AEMC explores changes to the MLF framework

This article was written by Roderick Smythe, Vishal Ahuja and David Ellis.

On 6 June, the AEMC commenced consultation on the MLF framework.  While in response to two specific rule change requests by Adani Renewables, the AEMC is considering broad reform on:

• how transmission loss factors are calculated and adjusted; and
• how the intra-regional settlement residue is allocated.

The consultation paper is available here.

Intra-regional loss factors adjust the spot price applicable to a connection point to reflect the electrical losses which occur during the transmission of electricity.  Generally, this results in a reduction in revenue for generators while loads experience an increase in cost.

Currently, intra-regional loss factors are based on the electricity losses that would occur if an additional unit of electricity (the marginal unit) were injected at the relevant connection point.  Accordingly, these loss factors are known as "marginal loss factors" or MLFs.

The rule changes proposed by Adani are:

• intra-regional loss factors should be based on the average electricity losses at the relevant transmission connection point; and
• the intra-regional settlement residue resulting from inaccuracies in loss factors should be distributed to generators and market customers (rather than to market customers only as is currently the case).

The MLF applicable to each transmission connection point is recalculated by AEMO each year to reflect actual and forecast changes to transmission losses.

In recent years, the rapid transformation of the NEM's generation mix has resulted in volatile (and generally decreasing) MLFs for many generators.  In the past two years, many projects have experienced decreases in their MLFs (and corresponding revenue impact) in excess of 10%.

As a reduction in MLF for a generator represents an equivalent reduction in spot market revenue, this risk has become a serious concern for developers and existing generators.

The AEMC has asked stakeholders to comment on several questions, including:

• Should marginal loss factors be replaced with average loss factors?
• Should multiple loss factors be used for each connection point to better reflect actual conditions, such a quarterly, peak/off-peak or real time factors? 
• Should loss factors be subject to a "collar and cap" mechanism?  This could apply as a fixed band for MLFs (for example, between 80-110%) or a constraint on the rate of change (for example, no more than ±5% per year).
• Should MLFs be grandfathered for the life of existing generators, with changes to losses reflected in lower MLFs for new generators?
• Should intra-regional settlement residues be allocated to market customers (as is currently the case), or to market customers and generators?

The consultation on the MLF framework is occurring within the context of other developments that will be relevant:

1. AEMO's commitment to publish loss calculations more frequently so that there is greater transparency for potential investors;
2. the AEMC's Coordination of Generation and Transmission Investment review, which is focussed on overarching solutions to making investment decisions for the generation and transmission sectors.  This includes proposed network access and charging reforms; and
3. the AEMC's consolidated consultation on rule change requests which seek to increase transparency of generators connecting to the transmission network.

The AEMC is currently accepting stakeholder submissions in response to the consultation paper until 18 July 2019, and is targeting publication of a final determination in December 2019.