Brian Fallow wrote a fairly good article in the NZ Herald yesterday.
In it he drew on the problems of asset swaps and some of the reasons why they might not work. He also wondered whether the complexity of the electricity market might be part of the problem; and, therefore, simplification could be part of the solution.
To an extent he has a point and there is some merit in pursuing some of his ideas. However, the reason that the electricity market is complicated is because electricity is complicated. While we should try to make things as simple as we reasonably can over-simplifying things that are genuinely complex can lead to a new set of problems.
But why is electricity so complicated?
Mr Fallow wonders whether things have been made complicated by engineers and economists. Again, to an extent, he has a point. The nodal market not only has nodal pricing but is also marginally priced including marginal transmission losses (and this is only the start of the gobbledegook). On the whole though the electricity system is more complicated than people realise and there are two good reasons for this.
First, electricity has its own branch of physics and much of the electricity system is constrained by pure physics. Electrical physics, in practice, probably isn't much more difficult than say the physics of flowing water, but is much less intuitively obvious. Most people, without necessarily understanding the underlying mathematical models can nevertheless understand that water falls down hill and will go anywhere lower than it is now if it isn't held back. A water system is fairly intuitive; and so too is a mechanical system. Electricity, though, does not behave in an intuitive way because it cannot be directly observed (for all practical purposes). For many people it is a mystery and it does have its peculiarities.
Second, electricity cannot be stored in large commercial quantities and must therefore be produced, transported and consumed at exactly the same time. This doesn't sound like a complicating factor but it is. If anyone has tried their hand at logistics, perhaps an example even as simple as buying, wrapping and posting Christmas presents so that they arrive at their destinations at the correct time, will know that logistics can be difficult at the best of times. Now imagine that the complexity of the problem is more like trying to coordinate traffic on all of Auckland's roads so that everything runs smoothly every second of every minute of every day of every year. The electricity system effectively does this and is does it in such a way that, generally, renewable resources are maximised and thermal fuel is called on as necessary. It also caters well for most emergencies of which there are many. And, it does so in such a way that new investment in the system does not need to be subsidised by the taxpayer.
Can the electricity market be simplified? Yes. Can it be simple? No, it cannot.