AEMC looks beyond coal and gas to batteries and flexible grid to manage reliability

The increasingly important electricity market contribution of demand-side resources like rooftop solar and battery storage, as well as the need for more “flexible” and responsive grid, have been flagged as key considerations in proposed changes to the standards and settings for a reliable power supply.

The Australian Energy Market Commission on Thursday published a Consultation Paper ahead of its 2022 review of the reliability standard and settings guidelines – the formula used to ensure an acceptable level of reliability in the national electricity market at the lowest possible cost.

The paper is seeking stakeholder views on a range of proposed changes to the current reliability settings guidelines, including key market signals that would put new generators and technologies on a more equal footing with market incumbents – namely coal and gas plants.

More broadly, the AEMC is throwing open to question the very foundations of the reliability standard and the modelling that shapes it, in acknowledgement that there could be better ways to minimise the cost of “keeping the lights on” in a rapidly changing power system.

“The physical power system of the NEM [National Electricity Market] has changed materially since the guidelines were first introduced in 2016,” the paper says.

“There still is a need to support stability and predictability in the market to the greatest extent possible, but there is also a need to align and have regard to the market changes and post 2025 reforms going forward.

“The Panel considers the benefits from stability may no longer outweigh the benefits of a flexible framework in a changing environment.”

The paper outlines a range of significant changes that have unfolded on both the supply and demand side of the wholesale market, including the arrival of enormous amounts of distributed renewables, the exit of thermal scheduled generation – coal; the increase in dispatchable generation – storage; and the increase in demand-side participation.

On the supply side of the market, the paper highlights the increasing investment in battery storage capacity, which it says is changing the way that the wholesale market responds to peak market events, typically the preserve of gas plants.

“Traditionally, Open Cycle Gas Turbines (OCGT) plants have been the technology type that responds to peak market events in times of temporary scarcity and very high prices,” the AEMC says.

“However, battery storage is expected to become increasingly prominent in setting and responding to high prices. Further, the increasing investment in storage capacity means that intra-day price volatility is becoming a progressively more important revenue source and investment signal.”

To this end, the AEMC proposes to review the guidelines it uses to shape key settings, including the market price cap (MPC), market floor price (MFP), cumulative price threshold, and the administered price cap (APC).

In the case of the MPC, the paper identifies a “number of material changes” in the NEM that might affect its settings, including the need to provide efficient price signals to demand-side participants, the transition to batteries and other energy storage technologies supporting peak demand, and declining investment in OCGT’s, previously considered the default ‘new entrant’.

On the market price floor, the paper notes that the increased penetration of rooftop solar is projected to increase the severity of minimum grid-based demand and so, very low prices.

To effectively manage risks associated with this, it says it may be prudent to consider a minimum cumulative price threshold and associated minimum administered price period and administered price floor.

“The Panel will exercise its judgement to achieve predictable outcomes, while reflecting significant changes in market conditions, to support efficient investment and operational decisions by participants,” the paper says.

“The settings should be sufficient to support the level of investment necessary to deliver the [reliability] standard, over the long run.”

Stakeholders are invited to make submissions to the consultation paper by 8 April 2021 and are also able to request a meeting to discuss specific issues in more detail, if they think it will help in the process of consultation.