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AEMC Reliability Framework review – something for everyone

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This article was written by Scott Gardiner, Josh Thorneycroft and Vishal Ahuja

The Australian Energy Market Commission is reviewing the reliability of the National Electricity Market and its regulatory framework.

It is a very wide ranging and very comprehensive review.

Some of the more interesting things AEMC has to say

  • AEMC is considering whether the incentives for efficient investment, retirement and operational decisions are resulting in sufficient dispatchable capacity being made available.
  • AEMC expresses a counterpoint to the Finkel recommended General Reliability Obligation of minimum dispatchability (for new intermittent generation), namely that increasing the diversity (location or technology) of flexible sources of electricity to accommodate fluctuations in intermittent supply should also potentially be part of the mix.

    AEMC expressly states that dispatchable capacity can be addressed by demand response and demand-side mechanisms. 

    One might go so far as to suggest that AEMC favours demand response and demand-side mechanisms over (but not necessarily in lieu of) a General Reliability Obligation.  This will obviously be of keen interest to developers of new renewable energy projects.

    AEMC also observes that upgrading (and presumably building new) interconnectors may be more cost effective than investing in more generation for reliability purposes.  It has sought stakeholder views on the role interconnectors can play in relation to reliability.  There really is something for everyone in this review.
  • AEMC is long on demand response generally.  This will clearly be a major focus of the review.  One option put on the table being the use of capacity or availability payments to stimulate the provision of demand response.

    AEMC is particularly interested in the ARENA/AEMO demand response trial currently being carried out.  AEMC wants to see the knowledge and data from the project used 'to accelerate the creation of a competitive demand response sector, with an initial focus on reliability demand response'.

    AEMC also appears to be open to increasing the market cap price to further 'incentivise' demand response.
  • AEMC notes that some stakeholders have observed that some overseas jurisdictions have recently implemented capacity payment mechanisms to facilitate 'firm' capacity.  AEMC then sought submissions on what outcomes stakeholders consider necessary to better incorporate intermittent generation sources in the NEM.

    While tentatively expressed, the door may be ajar - one might say 'again' – to the introduction of capacity payments into the NEM.
  • One thing is clear.  AEMC is going to consider a range of options for ensuring sufficient dispatchable capacity is made available, and not just the General Reliability Obligation.
  • AEMC will review the introduction of a day-ahead market.
  • AEMC is open to expanding the Reliability and Emergency Trader (RERT) regime to include unexpected generation shortfalls, not just anticipated generation shortfalls, to account for the rapid ramp up and ramp down of intermittent generation in response to changes in weather conditions.

    AEMC is clearly interested in the ARENA and AEMO availability payment based demand response trial for contracting RERT capacity more efficiently moving forward.

    AEMC is also going to consider the Finkel recommended strategic reserve as part of the review.  One suspects it hopes the RERT, revised as suggested above, might be sufficient for this purpose.
  • AEMC favours expanding the RERT over use of output directions and load shedding instructions under clause 4.8.9 of the NER.  However, it is open to reinstating the only-just-to-be-removed 9 month lead time long term RERT procurement process.
  • AEMC is considering what a credible contingency should be for lack of reserve notices in response to an AEMO rule change request.  AEMO has suggested that significant and rapid deteriorations in short-term power conditions now occur in response to non-contingency based variables (eg severe weather conditions) not just the traditional credible contingencies of say, loss of a generator. 
  • AEMO has raised similar concerns in relation to what should constitute a generating event for the Frequency Operating Standard - a generating event doesnot presently respond to rapid, unexpected generation events (eg a reduction in generation and subsequent ramp from solar panels as clouds pass) either.  AEMC is reviewing this too.

We consider a couple of the more interesting aspects of the Issues Paper in a little more detail below.  

But before we do that, a little bit of background.

What does AEMC mean by a reliable system?

AEMC defines a reliable system, in simple terms, as one which has sufficient generation to meet demand (ie adequate dispatchable capacity for supply to meet demand and provide some reserves).

AEMC distinguishes this from a secure system, which it describes as one able to operate within certain technical limits, even if there is an incident (eg loss of a transmission line). 

Current Framework for achieving a reliable system

The current framework for achieving a reliable system is largely market based, although AEMO has an escalating series of interventions to account for the limitations of a market system. 

The framework can be broken into four categories:

  • market incentives – the buying and selling of energy in the spot market and through financial products.  This is the main mechanism for delivering system reliability
  • market settings – the parameters within which AEMO operates the market (ie market price cap, market floor price)
  • information – includes reports from AEMO on whether the market is expected to meet the reliability standard, and information on expected future performance of the market to better inform market participants and investors
  • AEMO intervention – as a last resort AEMO has the power to intervene in the market to maintain power system security where the market has failed.  These intervention powers include the ability for AEMO to issue directions and instructions to market participants, and to reserve capacity where AEMO foresees a shortfall of supply.

