than qualifies.

That's why there's more and more interest in the potential to switch lens^[2], and take a look at the system through the perspective of abundance, not scarcity. In an abundance market, such as the Internet, the perceived "common good" shifts to lower the barrier to participation. Suppliers are rewarded less for creating downward pressure on demand via price rises, but for creating upward pressure on demand by contributing to "whole of grid" features like reliability and accessibility.

There's a lot to figure out here. But sometimes the contemporary lens (as comfortable and nearly imperceptible as they become!) will never show us the way forward. It doesn't hurt to take a look.

1. This article focuses on the NEM in particular, which is the largest energy market in Australia. ↩︎
2. The abundance lens is not the only alternative lens. One that has had more influence so far, is the negawatt market. It values demand reduction just like demand increase and underpins concepts like Demand Response. ↩︎