The Energy Security Board's (ESB) recommendations build on recent rule changes aimed at establishing a framework that will allow the connection of renewable generation and storage facilities at a lower cost to the network and consumers. In the ESB's view, there are two critical elements of the transmission and access report pathway:
- establishing a more transparent and expedient access application process; and
- introducing a system of financial impacts (described as a 'whole of system congestion management mechanism') aimed at encouraging the connection of new renewable generation and storage sources in areas of the transmission network where there is excess capacity (i.e. little or no network congestion).
The whole-of-system congestion management mechanism will help facilitate the roll out and uptake of renewable energy zones (REZs). The ESB has recommended a priority rule request be initiated with the Australian Energy Market Commission (AEMC) to commence stakeholder consultation around the detail of the proposed congestion management mechanism and how it will best complement the jurisdictional REZs.
Why is change needed?
Technology in the energy industry has been developing at an extremely fast pace and the traditional forms of thermal generation are being replaced by renewable energy sources. This shift away from large-scale thermal generation to renewable generation has driven an increase in investment in major new transmission projects across Australia.
The national electricity grid's transmission network was historically built to transfer a predictable and consistent flow of electricity from the traditional electricity generators to load centres. The increased connection of renewable energy sources that do not have a predictable and consistent flow of electricity has technically impacted the transmission network. Plus, access to the transmission network is more sought after compared to when only the 'traditional' energy sources were available.
Under the current access regime, a generator can connect to the transmission network if that generator can meet the relevant technical standards. The impact of that connection on the broader power system, particularly the power transfer capability of the relevant part of the transmission network, is not currently considered.
Measured against the rapid transition to renewable energy generation, the current transmission access regime and physical transmission network are no longer fit for purpose. They cannot efficiently and expeditiously accommodate the increase in access requests for the connection of new renewable generation and storage sources.
The current access regime is an unpredictable and lengthy process and this has the strong potential to impact investors choosing to invest in renewable energy in Australia. In addition, the risk of congestion is increasing, and existing generators and consumers bear the financial impacts of such congestion.
Change is also needed to enable the network to achieve the greatest efficiencies at the lowest costs. Currently, increasing amounts of renewable energy, which effectively has no associated fuel costs, is not being used and is wasted. The ESB recommends the connection of batteries in parts of the network where they can be best utilised to effectively act as sponges for this no / low cost renewable energy. The connection of batteries and hydrogen facilities will consume power from the national electricity grid during times of high generation and then export that power back into the national electricity grid during times of low renewable generation. This would result in much higher rates of renewable energy utilisation and reduce wastage.
What are the ESB's recommendations? How will they fix the problems?
The ESB has made two recommendations to address the current access and congestion issues plaguing the NEM.
1. Support the integration of renewable energy zones (REZs).
There needs to be clear signals identifying where new generation and storage facilities should be located in order to optimise their impact on the broader network and avoid adding to the congestion issues already faced by the transmission network. The ESB believes that the integration of REZs delivered through the Australian Energy Market Operator's (AEMO's) Integrated System Plan and complementary State-based initiatives will help to ensure that investment in new generation sources is efficient and has a positive impact on the broader network.
The whole of system congestion management mechanism will complement the jurisdictional REZs by:
- imposing a congestion charge on new generators that takes into account the congestion impact that their connection will have on the network (this congestion charge is proposed to be calculated using locational marginal prices and will be payable by all new scheduled and semi-scheduled generators); and
- paying a congestion rebate to incumbent and new generators who located their connections according to the new planning framework (for example, within a REZ). The congestion rebate will be funded by revenue collected from the payment of the congestion charges.
Generators will still be free to connect wherever they like. However, priority to access the power transfer capability of the network will be granted to those generators connecting within a REZ. This priority access will increase investment certainty for generators by guaranteeing a minimum level of power transfer capacity for their generation facilities.
The ESB has recommended that:
- the REZ Planning Rules and the Principles for the Interim REZ framework should be adopted and implemented as a matter of urgency; and
- the Minister should instruct the ESB to prepare a rule change request to the AEMC to progress the development and implementation of a congestion management mechanism that is adapted for integration with REZs.
The ESB has recommended that the rule request be classified as a 'priority rule request' and stakeholder consultation commenced as soon as possible.
2. Support Timely and Efficient Transmission Investment
The ESB has recommended that the Ministers seek advice from the AEMC concerning the reforms that are needed to improve the efficiency of the current access, connection and transmission investment processes for major transmission projects (including the regulatory investment test for transmission).
What are the pros and cons of the ESB's recommendations?
Existing generators will continue to be constrained until the congestion management mechanism commences.
Once implemented, existing generators will benefit from the ESB's recommendations (implementation is likely to be at least two years away). However, the recommendations do not propose any immediate actions to help existing generators that are currently suffering financial impacts from existing and increasing network constraints.
