AEMC delays ruling on marginal loss factors after investment warning

The Australian energy market’s principal rule maker has announced a two month delay in its much-anticipated draft decision on proposed changes to marginal loss factors, which have been blamed for wiping more than $1 billion off the value of wind and solar farms and putting a halt to new investment.

Marginal loss factors have been reduced by the Australian Energy Market Operator because of congestion on the grid caused by the huge rollout of new wind and solar farms over the last two years. The worst affected areas have been north Queensland, south western NSW and north western Victoria.

But many proponents argue that the MLF calculations are no longer fit for purpose, are unfair and do not accurately reflect what actually is occurring on the grid.

A whole range of alternatives have been put forward, with one big group of investors representing $11 billion of investment and a pipeline twice as big proposing an interim measure of “average loss factors”.

They argue that this better reflects the grid workings, will result in less volatility, and so lower the cost of capital and make new investments more likely. MLFs are just one of a number of challenges facing wind and solar farm proponents, including strict new connection rules and system strength requirements.

Some wind and solar farms have had their output downgraded by up to 20 per cent, including long-standing assets such as the Challicum Hills wind farm in Victoria, which suffered a 10 per cent downgrade – despite operating since 2003 – in what its developers say was a decision that could not have been predicted or hedged against.

The Australian Energy Market Commission was to have delivered its draft determination on Thursday, but has now announced it will not be released until November 21, a day before the first COAG energy ministers of the year, and after other key decisions, such as the COGATI review on generation and transmission requirements, are also released.

In a brief statement, the AEMC said: “The extension is necessary due to the complexity and volume of issues raised by stakeholders in submissions and discussions.  It will also allow the Commission to seek further data and undertake additional analysis.”

There was a fear that the AEMC would sit with the status quo pending the outcome and finalisation of the range of other rule and market changes that are taking place, such as COGATI and the Integrated System Plan, and the proposed re-write of the whole market design.

But the Clean Energy Investor Group – representing 20 industry heavyweights such as Macquarie Group, BlackRock, German energy giant innogy, Esco Pacific, Neoen, Pacific Hydro and others – argued that this would result in no investment going forward, and further losses of value on existing and proposed assets.

The $1 billion cited by the group earlier this week follows the announcement by John Laing that it had written off more than $120 million from the value of solar and wind projects currently under construction. Other investors have also taken hits, but have not revealed them because they are not listed.

State ministers are believed to have also pressured the AEMC into making a change that would not put a halt to new investments. Although the federal government has no intention of providing any new incentives or policies now that the renewable energy target has been met, various state governments have their own targets.

Two of them, Queensland and the ACT, are about to finalise significant reverse auctions that will comprise a mix of wind and solar and battery storage, but investor group chair Rob Grant warned this week that prices for those auctions would be significantly higher than otherwise without their proposed interim change to transmission prices, and providing an average rather than marginal pricing alternative.

Victoria, which has a 50 per cent renewable target for 2030, and is likely to also call another reverse auction, once its transmission needs are sorted out, says the AEMC needs to act.

“The AEMC has to get the decision about loss factors right but the process is taking too long,” Victoria energy minister Lily d”Ambrosio told RenewEconomy.

“The current rules aren’t working and we can’t afford to see this dragged out any longer by the AEMC. We need a resolution to give investors the certainly they need to keep investing in renewable energy projects.”

Grant told RenewEconomy that the investor group took the delay as a positive sign that the AEMC commissioners “have heard the story we are telling” and have asked AEMC management team to do further analysis on the ALF.

1. He is calling for a combined state government and AEMC workshop to look at how the ALF would work and demonstrate its “no regrets” nature, and allow network owners to come up with a workable solution for inter-regional settlement residues under an ALF.

You can listen to this week’s Energy Insiders podcast interview with Rob Grant here.