Following the 'Post 2025 Market Design Directions Paper' published in January 2021, the ESB released its Options Paper, entitled 'Post 2025 Electricity Market Design Options Paper' on 30 April 2021. The ESB has proposed four reform pathways to address Australia’s energy transition needs beyond 2025:

1. Resource adequacy mechanisms and ageing thermal retirement
2. Essential system services and scheduling and ahead mechanisms
3. Integration of distributed energy resources and demand side participation
4. Transmission and access

Consultation submissions on the Options Paper close on 9 June 2021. The ESB will deliver the final recommendations on Post-2025 Market Design to the Ministers in June 2021.

We have summarised the reform pathways proposed by the ESB.

1. Resource Adequacy mechanisms and ageing thermal retirement

The key objective of this pathway is to facilitate the timely entry of new generation, storage and firming capacity, and an orderly retirement of aging thermal generation. This means that sufficient dispatchable resources and storage capacity will need to be in place prior to anticipated plant closures and that the transition process does not cause significant price or reliability shocks to consumers. To achieve these objectives, ESB has proposed the following immediate and initial reform measures:

• New information to support government investment in generation and storage. The ESB is proposing a NEM wide approach to jurisdictional investment schemes which involves two measures:

1. Enhancements to information provision on resources to be underwritten

2. Agreed national principles for contract design

• Enhanced exit mechanisms. The ESB has developed three exit mechanisms to cope with potential reliability risks that may arise from unexpected exits during the near-term.

1. Increased information around mothballing and seasonal shutdowns

2. Expanding the notice of closure requirements to include mothballing

3. An integrated process to manage early exit

• Modifying the Retailer Reliability Obligation (RRO). The ESB has proposed the following two broad options for modifying the RRO:

1. Modifying the current RRO by removing the T-3 trigger

2. A physical RRO with no or minimal triggers

• Operating reserve mechanism. An operating reserve mechanism will also form a part of the initial reforms of resource adequacy.
• Monitoring reliability and overall costs. Longer term, the ESB intends to continue monitoring reliability and overall costs to consumers, particularly monitoring the presence of various types of resources, including long-term large-scale storage such as pumped hydro and emerging technologies such as hydrogen.

2. Essential System Services, Scheduling and Ahead Mechanisms

To maintain a secure and stable grid system, a number of core power system requirements need to always be met, through the provision of certain technical capabilities, which can be described as essential 'system services', including:

• frequency control
• inertia
• system strength
• ramping capabilities/operating reserves

All of these system services are critical to maintaining overall power system security and reliability.

To date, the lack of markets or other means of valuing the system services essential to system security, means AEMO is increasingly intervening in the market to procure these essential capabilities.

• AEMC rule changes and AEMO technical input. The ESB intends to use the AEMC rule change processes to accelerate its agenda for reform, through:

1. Fast frequency response and primary frequency response – being considered via the Infigen and AEMO rule changes.

2. Consideration of operating reserves – being considered via the Infigen Energy and Delta Electricity (Introduction of ramping services) rule changes.

3. Network Service Provider structured procurement provision of system strength – being considered via the TransGrid rule change.

4. Developing operational scheduling mechanisms to schedule system strength and inertia – being considered via the Delta Electricity (Capacity commitment mechanism for system security and reliability services) and Hydro Tasmania rule changes.

• Refining frequency control arrangements. The ESB's immediate reform focuses on the introduction of two new market ancillary services to help control system frequency and keep the future electricity system secure:

1. Infigen's proposal that the NER be amended to introduce new market ancillary service arrangements for the procurement of fast frequency response ancillary market to help efficiently manage system frequency following contingency events during low inertia operation.

2. AEMO's rule change that providers of primary frequency response in accordance with parameters defined by AEMO, would not be allocated any share of regulation costs.

• Developing structured procurement arrangements, including for system strength. The AEMC is progressing a rule change submitted by TransGrid for proactive TNSP provision and procurement of system strength which supports an operable system, based on the projected generator connections from the ISP. This follows the AEMC’s Investigation into system strength frameworks in the NEM, which concluded in September 2020.

• Considering the need to explicitly value operating reserves. The current provision of reserves in operational timeframes is implicitly valued through the energy spot market. New products and services may be required to manage growing forecast uncertainty and variability in net demand over timescales of minutes to hours. A new reserve service market could provide an explicit value for flexible capacity to be available to meet these net demand ramps spanning multiple dispatch intervals.

In the longer term, next reforms may include:

• Unbundling of system services
• Introducing spot market mechanism
• Integrated ahead market

3. Integration of Distributed Energy Resources and Demand Side Participation

Consumer-driven growth of rooftop solar PV, combined with the projected growth of battery storage and other advances in digital technology are forecast to disrupt the way customers receive and use energy. The energy system is increasingly becoming a two-way flow, with customers providing and demanding power. This transition opens up opportunities for greater flexibility in the system and value for customers interacting with the market. Aggregated Distributed Energy Resources (DER) can provide a competitive alternative to large scale generation, providing low-cost energy and system services. The following reform measures have been proposed under this pathway to facilitate greater flexibility in the market and to provide better consumer protections:

• Risk based approach for assessing customer protections. The ESB has proposed developing a consumer risk assessment tool which would be used by the market bodies to interrogate any new market design impacts brought about by the two-sided market.
• Technical standards. In February 2021 the AEMC released its final determination on technical standards for DER. These technical standards are designed to simplify the obligations for manufacturers and installers while providing more certainty and transparency to consumers.
• Minimum demand. The ESB has proposed a solution which focuses on providing greater flexibility and enabling customers to maximise value from their solar PV asset. The ESB has considered the emergency backstop function utilised in SA as a mechanism to address minimum demand risk. The ESB has recognised that there is value in having a consistent approach to handling this issue across the NEM.

