Feb 27 2020

Victoria’s audacious intervention: The end for national planning?

On 18 February the Victorian Energy Minister, Lily D’Ambrosio, introduced the National Electricity (Victoria) Amendment Bill 2020. Below we look at what is in the Bill and the implications for national planning and grid developments.

The actions of the Bill

The Bill is “intended to facilitate or expedite specified transmission system augmentations or services to improve the reliability of electricity supply in Victoria …”.  To do this, it will grant the power to the Minister to modify or disapply sections of the National Electricity Law (NEL) and the National Electricity Rules, particularly the requirement to undertake a regulatory investment test for transmission (RIT-T), and the requirement to undertake a competitive tender process to determine who will carry out a contestable augmentation.  It will also apply to non-network services.  Although the focus of the Bill is transmission, solutions could include batteries and generators.

The powers granted to the Minister are very broad, and include:

  • specifying the augmentation(s) which is/are to be carried out;
  • specifying the services to be provided in relation to the augmentation(s);
  • deeming such services as ancillary services, inertia network services, prescribed transmission services, system strength services, or any other service;
  • specifying the test, examination or assessment which should substitute for the RIT-T;
  • requiring that the augmentation-related costs are recovered as charges for services, or as a pass-through event;
  • requiring that a declared transmission system operator plans, implements and operates the specified augmentation; and
  • requiring that agreements be entered into, and the terms and conditions of such agreements.

When deciding to use the powers, the Minister may (but is not obliged to) consider:

  • whether there is or may be a crucial national electricity system need in Victoria or in Victoria and another participating jurisdiction;
  • options available under the Law and the Rules to address any crucial national electricity system need;
  • the potential costs to end users;
  • the immediate, medium and long-term needs of the national electricity system; and
  • the actual or projected amount of generation or reserve in the national electricity system.

Finally, before exercising the powers, the Minister must consult with the Premier, the Treasurer and the Australian Energy Market Operator (AEMO), and, once exercised, publish the reasons (but not any detailed justification) for making the order.

While the Bill specifies that the Minister may set out guidelines for the alternative to the RIT‑T, there is no obligation for such guidelines to be developed and consulted upon.

There is a clause requiring the legislation to have an independent review conducted by December 2025, but there is no requirement for the legislation to be repealed if the independent review recommends it; there is only an obligation for the report to be tabled in Parliament.

The Bill’s likelihood of success

We expect the Bill to be debated in the Legislative Assembly (Lower House) next week (week commencing 2 March), and it's understood the Government wants to get it through both the Lower House and Legislative Council (Upper House) by the end of March.

There are 40 seats in the Legislative Council, with the Labor Government holding 18, and the Opposition 11. Thus to pass the legislation the support of 3 of the 11 cross-benchers will be required, but this is likely since there are a number who generally side with the Government to pass legislation.

Implications for the development of networks

The construction of networks by ministerial decree represents a major departure from the basis of the planning and regulation of energy infrastructure. Over the National Electricity Market's (NEM) 21 years, electricity transmission development and funding has occurred through a technocratic process, independent of government. In that time a strong knowledge base and process of economic cost-benefit justification has developed, overseen by the Australian Energy Regulator (AER) within the transparent and disputable structure of the RIT-T. This has played a critical part in the NEM, by:

  • Ensuring all major augmentations are properly ex-ante justified, thereby protecting customers from paying for inefficient monopoly assets;
  • Giving some predictability and confidence to competitive market investors, whose assets’ profitability will be affected by network augmentations;
  • Providing clarity to long-term network planners, such as those performing AEMO’s Integrated System Plan (ISP), providing a clear economic basis for their planning.

The legislation turns that regime on its head. Issues become immediately apparent – picture the challenge for AEMO’s specialists attempting to develop a nationally coherent ISP supposedly prepared on consistent cost-benefit principles whilst augmentations not recommended by them can occur within one-state, without warning, through ministerial decree.

Implications for other jurisdictions

The legislation only covers Victorian transmission assets. The Minister’s press release stated, “As a first step to secure additional transmission capacity the Government will ask AEMO to call for expressions of interest to increase the capacity of the Victoria-New South Wales Interconnector.”  Yet it is unclear how this could be the case: any asset north of the Murray River remains subject to the NEL and therefore requires conventional justification before its costs may be recovered from New South Wales’ customers.

It may then be thought that this legislation has only intra-Victorian effects. In a complex interconnected grid, this however cannot hold either. Even if all the assets of an augmentation are intra-Victoria, there will always be flow-on effects in other regions

Firstly, consider the planning of the overall grid. For example, any changes to the network between Victoria’s Western and Northern borders will have significant consequences upon the recently justified EnergyConnect, which runs in parallel outside these borders. The planning of parallel paths in an electricity system must be carefully coordinated, as their operations will interact and may undermine each other.

Secondly, if Victoria’s ability to import power from another state is enhanced by a project developed by the legislation, then prices in that state will necessarily rise.

Thirdly, transmission customers already share in the costs of transmission through a process known as “Inter-regional Transmission Use of Service (TUoS)” and the allocation of Inter-regional settlement surplus. Investments made within one state will necessarily affect these quantities, therefore changing the charges levied by ElectraNet on South Australian consumers and by TransGrid on New South Wales consumers. For example, if the network is expanded in Victoria, then the TUoS charges at the Victorian ends of the interconnectors will increase. Inter-regional TUoS then passes these charges onto customers in those states when they import from Victoria.

Implications for the NEM

As energy is constitutionally a state responsibility, the NEM construct is the result of a remarkable 1990s achievement in getting all the participating jurisdictions to pass mirroring legislation of the NEL of South Australia. To ensure the structure remained intact, the states signed the Australian Energy Market Agreement. State-based derogations were permitted, but where controversial they were subject to a peer consultation process to ensure they did not have spillover effects and did not in any other way undermine the fundamentals of the NEM. This fragile understanding has been challenged many times before, however this legislation appears the most audacious breach to date of at least the intent of the Agreement.

Passing of the legislation would thus reinforce the limitations of the Australian Energy Market Agreement, and may perhaps motivate other jurisdictions to follow suit, in order to further their own agendas.  This would then render meaningless the national planning of the NEM’s grid.

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