Competition–Too Much of a Good Thing?

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Competition in the electricity industry is generally perceived to be a good thing for customers because it ensures no single company delivers all the services required to turn on your kettle. Practically, this means the company that generates the electricity is not the same company that sells it (although, in some places, such as Australia, the combination of generation and retail is permitted) or transports it through a network.

Regulators who believe open markets are the only way to deliver fairness and low prices rigorously enforce this competitive separation. But in some countries, such as the United States, where vertical integration (one company does everything) is the norm, the price for electricity is typically lower than in separated markets.

But in some situations, trying to force separation and create a market is likely to increase costs. An example of such a situation is the stand-alone power system, a small, isolated microgrid not connected to the wider network and comprising a few customers. These stand-alone systems are proposed by Australian networks for remote, grid-edge locations, where the maintenance of overhead lines many hundreds of kilometers long is expensive. They also typically are very unreliable, with an increased risk of igniting a bushfire. Replacing these long lines with stand-alone power systems not only improves reliability and resilience to bad weather, but it reduces the risk of exposed lines in bush and critically reduces the cost for all customers in that network, not just those connected to it.

But how can effective competition take place, particularly for retail, when a stand-alone power system is isolated and there are only a few customers? Who should own and operate the generation when it’s small in capacity and only for those few customers? Can a few customers, cut-off from the rest of the network, really expect to access a full range of retailers? And does this really offer competition that reduces costs? Or does imposing a market model that works with interconnected systems onto stand-alone systems having only a few customers result in higher costs for everyone as networks twist and turn to comply with regulations inappropriate for a tiny system? The answer is no.

Stand-alone power systems are not new in Australia. They’ve been operating for many years in physically isolated locations, such as islands. State legislation oversees the regulations, which cover retail price and operation. The network operates as a fully vertically integrated entity, delivering reliable electricity to customers at a competitive price. It’s difficult to see why the arrangements that have worked so well at the state level can’t be rolled out nationally.

It’s complex because stand-alone power systems today will lead to larger isolated microgrids encompassing entire towns, with many customers and potentially many sources of generation with multiple owners. At what point should full market competition be imposed on an isolated microgrid?  Ten customers?  A hundred?  A thousand? I’d be interested to learn your thoughts in the Comments below.