Why is change needed?

Australia is a world leader in the uptake of rooftop solar. According to the Energy Security Board (ESB), more than 2.7 million homes in the National Electricity Market (NEM) have installed rooftop solar. This (in aggregate) represents the single largest generation source in the integrated power network running from northern Queensland to mid-western South Australia and across to Tasmania. Clearly, consumers have voted with their feet to seek to reduce their power bills by generating their own power.

However, the ESB has recognised that the current regulatory regime is not fully optimised for consumers to reduce their own power costs, and make money by exporting power to the grid. Consumers with rooftop solar can currently sell their excess generation to their retailer or small generation aggregator (SGA) for a feed-in-tariff, but opportunities to derive additional revenue from providing power system support (or ancillary) services, flexible demand or network support are more limited. This lack of opportunity is expected to be compounded as consumers increasingly take up batteries and electric vehicles, or elect to provide flexibility with their electric loads (e.g. by modulating or changing usage patterns for equipment such as air conditioners, hot water systems and pool pumps).

Across the NEM, the ESB notes that up to 77% of daytime power demand in South Australia is met by rooftop solar. In Queensland, NSW and Victoria, up to 35%, 30% and 40%, respectively, of daytime demand is met by rooftop solar. This means that, during those periods, consumers are increasingly self-generating power to meet some or all of their consumption without needing to import power from the grid. Alternatively, they may also be exporting power to the grid to be consumed by other consumers who would otherwise have needed to import power from large-scale generation to meet some or all of their requirements.

This is a good result from the perspective of reducing carbon emissions in the NEM and empowering individual consumers to manage their power requirements. Still the high penetration of rooftop solar in the market during the day also presents a challenge for the Australian Energy Market Operator (AEMO) in managing system reliability and security.

This is because rooftop generation can vary significantly from minute to minute due to variability in the solar resource (and the existence of cloud cover etc) and changes in onsite consumption. To cover that variability, AEMO needs to have 'dispatchable' generation (e.g. coal, gas, batteries or pumped hydro) operating in the system and ready to ramp up to cover fluctuations in the output of the rooftop solar generation fleet. This is to ensure that there is enough power to meet demand from time to time (i.e. reliability), and ensure that the power system operates smoothly (i.e. system security). Sudden drops or increases in power being exported to the system can cause security issues for AEMO in managing the power system.

To date, AEMO has had little visibility or control over how rooftop solar comes into or out of the system. However, in some parts of Australia, customers have sometimes been prevented by the distribution network from exporting the maximum amount of electricity they can generate. In some cases, this has resulted in solar facilities being completely prevented from exporting power into the grid. Given the rooftop solar fleet's size and its projections for further growth, a more transparent and market-driven approach to managing and optimising the DER fleet was thought to be necessary.

The ESB recognises that the optimisation of rooftop solar, batteries and energy flexibility (together, Distributed Energy Resources or DER) in the NEM is complex, and is evolving with developments in technology and uncertainty over the rate of consumer take-up of these resources. Accordingly, the ESB has proposed:

• a DER Implementation Plan to immediately plan for regulatory reform in this space; and
• a Maturity Plan, which is a framework to work with industry players and consumers to test the assumptions that underpin the DER Implementation Plan, and accommodate necessary changes.

Like the other elements of the ESB's recommendations, the DER Implementation Plan is divided into immediate reforms, near term reforms, and longer-term reforms.

Immediate Reforms

The immediate focus is on alleviating the system risks created by DER

The immediate reforms proposed by the ESB are mostly, but not completely, directed at managing the system security risks associated with increased rooftop solar penetration in the NEM, rather than optimising the money-making opportunities for consumers who have invested in DER.

Like in place in South Australia, the ESB believes that backstop measures will need to be implemented on a State-specific basis in Queensland and Victoria to curtail export of power from rooftop solar and batteries when required to maintain system security. This means stopping or reducing the export of power from DER in favour of dispatching utility (i.e. large) scale generation to help AEMO manage the security of the power system.

