Australia: AEMO chimes in on energy security measures

Strategies to ensure energy security and reliability are at the fore of discussions around the role of the NEM and changes that can assist the transition to a low carbon generation environment.

The recommendations in the AEMO Report come after it was agreed that all of the security and reliability recommendations in the Finkel Report would be implemented at a meeting of the COAG Energy Council earlier this year.

This article will focus on the recommendations in relation to energy security and reliability in the NEM in both the Finkel and AEMO Reports.

What needs to change?

Regardless of whether a CET is introduced, energy from renewable sources will continue to penetrate the NEM on the back of renewable energy target subsidies, the availability of funding for renewable generation and the reducing cost of building renewable generators. As AEMO noted in its report, the business model of fossil fuel generators "will be challenged by the increasing variability in the [NEM] and falling costs of competitive sources of energy".

As large baseload coal-fired generators retire from the NEM and domestic gas costs remain high for gas-fired generators, the volume of renewable energy in the NEM is increasing, bringing with it issues as to how to best deal with the intermittent nature of renewable generation, its inability to act as large-scale base load over the 24 hours in the day and its impact on the physical operation of the electricity network. AEMO has also identified in its covering letter to the Federal Government that "the overall responsiveness and resilience of the system is at risk from increased vulnerability to climatic events".

As a result of these concerns, strategies to ensure energy security and reliability are at the fore of discussions around the role of the NEM and changes that can assist the transition to a low carbon generation environment.

What are the solutions?

Energy storage

The Finkel Report identified energy storage as an important tool to ensure the stability and security of the NEM, stating that: "there will be a need for more dispatchable capacity to be brought forward to the market to complement an increasing proportion of [variable renewable electricity] generators like wind and solar photovoltaic". In this context, the announcement earlier this year (and subsequent funding of a study into the viability) of what is described as "Snowy Hydro 2.0", reflects the capacity of hydro to store energy and thereby complement variable generation through its dispatchable capacity.

Recommendation 3.3 of the Finkel Report calls on the AEMC and AEMO to develop and implement a "Generator Reliability Obligation" which requires new generators to ensure adequate dispatchable capacity is present in each region of the NEM by mid-2018.

According to the 12th COAG Energy Council Communique (for the COAG Energy Council meeting at which the recommendation was adopted), the Generator Reliability Obligation will essentially require new generators to guarantee a level of dispatchable capacity before they enter the NEM. This measure will help ensure enough generation capacity is available to meet demand at all times.

While new generators will be responsible for meeting their individual Generator Reliability Obligations, the Finkel Report makes it clear that the back-up energy supply does not need to be located on site and may employ economies of scale. For example, multiple renewable generators could pair with one new large-scale battery or gas-fired generation project to discharge their obligations.

Strategic reserve

Recommendation 3.4 of the Finkel Report called for the assessment of "[t]he need for a Strategic Reserve to act as a safety net in exceptional circumstances as an enhancement or replacement to the existing Reliability and Emergency Reserve Trader mechanism" (RERT).

In line with that recommendation, the AEMO Report has identified the development of a strategic reserve as a key measure to ensure the reliability of the NEM. According to AEMO, it would contract for electricity resources to use during emergency situations as a last resort to load shedding.

In its covering letter to the Federal Government, AEMO noted that any strategic reserve mechanism would, by design, comprise energy resources that do not participate in the wholesale market. For example, "mothballed generator units" that are not economical in the NEM may be targeted to ensure there is no impact on private investment signals.

According to the AEMO Report, the reserve generation would be procured ahead of time for use from summer 2018-2019 to summer 2020-2021, with the intention of putting in place a plan to maintain electricity supply in the anticipated peak load and volatile summer periods.

Significantly, AEMO has indicated that is it currently pursuing a strategic reserve of 1,000 MW for summer 2017-18 as an immediate measure by relying on the existing:

• RERT (which only allows resources to be procured 10 weeks ahead of any identified need); and
• demand response initiative between AEMO and ARENA to manage electricity supply during extreme peaks from 1 December 2017.

However, the AEMO Report has suggested that "[a] new strategic reserves framework could replace these services, incorporating existing contracts and providing the basis for more comprehensive, longer-term resources".

Extended market design

In its covering letter to the Federal Government, AEMO also noted that it is concerned that "in the absence of a market design change, sufficient investment in new resources or existing resources that provide dispatchable capability are unlikely to occur".

Specifically, the AEMO Report has identified that the NEM will require the incremental introduction of new dispatchable resources to replace the Liddell Power Station upon its expected closure in 2022. However, AEMO has not identified an approach for achieving this outcome in its report.

What's next?

Australian consumers' expectation is that the NEM will deliver a high level of reliable electricity supply in all but the most extreme of weather events. Clearly the transition to a higher concentration of distributed renewable generation is creating operational challenges in the NEM, not the least being how to maintain a cost effective, low carbon emission electricity market that is robust and reliable.

The expectation on regulated electricity markets in Australia is to respond with accurate and effective market design that reflects and facilitates the range of sources of renewable generation which will increasingly contribute to the NEM, combined with new and improved technology in the form of energy storage and generation such as large-scale batteries, in addition to existing or expanded hydro capacity.

The reforms and strategies outlined above should go some way to realising that expectation as soon as mid-2018. According to the Finkel Report, the Generator Reliability Obligation should be implemented by mid-2018 and the COAG Energy Council has indicated that a rule change request will be submitted to the AEMC following the outcome of the AEMC's Reliability Panel "Review of the Reliability Standard and Settings" and advice from AEMO on optimal levels of dispatchable capacity.

The AEMO Report also suggests that its proposed strategic reserve mechanism and strategy for encouraging new dispatchable resources to enter the NEM should be completed for consideration by the COAG Energy Council by mid-2018.

RELATED KNOWLEDGE

• The renewables debate shifts a gear: Finkel Review proposes Clean Energy Target

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.