The proposed solution involves introducing a remote disconnect for distributed PV as an emergency backstop, transitioning to distributed PVs which are responsive to market signals, and turn-up services where flexible demand would be available to balance generation and demand.

• Tariff and pricing reform. The tariff and pricing reforms focus on providing greater flexibility for the AER and distribution businesses to efficiently meet consumer preferences. The reforms focus on three key areas:

1. Updating the regulatory framework to reflect the community expectations for Distribution Network Services Providers (DNSP) to efficiently provide export services to support DER

2. Promoting incentives for efficient investment in export services

3. Enabling pricing tools to send efficient signals for future network costs and DER investment decisions. These tools would reward customers for actions that better utilise the network or improve network allocations.

• Streamlining participation. The ESB has proposed a 'trader-services model' to integrate new technologies and business models and to remove barriers preventing customers from being rewarded if they choose to participate in energy markets. The trader-services model would involve a single (or universal) registration category for all entities who want to engage in the wholesale energy market.

• Accommodating active participation. The ESB has identified the concept of 'schedule lite', which is a proposal that could enable resources that do not actively participate in dispatch or market processes to interact with the market.

• Ease of transfer and switching. The ESB is seeking feedback on principles relating to the interoperability of DER devices, including:

1. Consumers should be able to share data with service provider

2. Consumers' DER assets should have a level of portability between providers

3. Control of and access to consumer devices should be limited to clear use cases

4. Consumers need to receive clear information about the compatibility of their DER assets.

4. Transmission and Access

The ESB recognises that emerging forms of renewable generation (e.g., wind and solar) are more decentralised and dispersed as compared to coal fuelled and hydro generation and often need to connect in new locations where there is no or only limited existing transmission infrastructure.

The ESB has identified a need for significant transmission investment to host the forecast 26 to 50 GW of new large-scale variable renewable energy by 2040.

The key objectives of this pathway are the increase of transmission investment to enable new generation and market arrangements and the location and operation of new generation and storage in ways that promote the efficient use of transmission investment.

The ESB acknowledges that significant progress towards achieving these objectives has already been made via a number of measures, including:

• New transmission investment. AEMO has prepared two integrated system plans which describe a least cost pathway for the development of the power system and identify a number of committed, actionable and future projects.
• Actionable ISP rules. These rules reflect a change of approach towards whole-of-system planning.
• Interim renewable energy zone (REZ) framework (including access within a REZ). The ESB is working with state governments (some of which have already announced policies to develop REZs) to develop a framework for the efficient planning, development and maintenance of REZs.
• AEMC's Dedicated Connection Assets rule change. The AEMC proposes to allow generators to share transmission assets to promote efficient investment in, and use of, the transmission system.
• AEMC's system strength investigation. This review addressed the uncertainty, delay and high costs associated with the generator connection process.
• Initiatives to enhance the information available on congestion. Noting that AEMO will consult this year on the Congestion Information Resource Guidelines, the ESB has proposed that AEMO could publish local pricing offsets more prominently and improve the congestion information available to participants.

The ESB has developed three models (and two further variations) to achieve the objectives. In doing so, the ESB sought to address the concerns of market participants which include the regulatory risk of changing financial outcomes of incumbent market participants, and the complexity of the market.

Those three models (and two variations) involve:

• Congestion management model. Under this model, a congestion management charge (reflective of the generator’s impact on congestion) and a rebate (reflective of generator availability) would apply to scheduled and semi-scheduled generators.
• Congestion management model mechanisms modified for new investment and renewable energy zones. Under this model, the rebate would apply only to incumbent generators and new entrant generators outside of a REZ.
• Locational connection fee. Under this model, a connection fee (reflective of the NPV of congestion caused by the generator or the efficient cost of required transmission infrastructure) would apply to new connecting generators.
• Generator transmission use of system charges. Under this model, an ongoing charge (reflective of the cost of transmission infrastructure) would apply to generators to provide a locational signal. In return, generators would receive a defined level of access standard.
• Hybrid congestion management and connection fee model. This model comprises a hybrid approach, recognising the strengths and weaknesses of each of the above models.

In the longer term, the ESB's preferred solution is to adopt locational marginal pricing and financial transmission rights.

Submissions on the Options Paper close on 9 June. This is an opportunity for those with an interest in the sector to provide feedback to shape the design of the National Energy Market. MinterEllison will continue to follow and report on the next phase of the process being the recommendations on Post-2025 Market Design to Ministers in June 2021.