Congestion issues are currently resulting in:
- existing generators losing revenue because their output is being constrained due to congestion issues; and
- potential renewable generation projects being put on hold despite being well advanced.
The ESB has recommended that a congestion rebate be paid to new generators locating within designated areas of the network and 'incumbent' generators. However, the ESB has provided no detail concerning what is meant by 'incumbent' generators.
We think it is clear this will include generators that are currently connected to the transmission network no matter the location of that connection. However, it is unclear whether generation projects that are well advanced (e.g. have secured the required land access rights and development approvals) that have been put on hold due to congestion issues, will be entitled to receive the congestion rebate. It is likely that many of these projects will not proceed if they are required to pay the congestion charge due to their proposed connection location. The questions remain as to whether these generators benefit from a congestion rebate and how flexible the definition of 'incumbent generator' should be.
Balancing investment certainty and the need for change
Whilst it is clear that significant changes need to be made to the current transmission and access regime, the Energy Security Board and AEMC will need to strike a balance between:
- the level and timing of regulatory changes; and
- the need to provide certainty for investors.
New generation projects require long term investment and ongoing high levels of regulatory change create risk for investors. The ESB has acknowledged this concern in its recommendations and has deliberately refrained at this stage from recommending a long term transition to locational marginal pricing and firm transmission rights.
Integration of initiatives
One of the main challenges for governments and regulators will be to ensure that the proposed initiatives work together and do not result in unintended negative impacts. The rate of change to the Australian energy market will only increase over the next ten years.. For example, the modelled uptake of new generation projects used in the 2020 Integrated System Plan has already been shown to underestimate the actual uptake by some 27%. Keeping up with the rate of change will be a constant challenge.
What's been left on the table?
The AEMC will determine the details of the design and implementation of the congestion management mechanism as part of the rule change process. Many stakeholders have reserved their views concerning the benefits of the congestion management mechanism pending the release of these further details.
As with all regulatory reforms, the development of the details of the congestion management mechanism will likely raise issues that may impact the proposal's efficacy and require further reconsideration of some of the underlying principles.
The finalisation of the details for other related reforms may impact the details of the congestion management mechanism. For example, the speed at which transmission networks can be expanded to service REZs will depend upon the outcomes from the review of the regulatory investment test for transmission and whether state governments are prepared to wait for a national solution or continue to progress their own solutions.
What else is happening?
A lot. Several other regulatory reforms have been recently completed or are currently underway that relate to the transmission and access reform pathway.
Renewable Energy Zone Planning Rule
The REZ Planning Rule commenced on 13 May 2021. The rule is still relatively new and how the zones will work and their location will be subject to review and change over the next few years.
The development of jurisdictional REZ schemes is accelerating the pace of the transition. The Final Advice notes that:
- "NSW is implementing its legislated Electricity Infrastructure Roadmap, which involves the development of five REZs;
- Victoria is consulting on a REZ development plan involving six proposed REZs backed by a $540 million REZ fund; and
- Queensland has identified three REZ corridors and has established a $500 million renewable energy fund."
The ESB would prefer that the NEM jurisdictions roll out their REZ initiatives with the ultimate intention of establishing a uniform national approach to REZs.
Transmission Investment and Planning Review
The AEMC is currently undertaking a Transmission Investment and Planning Review to examine the efficiency of the delivery of new major transmission projects.
Consultation on the Congestion Information Resource Guidelines
AEMO is currently consulting on the Congestion Information Resource Guidelines and seeking feedback on the following:
- Does the quality, relevance and frequency of information in the Guidelines remain appropriate?
- What additional information should be included in the Guidelines?
- What current congestion-related information could the AEMO stop publishing in the Guidelines with no or little loss of value for stakeholders?
Should there be a clear requirement for transmission network service providers to publish their limit advice on their website or on the AEMO's limits advice page?
Connection to dedicated connection assets
On 8 July 2021, the AEMC made the final 'Connection to dedicated connection assets' rule "…to facilitate more efficient investment in, and use of, transmission assets built to connect generation to the ‘shared’ network."
Efficient management of system strength on the power system
The AEMC has recently published its draft determination for the 'Efficient management of system strength on the power system' rule change. The ESB believes that a reformed system strength regime has the potential complement the coordination process that will be used to deliver REZs.
What you can do
To address existing access and congestion issues, it is critical the AEMC receives detailed submissions from existing and potential market participants concerning the congestion management mechanism.
While transmission network service providers, existing generators, and AEMO have the best understanding of the current access impediments and congestion impacts, it will be important to obtain a broad range of views concerning the detail of the mechanism to ensure that the final mechanism is fit for purpose and efficiently and expeditiously addresses and resolves the current impediments to the transition of the Australian electricity industry.
We recommend that market participants and investors closely monitor the rule change request and the progress of the related regulatory reforms outlined above.