However, the ESB recognises that backstop curtailment schemes for DER are a blunt tool that should be used sparingly. In addition, measures are needed to encourage consumers to refrain from exporting power from DER into the grid when the grid does not need that power, or alternatively to utilise the grid at times of low prices.

To support the latter, the ESB has recommended that AEMO work with ARENA to incentivise consumers to increase consumption during periods of low or negative wholesale electricity prices (i.e. low demand periods). In such circumstances, consumers would be incentivised to increase their grid consumption (and receive the cost savings when wholesale prices are low or negative), to ensure a minimum level of power is transported across the grid (rather being generated and consumed onsite from DER) to help manage system security. This is a novel concept that the designers of the NEM (in the 1990s) likely did not envisage (i.e. it had been assumed that consumers would be paid to reduce consumption at times of high grid demand or high wholesale prices, rather than being incentivised to increase consumption from the grid during periods of low grid demand).

Any such developments would need to be developed without impeding existing demand response mechanisms in the market, such as (at the small consumer level) pool pump or hot water curtailment plans offered by distributors to consumers (in exchange for lower network tariffs).

Given the expected dissymmetry in market information, data and expertise between service providers and consumers, the ESB is conscious of ensuring that sufficient consumer protections are built into all new reforms in the DER and demand side management space. It has outlined a plan for ensuring that existing consumer protections are enhanced, where needed, while at the same time striking a balance between protecting the consumer experience and ensuring that innovation is not stifled.

How has the industry responded?

Submissions made across the industry to the ESB, other than from consumer bodies (who opposed extending the backstop mechanisms beyond South Australia), generally supported the idea that backstop curtailment schemes for DER should be implemented as a last resort, provided that carrot (rather than stick) mechanisms are also implemented to drive DER consumer behaviour to better match grid requirements.

What other measures are in train?

The ESB recognises that a number of reforms for DER are already being pursued by the Australian Energy Market Commission (AEMC). They include:

• Development of technical standards: the AEMC's determination (the National Electricity Amendment (Technical Standards for Distributed Energy Resources) Rule 2021) will standardise inverter performance and grid responsiveness for DER under a set of 'DER Technical Standards' which are compliant with Australian Standards. This rule change will take effect on take effect on 18 December 2021.

The ESB has submitted a further Rule change request to implement further governance arrangements for the DER Technical Standards, but the AEMC has yet initiated this.. That rule change request proposes that the AEMC, with the assistance of an advisory committee, will be responsible for overseeing the development of new DER Technical Standards.

• Reform of network pricing service requirements: the AEMC's determination (the National Electricity Amendment (Access, Pricing and Incentive Arrangements for Distributed Energy Resources) Rule 2021) will, amongst other things:
  • allow distribution networks to offer pricing for the two-way services they are increasingly providing to the market (i.e. import services for power consumed by consumers and export services for power exported by consumers back into the grid from DER); and
  • allow distribution network to create network pricing structures that reward customers for exporting energy at times of high demand and charge customers when the network is congested; and
  • limit the ability of distribution networks to impose physical export limits on DER.

This is a significant reform that could see 'passive' consumers receiving lower value for power exported to the grid power from their DER when the distribution network does not need that power. As many householders and small businesses will neither have the time, inclination or experience to manage their DER facilities and consumption patterns, many will increasingly need to rely on their retailer or SGA to manage this for them and share the revenue opened by these (and other DER) reforms. In turn, this potentially supports further aggregation of DER and household loads to create virtual power plants in the NEM.

The ESB also notes that its DER Implementation Plan accommodates:

• the Distribution Energy Integration Program (or DEIP) being led by ARENA to develop Australian standards for inverters for DER to better respond to voltage and frequency standards on the grid; and
• the work being undertaken through industry trials to develop Dynamic Operating Envelopes (DOEs) on the distribution network to determine optimal export or import limits for DER from time to time. We expect this work will help distributors craft tariffs to incentivise, or disincentivise (as applicable) DER to export power into the grid, and also better manage the integration of DER into the system.

