NEM post-2030 redesign should focus on capital, not operating costs.

Because CapEx is 21 times larger than OpEx post-2030...

Is the post-2030 NEM re-design just a re-hash of the 2025 re-design attempts? Or could it be something much bolder? Now that carbon reduction is in the National Energy Objective, the scope could be incredibly bold.

But regardless of carbon policy, I think the capital structure of electricity supply has shifted so much, that the spot market design of the NEM has to be rethought. Capital costs now dominate electricity supply, and so a market design must start from optimising capital, not dispatch. Let me explain.

Lets look at the most boring ISP scenario; Progressive Change with the CDP2 network development path. We’re talking about post 2030 re-design, so lets look FY31 onwards. The model outcomes show $108Bil (in 2030 dollars) is needed in generator capital from FY31 to FY52. Another $39Bil is needed for Fixed Operations and Maintenance. For context, only $16Bil is needed for fuel to run the system 2030-2050 and $3Bil on variable operations and maintenance. The ratio of fixed costs to variable costs is 5x.

So even without material carbon policy, The change in technology costs alone since the 1990s along with aging coal plants mean that the NEM will be dominated by capital investments, not operating costs. But we have a market dispatch engine (NEMDE) designed in the 1990s built purely to optimise short-term costs and facilitate short term competition to the best of its ability. If we are looking for efficiency (as per the National Energy Objective), we need to look first at capital investment efficiency, not fuel dispatch efficiency.

Now looking to a market that is expected to dramatically reduce carbon (again as per the updated NEO), the issue is even larger. In Step Change, future generation investments and fixed operating costs have an NPV of $195Bil in 2030, while fuel and variable costs have a 2030 NPV of only $9Bil. In a getting capital investment right is 21 times more important than getting short term dispatch decisions right!

Are capital investments even remotely efficient now?

Many governments would seem to believe they are not, hence the introduction NSW energy Roadmap, the QLD energy and jobs plan, re-incarnation of the State Electricity Commission of Victoria and the Capacity Investment Scheme to name just a few major interventions in electricity capital investment.

In my view, the dominance of capital costs over operational costs should be the guiding theme of a 2030 re-design. Fuel and operational costs are very much the tail on the dog. We need to design and efficient system for getting the right generators (and transmission) in the right places with efficient investment as the first principle of market re-design.

The spot market can become materially less efficient and it just won’t matter as long as we get capital market efficiency right this time.