AEMC approves Victoria’s request to go it alone on energy reliability reform

The Australian Energy Market Commission has approved a “special arrangement” requested by the Victorian government that allows the energy market operator to enter into long term emergency reserve contracts to ensure reliable electricity supplies in the state.

The new rules allow the Australian Energy Market Operator (AEMO) to enter into longer term, multi-year, contracts under the Reliability and Emergency Reserve Trader (RERT) mechanism.

The RERT is triggered during periods of predicted electricity supply shortfalls and allows AEMO to enter into emergency reserve contracts to maintain the sufficient electricity supplies.

Currently, emergency contracts can be entered into for up to one year ahead, but the Victorian government saw a need for multi-year contracts.

Victorian energy minister Lily D ‘Ambrosio requested the new powers that would allow for three-year contracts and which are a special arrangement that applies only in Victoria, following growing frustrations with the slowness of action being taken to boost reliability and security of electricity supplies in the state.

In a keynote speech to the All Energy Conference last year, D’Ambrosio slammed both the federal energy minister Angus Taylor and the AEMC, saying that the latter had a ‘tin ear’ to the need for more comprehensive reforms to the national electricity market rules.

“The rules are preventing [AEMO] from reducing the risk of shortfalls or finding cost-effective solutions for procuring RERT contracts on a multi-year basis,” D’Ambrosio told the conference. “This is despite a recent review by the Australian Energy Market Commission into RERT. And it’s not the first time that the Australian Energy Market Commission has demonstrated it has a tin ear to the need for change.

The AEMC has subsequently approved the “jurisdictional derogation” requested by Victoria and will help address electricity supply challenges, in particular the growing risk of load shedding. It also sees the state acting independently from the rest of the National Electricity Market.

In approving the change to the National Electricity Rules, the AEMC said that it recognised that Victoria is responding to a challenging environment for system reliability, as wind and solar projects encounter difficulties in getting connected to the grid in some parts of the state, and coal generators approach the end of their operational lives.

The AEMC opted to amend the requested changes before final sign off, to ensure the “enhanced RERT” arrangements did not lead to unnecessary contracting for electricity supplies, and to avoid inadvertently contributing to higher electricity prices.

The AEMC said that it had responded to concerns raised by energy consumer groups, saying that it had included measures in the rule change request that would ensure long-term supply contracts would not lead to higher prices for consumers.

“And to reinforce protections for consumers – we have introduced checks and balances to make sure multi-year contracts are only used where they minimise costs,” Pierce added.

These checks and balances include limiting AEMO to entering into multi-year contracts only for “duration of time AEMO reasonably expects that the emergency reserves would be required”, and the length of contracts and volume of additional supplies contracted cannot be more than what AEMO as deemed as reasonably necessary for maintaining reliability of supply in Victoria.

The new rules will come into effect on 16 April 2020 and will remain in force until 30 June 2023. By that time, it is anticipated that a longer-term solution to Victorian grid reliability will be found.

The AEMC pointed to an assessment completed by AEMO that suggested that new generation capacity being brought online in Victoria would only lead to a mild improvement in supply reliability, with Victoria continuing to face the challenges of an ageing brown coal generation fleet that is becoming increasingly unreliable.

“The Energy Security Board will provide advice to the COAG Energy Council on immediate measures to ensure reliability and security of the power system across the national electricity market as a whole,” AEMC chair John Pierce said.

“All the market bodies are currently involved in both this work and investigating a two-sided market where less generation would be needed in a market with higher levels of consumer participation and responsiveness.”

On Thursday, the AEMC also released a second draft determination for the introduction of a wholesale demand response mechanism. The AEMC looks set to approve the introduction of demand response trading for large energy users, allowing them to be compensated for reductions in energy use.

However, the AEMC will exclude households and small businesses from the demand response mechanism, saying the complexity and uncertainty of including smaller users would likely only work to drive up electricity prices.

Minister D’Ambrosio has been contacted for comment.