Near Term Reforms

In the near term, the focus shifts to opening markets and choices for DER consumers

Two major reforms are recommended by the ESB.

Single registration category: If consumers sell their excess power to a retailer or a small generation aggregator (SGA), the retailer or SGA has to register with AEMO in various categories in order to on-sell that power in the wholesale electricity market or the system support (or ancillary) services market. The same applies if the consumer wishes to participate in those markets directly itself (which is very rare for householders and small businesses, not least because of the small size of their DER facilities). Different rules and fees currently apply to each registration category.

To reduce complexity, the ESB proposes that a single, universal trader registration be introduced to streamline participation in the wholesale energy or ancillary services markets. Under this new model, retailers, aggregators or DER consumers wishing to trade in energy markets would register once as a market participant and nominate the services they intend to trade from their customers' (or, for the consumer, their own) DER facilities and premises to the grid.

Flexible trading arrangements: Under the current market design, DER consumers are, essentially, required to sell their excess generation, stored energy or flexible demand to a single retailer or SGA. However, the ESB proposes reforms to allow consumers to decouple their energy sources in order to engage more than one service provider. For example, they might have a retailer for their back-up grid consumption for their house (and sale of excess power from their rooftop solar and battery) and another for the charging of their electric vehicle.

The ESB proposed two models to implement flexible trading arrangements and recommended that AEMO be instructed to investigate the concept further with a view to introducing a rule change proposal for one of the models by the end of the year.

Other measures proposed by the ESB for the near term include:

• the ability for DER to opt in to be centrally scheduled by AEMO under rules that are more flexible than those that currently apply to large-scale scheduled generation;
• further work on development of network tariffs for DER (over and above the changes already made by the AEMC, discussed above), further review of the ring-fencing arrangements between the regulated distribution networks and their non-regulated businesses, and further assessment of the incentives for the economically-regulated (i.e. monopoly) networks to support DER; and
• further review and development of data sharing arrangements between the distribution networks, retailers, aggregators and others to support the optimal utilisation of DER, and allow consumers to easily transfer between DER aggregators.

How has the industry responded?

Single registration category: Industry support for this reform was mixed. Some thought the concept required further detail, others thought it was unnecessary, while consumer bodies generally favoured the concept.

Flexible trading arrangements: Again, industry support for this reform was mixed, but it was generally only retailers (but not all retailers) who expressed reservations about the reform. SGAs and consumer bodies were generally in favour of the proposal.

What other measures are already in train?

Single registration category

On 15 July 2021, the AEMC released a draft determination (the National Electricity Amendment (Integrating Energy Storage Systems into the NEM) Rule 2021) which, amongst other things proposes to introduce a new, single registration category for batteries called the Integrated Resource Provider. It is proposed that service providers (or consumers themselves) will be able to register in this category to not only export power from DER into the electricity market, but also provide system (or ancillary) services from DER or load (e.g. load reduction) under a single category. If this proposal proceeds, it remains to be seen whether further aggregation of market registrations under the ESB's proposed trader classification is required.

Flexible trading arrangements

If the ESB's flexible trading arrangements are implemented by allowing electricity meters to be split amongst a number of service providers who service a single consumer, then those reforms will likely need to be considered in conjunction with the AEMC's Review of the regulatory framework for metering service' which was initiated in December 2020 and is ongoing.

Longer Term Reforms

In its recommendations, the ESB did not outline any longer term reforms for DER. Instead, the immediate and longer term proposals – each of which are included in its DER Implementation Plan - will be subject to challenge and review in the short, medium and longer term (through to 2025) via the Maturity Plan.

It is thought that the proposals in the DER Implementation Plan will be able to be reviewed and adjusted to accommodate technological, market and regulatory developments in the DER sector.