“I was a young man and sure to go astray
You walked into my life and told me love would find a way
To keep on growing, keep on growing, keep on growing” Derek & the Dominos 1970
Need to know
Caution. This note was originated with a view to analysing how renewable developers would behave in the face of the forthcoming Generator Reliablity Obligation [GRO]. It quickly became apparent that this was a bit of a mine field and that some basic knowledge of power engineering might have helped.
Still in the spirit of publish and perish…
In the end today’s view. but without much confidence, is that the cost of the GRO, everywhere other than South Australia, to new developers, will be relatively small. This view is based around what we take from what might be one of the more useful reports published in Australia in recent years Power system security assessment
One thing for sure though is it will be a cost increase and not a reduction. As such our basic premise remains that there is an incentive to get renewable projects “approved” for connection to the grid, before the GRO procedures are introduced. That incentive would appear to be strongest in South Australia. However, this is just one of many factors.
GRO- Will developers shoot first, ask questions later?
Your correspondent knows very little. And certainly nothing about how the Generator Reliability Obligation is going to work.
Based on what we heard at the CEC Summit no one seemed to be expressing too strong a view on what it means…..If anything. At this stage what we read is that the Coag Energy Council has handed the job to the AEMO and it will then go back to the AEMC for a rule change.
We also understand from comments made at the CEC Summit that the AEMC already has a process under way.
However two points seem very clear.
- Finkel recommended that the GRO be implemented within 12 months
- It will increase costs of putting in new renewable generation. Not only will there be actual extra costs, perhaps accompanied by extra revenue, but there will be more agreements, negotiations and documentation required for every project. Great business for lawyers. We don’t know how much costs will increase, but we are highly confident they will be higher.
So if you are a project developer what do you do?
Possibly you try and accelerate your project to get in in front of the GRO.
This will still leave you the option but not the obligation to firm up your renewable supply after the GRO becomes law.
So our thought is that we might expect to see some acceleration of projects reaching FID and perhaps even starting operation ahead of when the GRO comes into force.
Generator reliability obligation (GRO) driven by minimum dispatchable capacity
The Finkel Report’s recommendation 3.3 states:
“To complement the orderly transition policy package, by mid-2018 the Australian Energy Market Commission and the Australian Energy Market Operator should develop and implement a Generator Reliability Obligation.
The Generator Reliability Obligation should include undertaking a forward looking regional reliability assessment, taking into account emerging system needs, to inform requirements on new generators to ensure adequate dispatchable capacity is present in each region”
No actual theoretical justification was offered for this recommendation. Nor was there any review of how it is done elsewhere in the world.
As part of the GRO “the market bodies” will take regional reliability assessments aimed at measuring
“Minimum dispatchable capacity” including:
- Total VRE generation as a proportion of dispatchable generation;
- Network strength.
- Variation in VRE;
- Interconnections
- Load profile
- Wholesale and contract market consideration’
- Expected future trends.
Your analyst had to smile at these last two as they would seem to allow for just about anything.
Melbourne Institute Security report may prove more useful than Jacobs modelling
At the same time as Finkel was recommending the GRO Finkel also commissioned a report by the Melbourne Institute titled “Power system security of the future electricity market.”
Although unavoidably technical the report can almost, I say almost, be read by a determined amateur.
To this reader, it seems to be a first class piece of analysis. We quote from the horse’s mouth (so to speak).
“Whilst a comprehensive analysis of system security is beyond the scope of this work, these analyses highlight two main points:
- Without implementation of appropriate operational measures, the NEM will experience increasing issues of frequency control in all modelled scenarios, including the Business As Usual case.
- There is significant potential to use several operational measures and electricity market designs to ensure frequency response adequacy in VRE- rich power systems.
Such operational measures and market designs could drive the generation portfolio’s operation so that the dynamic response of the system after a potential contingency event is constrained to return the system frequency to 50Hz. Indeed, frequency response adequacy appears achievable in all of the scenarios studied in this report.
Furthermore, whilst inertia-bearing generation is likely to remain important, our analyses also show that there are a number of other technologies and services that can provide so-called Fast Frequency Response (FFR) and therefore also legitimately play a significant role in supporting frequency regulation. This includes demand response, energy storage of several forms, and the so-called synthetic inertia in newer wind turbines, amongst others. “ MEI System security report
The report indicates, in common with other stuff we see around the world, a declining emphasis on inertia and a renewed focus on frequency.
The report recommends a dynamic approach to frequency management.
