Major Energy Changes Go Unnoticed

Amidst the focus on COVID-19 significant developments for the energy sector have passed largely unnoticed. Victoria’s intent to go-it-alone on energy policy was behind the passage of state legislation that allows it to sidestep national electricity rules for transmission developments, while a rule change also clears the way for the market operator to enter multi-year emergency reserve contracts for the state.

And last week the Reliability Panel released its annual Market Performance review which considers the performance of the NEM against power system security and reliability standards. The reliability standard is also being considered by the Energy Security Board (ESB) after a referral from the COAG Energy Council late last year. This followed a concerted push from Victoria[i].

COAG asked the ESB to provide advice on immediate measures to ensure reliability and security of the electricity system and ensure the Reliability Standard “is fit for purpose and to also assess benefits and costs to consumers”. It is expected to report to tomorrow’s COAG Energy Council so that any change to the standard can be made in time to inform the Australian Energy Market Operator’s (AEMO) next Electricity Statement of Opportunities. Below we outline these recent changes.

Victoria has also been busy introducing legislation to lift the moratorium on onshore gas exploration and development, while also reconfirming its ban on unconventional gas exploration.

Reliability Focus

Last week the Australian Energy Market Commission (AEMC) released its final determination giving AEMO the flexibility to enter into multi-year contracts under the Reliability and Emergency Reserve Trader (RERT) mechanism for Victoria. The Commission said its decision was in response to the short to medium term reliability challenges facing that state and noted that Victoria has a tight supply-demand balance.

In its assessment the AEMC found that:Over the next two to five years, AEMO considers that Victoria is particularly vulnerable to uncontrollable, high impact events, such as prolonged or coincident generator outages combined with low variable generator output.”[ii]

The RERT was activated twice during the past summer in Victoria (980MWh overall), while LOR-2 and LOR-3 conditions were declared four times. AEMO also entered into short notice RERT contracts on four occasions in Victoria during the 2019-20 summer.

The RERT is a last resort mechanism which allows the market operator to contract for emergency reserves and typically this has been via demand-side response and emergency diesel generators. AEMO is able to use the RERT if it forecasts that the market can’t meet the reliability standard, and the market fails to respond adequately. A more detailed outline of how the RERT works can be found here.

This latest change follows an enhancement to the RERT mechanism last year which extended the period for which the market operator could acquire RERT from nine months to 12 months, which was expected to broaden the pool of RERT providers. The full changes come into effect on 26 March 2020.

The latest decision was based on a rule change request from Victoria’s Energy Minister, Lily D’Ambrosio, who said Victoria was “sick of waiting for the National Energy Rules to change and would instead go it alone with the market operator in negotiating cheaper multi-year contracts for additional reserve power”.

It’s worth nothing that while multi-year contracts may allow vendors to offer cheaper contracts given the reduced risk they face by being able to agree their output, there is still the risk that the contracts may not be needed in the later years, despite the cheaper price for a multiple year agreement. The rule change requires low reserve conditions to be forecast in the coming year, which is a reasonable test but still doesn’t eliminate the chance that the RERT in the later years may actually be a wasted cost because it is not needed. It could also be better addressed through short-term contracts.

Overall there is also a risk RERT contracts may lure vendors away from the normal energy market, for example selling their services to retailers, and if this was to occur it would not actually improve power system reliability.

Reliability Assessment

The electricity system’s reliability, security and safety performance was also the subject of an assessment released by the Reliability Panel last week. That assessment found that security and reliability are both more challenging to deliver given the broad changes underway in the electricity system, but that overall the reliability performance of the NEM was satisfactory during 2018-2019.

This Reliability Panel conclusion appears to be at odds with AEMO’s report into the load shedding events of 24 and 25 January 2019[iii] which stated as its second conclusion:

“The reliability standard of 0.002% unserved energy (USE) was exceeded in VIC as a result of these events.”

The Panel noted that intervention mechanisms like the RERT are increasingly being relied upon to support reliable delivery of electricity to customers.

“The Panel is concerned by this increasing reliance on interventions. Using emergency tools means the market is not delivering sufficient capacity to meet demand and indicates a need for new investment that can be relied upon at times when consumers need it,” the report found.

“To maintain reliable supply into the future, the Panel’s view is that focus should be given to:

  • adapting our approach to delivering reliable supply to changing power system conditions and community expectations
  • improving coordination and total system thinking to reduce total system costs and maximise total system benefits. It also had an air of caution by pointing to the need or improving coordination at a time when Victoria is going it alone.
  • fostering regulatory and policy certainty wherever possible to underpin new investment.”

Retrograde Step

Aside from changes to the RERT arrangements this week Victoria’s Parliament passed the National Electricity (Victoria) Amendment Act (the Act). This Act will allow the Energy Minister, without any transparency or cost-benefit assessment, to commit to major transmission upgrades.

The National Electricity Rules currently undergo a robust assessment of potential investments in new transmission infrastructure via the Regulatory Investment Test for Transmission (RIT-T). This assessment is run independently and at arms length from political considerations. These changes pose serious issues as noted in this analysis (Victoria’s audacious intervention: The end for national planning?).

The Victorian Government had argued that the current arrangements weren’t flexible enough and also cited concerns about grid links for western Victoria where there has been a surge in renewable projects.

Energy users have flagged concerns about the potential costs of state-based changes with the Energy Users Association of Australia stating:

“Forcing additional costs onto consumers without checks and balances in place is extremely disappointing,” added Mr Richards. “We recognise the challenges being faced in western Victoria, but the rules are there to make sure that network investment delivers a positive return for the consumers who pay for it.”[iv]

The change will also create uncertainty for market investors with the change likely to impact investment decisions and was rushed through Parliament with no consultation and minimal scrutiny.

Gas Changes

Victoria has shifted its approach to gas exploration in the state by introducing legislation to lift the moratorium on onshore conventional gas exploration and development. This will occur from mid-2021 with the potential to help offset declines from Bass Strait[v] supplies.

Any onshore gas produced would be prioritised for the domestic market. At the same time, Victoria's ban on fracking and coal seam gas exploration will enshrined in the State’s Constitution.

The lifting of the conventional gas ban, which was due to expire on 30 June this year, should allow "potentially significant" resources in the Otway Basin to be developed.

The decision follows three years of investigation overseen by Victoria’s Lead Scientist, Dr Amanda Caples, who chaired an independent Stakeholder Advisory Panel[vi].

 


 

[i] “Victoria secures reliability win at energy COAG”, Victorian Energy Minister Media Release, 22 November 2019

[ii] AEMC Rule Determination, National Electricity Amendment (Victorian Jurisdictional Derogation – RERT Contracting) Rule 2020, 12 March 2020

[iii] https://www.aemo.com.au/-/media/Files/Electricity/NEM/Market_Notices_and_Events/Power_System_Incident_Reports/2019/Load-Shedding-in-VIC-on-24-and-25-January-2019.pdf

[iv] EUAA Media Release,

[v] Victoria scraps ban on conventional onshore gas, Australian Financial Review, 17 March 2020

[vi] “Backing the science, protecting farmers and boosting jobs”, Victorian Premier Media Release, 17 March 2020