AEMC sides with incumbents against wind and solar on transmission losses

The Australian Energy Market Commission has once again disappointed the renewable energy industry after siding with incumbent generators and rejecting proposed changes to the way transmission losses are calculated.

The transmission losses – known as marginal loss factors (MLFs) – has been the biggest among many factors creating roadblocks for wind and solar developers in Australia, who had lobbied for a shift to “average loss factors” (ALFs), which they argued would be a fairer and more predictable means of calculating the impact of grid congestion.

Some wind and solar farms – even those built years ago –  have had their MLF ratings slashed by nearly a quarter, leading to an equivalent fall in revenue. They say this is an impossible way to manage their investment and the uncertainty – and constant changes – caused by MLFs was creating risk, pushing up the cost of capital, and costs to consumers.

Some developers have warned that they would quit Australia is the rules were not changed. One developer, UK infrastructure group John Laing, foreshadowed a $120 million write down from three investments as  result of MLF downgrades.

In its final ruling released on Thursday, the AEMC – the country’s main rule maker – conceded that investment in networks had not kept up with wind and solar developments, and the rules of the market needed a complete makeover to catch up with new technologies.

But on MLFs, it refused to budge, even on a temporary basis as the new rules are designed and put in place – a process likely to take five years.

It stuck to its much criticised draft ruling, saying it had now conducted its own modelling which came to a different conclusion to that produced by a group of 25 leading renewable energy investors, known as the Clean Energy Investment Group representing investments of more than 6.5GW of installed capacity and an even bigger pipeline (10GW).

The AEMC argues that its modelling showed the current system of MLFs would “likely” result in lower costs to consumers than changing the method to ALFs, which proponents said would still use an important “locational” pricing signal, but would seek to average out any losses to multiple generators in the same location.

However, the AEMC concedes that the change in aggregate revenue to generators would be small in average, but could be significant to some generators badly affected by MLFs.

Basically, this means that moving to ALFs could improve the lot of some wind and solar farms, but retaining the MLFs was better for gas generators, in particular, and many coal generators.

That would explain why incumbent utilities, those with big investments in fossil fuel generators, had sided with the AEMC on retaining the MLFs. AGL, for instance, wanted the status quo, while its partly owned renewables fund PARF that holds its key wind and solar assets, wanted a change, a stark illustration of the industry divide over the issue.

AEMC also cited support from the ACCC and Energy Consumers Australia, neither of which is considered particularly disposed to encouraging renewables and tend to side with the incumbents.

Another consumer advocacy group, the Public Interest Advocacy Centre (PIAC) had argued that reforms were necessary because the current rules did not serve the best interests of consumers in an energy system undergoing a shift to new technologies.

“The National Electricity Market is undergoing a structural transformation in generation and operation, which the current regulatory framework is not well-designed to deliver. The inadequacy of the planning and investment signals for new, large-scale generation has been a growing issue, with the volatility of Marginal Loss Factors (MLF) just one symptom,” PIAC wrote in its submission.

The AEMC – one of the institutions whose remit was supposed to ensure that rules and regulations kept up to speed with the energy transition – agreed with this on all points but the MLFs.

It said it agreed that the volatility and uncertainty from MLFs are affecting the investment environmen.

“But we disagree on the cause,” AEMC chairman John Pierce wrote. “Volatility is a symptom of a broader issue – the rapid transition of the NEM. This doesn’t make MLFs inherently wrong – it means the NEM is rapidly changing and volatility is a symptom of the change.

“The rapid pace of renewable investment has meant that generation has got ahead of transmission.

“We agree this has to be fixed but diluting market price signals and shifting costs onto others is not the way. Changing to ALFs could increase total losses, which means more electricity needs to be generated to meet consumer demand. It could also increase wholesale energy prices and overall make the operation of the NEM less efficient.”

Rob Grant, a former head of Pacific Hydro and spokesman for the CEIF group of investors, said he was disappointed but not surprised by the AEMC decision.

“They seem to be blaming volatility in the markets on the transformation to renewables, rather than embrace the transformation,” Grant told RenewEconomy.

“They have confected an argument to justify their decision. It’s as though they have decided that if they maintain the MLF then the transformation will go away.”

Grant noted that the AEMC, in its cost benefit analysis, did not include the cost of capital increases for wind and solar developers it admitted would be the result of retaining the MLFs. And it also dismissed the CEIF modelling on the basis that it did not include inter regional settlement residues. But Grant said this data was only available to the AEMO and the Australian Energy Market Operator.

Grant said the industry would be watching carefully the anticipated release of draft MLFs for the upcoming year by AEMO on Friday – particularly the amount of new generation that is assumed to be built. The last draft revealed a sharp slump in committed projects, partly as a result of the MLF.

“Investment is going down, and that means the fall in wholesale prices we have seen in the last few years because of increased wind and solar will start to reverse,” Grant said.

“A good outcome would be that investment will continue with a higher cost of equity,” Grant said. “The reality is that we are likely to see very little investment. We said that if you don’t get investment, we won’t see lowering prices. They have acknowledged that. It’s economics 101.”

But the battle is continuing. The next is about the equally controversial COGATI (co-ordination of generation and transmission investment) reforms that are also being pushed through by the AEMC, also against the recommendations of the renewables industry and even AEMO – because of its sheer complexity.

That issue will emerge at the next meeting of the COAG energy ministers in March. If that can be held at bay, the industry’s best hope is that the next chairman of AEMC – Pierce is resigning soon – will be less dogmatic.

“They seems to have an amazing academic view of the world, if we stick to this view of economic efficiency it will overcome everything else,” Grant said.