The generation mix is changing

Australia's energy markets are undergoing a fundamental change as they shift from dispatchable thermal generation (eg the retiring of coal fired power stations) to new intermittent technologies (eg solar and wind). 

Intermittent generation makes it difficult to predict generation capacity at any given time as it is reliant on external factors (eg weather).  These rapidly changing generation capabilities can cause "supply ramps" (eg as a cloud passes, a solar farm can increase generation by up to 90% in five minutes, or as much as 101MW in an 103MW plant).  

Turning to the more interesting issue:  how best to deal with and manage intermittent generation.

Dealing with and managing intermittent generation

Forecasting

Intermittent generation is difficult to forecast.  

AEMO is currently analysing the historical accuracy of its current wind and solar forecasting systems.  AEMC will use the results of that in its review.

AEMO also wants more information about where distributed energy resources are located to enable it to better manage the power system.  AEMO's demand-side participation guidelines will require registered participants to submit demand-side participation data annually at the NMI level from April 2018.

AEMC wants all relevant parties to have sufficient information about distributed generation and for it to be reflected in price signals that reflect the value of providing possible services, so that buyers and sellers of those services can make efficient investment and operational decisions.  Perhaps more cost reflective charging for distribution and greater exposure of mums and dads to wholesale power prices (see below for more on this) is closer than we think.

How to accommodate fluctuations in supply

AEMC believes that intermittent generation may be accommodated by:

  • consistent with the Finkel recommended Generator Reliability Obligation, bringing forward dispatchable capacity to complement intermittent supply
  • increasing the diversity (location or technology) of flexible sources of energy to accommodate the intermittent supply.

AEMC does not see these as mutually exclusive.

In this regard, AEMC expressly states in the Issues Paper that dispatchable capacity can be supplied through demand response and other demand-side mechanisms (eg customers being paid to curtail consumption or pursuant to control arrangements they have agreed with their retailer).  

AEMC clearly sees a major role for demand response in dealing with intermittent generation issues.  

AEMC sought stakeholders' views on whether either of the above can accommodate increased intermittent energy without compromising system reliability. It says that these views will inform consideration of the General Reliability Obligation.  

AEMC then goes on to note that:

  • Bloomberg New Energy Finance believes that rooftop solar and batteries will make up 47% of all new capacity additions in Australia over 2016-40, and that together with demand response, behind the meter assets will make up 45% of total power capacity in Australia by 2040.

    If these figures are correct, and no doubt AEMC is considering stakeholder views on their veracity, then perhaps AEMC sees its 'flexible sources of energy' option having a very material role (ie alongside any General Reliability Obligation for a set percentage of future large scale renewable energy projects to be able to be dispatched on a firm basis)
  • some stakeholders have observed that some overseas jurisdictions have recently implemented capacity payment mechanisms to facilitate the provision of 'firm' capacity . 

    This comment, while tentatively expressed, is nonetheless interesting, particularly as AEMC followed it with questions which include the outcomes stakeholders consider necessary to better incorporate intermittent generation into the NEM.

Demand response

AEMC then moves onto an extensive discussion of wholesale demand response.  It clearly sees this as a key mechanism for creating "flexible" – there's that word again – energy supply.

AEMC uses the examples of:

  • participants becoming market customers and being directly exposed to spot prices through the wholesale market. High spot prices would encourage them to reduce consumption (or if they were hedged, while spot prices were above the value of energy to them, they could curtail consumption and retain the contract payments)
  • consumers agreeing with their retailers to take a degree of spot price exposure, and managing their own exposure or using technology to manage (their consumption and therefore) their spot price exposure, or simply contracting to provide demand response for payments or other (eg tariff) concessions.

Some of this is cutting edge stuff, but AEMC seems to believe in the future 'flexibility' it can bring.

AEMC notes that Bloomberg New Energy Finance has recently done some research on demand response in the NEM and concluded that the key impediments to its widespread adoption are:

  • a lack of access to wholesale markets
  • conflicting incentives for retailers who are vertically integrated (ie retailers incentivised to offer customers demand response products may also be incentivised by their generating facilities to increase the amount supplied to the grid during periods of high prices).

Bloomberg concluded that the 2 key factors present for widespread demand response adoption in other markets are capacity payments and participation by third party aggregators, instead describing the NEM as currently only encouraging "non-dispatchable demand side participation".  What a great descriptor.  Third party aggregators are clearly entering the Australian market now, and it would also appear that capacity payments for demand response will be considered by AEMC.
AEMC go on to say that there are potentially 2 issues, namely: 

  • increased vertical integration of retailers may be an impediment
  • the price customers are willing to pay for energy may be actually higher than what they are currently paying, suggesting that raising the market price cap may result in improved demand response (ie by those customers wholly or partially exposed to spot prices).   

Finally, AEMC is clearly looking forward to the results of the ARENA/AEMO demand response trial with a view to seeing the knowledge and data from the project used 'to accelerate the creation of a competitive demand response sector, with an initial focus on reliability demand response'.  It doesn't get much clear than that! 

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