Although the report does not deal with the GRO directly, by implication one can get a sense of the appropriate NEM wide level of VRE generation as a share of total generation.
The report seems to indicate, to this reader, that VRE could be as high as 75%. Fig 1 below taken from section 5.3 shows a NEM wide graph detailing the minimum online synchronous (ie thermal) generation from a static point of view to maintain frequency in the even of a sudden loss of 700 MW generator. In 2020 its just 7GW, provided there are 3 GW of other forms of frequency support.
Of course in South Australia where wind output can get to 100% of demand the situation is different.
NEM wide though the big $ question is whether there is much need for VRE support right now.
Finkel puts fast frequency response market in the three year time frame
Other jurisdictions, most notably perhaps in the UK, have already started a fast frequency response market but in Finkel’s estimation this is something that only needs to be considered in a three year time frame.
One interpretation of this is that there aren’t any urgent problems with frequency. As such why will there be much cost for generator reliability?
The AEMC and AEMO both could have done better, but that’s history
We’ve been critical of some aspects of the AEMC and indeed we argue that the lack of direction and failure to advise COAG on the scale of change and adjustment required is one of the root causes of the adjustment process.
More fundamentally there is a lack of executive chain of command. Governance but no management. We also think that the philosphical reliance on markets, which we share, nevertheless fails to sufficiently account for.
- Electricity is an essential service, and gas just about is. What this means is that the markets won’t be allowed to work fully. Prices are allowed to go down but public pressure will stop them going up for any extended period. We’ve already seen this in gas and we are going to see it in electricity.
- By their nature markets produce booms and busts. With an essential service that can be a problem. In many products and services a shortage leads to high prices but if a shortage leads to blackouts that’s a different kettle of fish. Even more importantly we argue that booms and busts increase the cost of capital. So although the risks are borne by the private sector and as the AEMC argues the private sector is best placed to judge and bear the risk, the fact is that the price of that risk is borne by consumers. Further more the overall level of risk is arguably higher than it needs to be if a more centrally planned approach is taken to the “quantity of new investment”. In the case of reverse auctions the price is still set by competition and the market and to some extent the technology. However the quantity of new investment and perhaps its characteristics (ie dispatchable or not) are set by central policy.
- In any case there is no real market. Half the price is set by regulation of wires and poles, and not set very well and the other half is set by a vertically and horizontally integrated oligopoly.
Similarly we’ve been critical of AEMO’s responsibility for the South Australian blackout.
In our view its an absolute core competency of AEMO to be aware of the ride through settings of the wind farms in South Australia.
Our understanding is the AEMO was aware of the islanding risk in South Australia, just as the South Australian Govt was aware of the risk.
The problems with ride through settings on wind farms had been known and fixed in both Europe and the USA years ago. It was the AEMO’s job to understand the mission critical nature of those settings and get them adjusted.
However that’s history – Only sympathy for the work load going forward
Whatever the past you have to feel a bit for both organisations regarding the workload over the next 18 months.
50 Recommendations from Finkel as well as a new management and governance structure.
Finkel provided little or no detail, and indeed not much justification, for many of the recommendations.
Lets start with the new governance.
Management need to be empowered and accountable, but are they?
Our view is that the NEM needs a CEO empowered and accountable. Nothing in the Finkel structure gives confidence that such a role exists.
The new NEM governance structure is:
We’ve heard arguments both for and against the structure. However, in our view it’s not clear still who is reporting to who.
The heads of the AEMO, AEMC and the AER are members the ESB, but do the CEO’s of those organisations report to the ESB? Almost certainly not.
We think the particular area of concern will be the division of responsibilities between the AEMO and the ESB.
However, the real point though is the time delay it introduces into the change process.
Not only do the ESB people have to be appointed they need to take time to work out who is doing what. But time is relatively short.
Is there enough accountability?
Or will there just be murky buck shifting and endless bureaucratic style reports? It will probably come down to the people.
Far too much homework
Figure 3 is recreated from the Finkel report. We have highlighted some of the recommendations that we think could directly impact the renewable energy. Most of them will one way or another increase costs.
Everyone has their pet projects but we find it disappointing that the generation transmission and renewable zones wasn’t even mentioned in the timetable, as we see this as one of the most fundamental building blocks of NEM 2.0
Finkel’s Timeline
David Leitch is principal of ITK. He was formerly a Utility Analyst for leading investment banks over the past 30 years. The views expressed are his own. Please note our new section, Energy Markets, which will include analysis from Leitch on the energy markets and broader energy issues. And also note our live generation widget, and the APVI solar contribution.
