AER sues Hornsdale battery: Fair cop or regulatory over-reach?

Gobsmacked. That’s a fair way to describe the reaction of many energy insiders to news late Wednesday that the Australian Energy Regulator was taking the Hornsdale Power Reserve – aka the Tesla big battery – to court for allegedly failing to do what it said it could do, and for what it was being paid to do.

The first thing that should be said about this intervention by the regulator – and you can read the details in our initial story here – is that this is hugely significant. Some say it is also disturbing, and to understand why it is important to have some context.

When South Australia experienced its “system black” in late 2016, battery storage was virtually unheard of, and little understood. But since those famous twitter exchanges between Elon Musk and Australian billionaire Mike Cannon-Brookes led to the construction of the Hornsdale battery in late 2017, battery storage has taken centre stage and redefined the market and the future of the grid.

What we are seeing is that inverter-based technologies – such as those found in wind, solar, battery storage and demand response – are faster, smarter, cheaper and cleaner than what we have now.

They are the future of the grid, there’s no doubt about that. But regulators, operators, investors, rule makers and policy makers are struggling to keep pace. And the owners of legacy, incumbent technologies have either been kidding themselves about the pace of the change, or doing anything they can to stop it, and leaning on ideological supporters and ambitious folk in key institutions and governments to protect them.

The basic facts of the case against Hornsdale do not appear to be in dispute. The court documents say that during a firmware upgrade of the Tesla batteries in July, 2019, the “droop settings” on the Hornsdale facility were accidentally changed from 1.7 per cent – the minimum allowed for battery storage to respond at the super-fast speeds advertised – to 3.7 per cent.

It appears that no one noticed this change and it had no impact until October 9, when the 750MW Kogan Creek coal generator in Queensland, the newest and biggest coal unit in the main grid, tripped – for the 17th time over a two year period.

Hornsdale was required to respond under a contract for “contingent frequency response” with AEMO. This is where the cavalry rushes in to address major network problems to prevent outages. But because of the changed droop response, Hornsdale delivered just 13.4MW in the fraction of the second it had promised, instead of 29MW that would have been expected.

In the end it didn’t matter much, because the lights didn’t go out, and no load was lost. But it is also where agreement on the facts diverge. RenewEconomy has been told that the battery remained available to deliver more capacity – still in less than a second, and so much faster than other kit – but it wasn’t needed because its initial response had already helped arrest the frequency diversion.

Still, no one noticed and not much was made of it until AEMO – in a regular audit of its FCAS payments a month later – found that the Hornsdale battery had been paid for more than it had delivered and, in fact, had not been in a position to deliver that capacity at the speed expected for several months. It alerted Hornsdale, and the problem with the droop setting was rectified within days, and the excess payment returned.

The AER, the regulator or energy cop, was also alerted. And this is where things got difficult. And nearly two years later, rather than an agreed settlement, or a fine and infringement notice, it has resulted in court action.

Its chair Clair Savage justifies this by saying “it is vital that generators do what they say they can do if we’re going to keep the lights on through the market’s transition to variable renewable generation.”

It would seem that the AER is seeking to make an example of Hornsdale, and send a warning to all inverter-based technology owners that software settings – as they were in wind farms in the lead-up to South Australia’s blackout – are just as essential, if not more-so, than the hardware itself.

Fair enough. But many in the industry are taken aback by the apparent inconsistencies and double standards of that position, at least as it applies to this case.

A year earlier, on Scott Morrison’s first day in office as prime minister, the Hornsdale battery had intervened when the main transmission link between NSW and Queensland was lost. It kept South Australia, which was cut off from the rest of the grid, secure. For free! And was praised for doing so.

But other coal generators responsible for responding in other parts of the grid failed to do so, leading to widespread outages and a damning response from AEMO.

Two days after the Hornsdale droop settings were fixed in November, 2019, Hornsdale was again called into action and was credited with playing a key role in keeping the system secure. Again, coal generators fell short.

The AER chose to fine one company, the Queensland state-owned generator CS Energy, for multiple failures to deliver FCAS as expected from different units in the August 2018 event, and in November 2019, and January 2020. It was fined $20,000 per incident.

No other generators were punished, despite widespread failures and a recognition in the industry that the coal generator response to frequency excursions was so bad it was putting grid security at risk, a fact recognised by regulators in a tightening of the rules on primary frequency response this year.

But why pursue Hornsdale in such a way? The company will likely now have to pay a QC $20,000 just to get out of bed, and legal experts note that the AER’s own compliance guidelines, issued in June, make it clear that court proceedings should only be pursued ….

“Where the conduct is serious – for example, because it has caused, or could potentially cause, significant harm, the conduct is widespread, the party in question has a history of previous breaches of national energy laws or has demonstrated a blatant, ongoing or serious disregard for the law, or the matter raises complex questions about the interpretation of national energy laws.”

The experts struggle to understand how that applies to Hornsdale, given its repeated interventions in the market, often for no revenue because the regulators and the rule-makers have yet to create markets to recognise the speed and accuracy of its services, and to widespread praise from AEMO and others.

Some suspect a political element, particularly given the hostile view to new technologies such as battery storage from the federal Coalition, which has variously described Hornsdale as being as useful as the Big Banana, or the Kardashians. Just a few months ago, the resources minister Keith Pitt, an electrical engineer by trade, refused to even acknowledge that battery storage was capable of delivering dispatchable power.

RenewEconomy asked the AER if could explain how Hornsdale fits the bill of “blatant, ongoing or serious disregard for the law”, or if there was a political element to its actions. We did not get a response.

We asked AEMO if it supported, or advocated the action against Hornsdale. And if it wanted coal generators pursued for similar failings. A spokesperson responded that “the AER determines which matters it investigates, and makes its own compliance and enforcement decisions.”

And, “As the AER has commenced court proceedings in relation to Hornsdale Power Reserve, it is not appropriate for AEMO to comment on this matter.”

Meanwhile, the industry shakes its collective head at the irony of the situation. The main grid’s newest and biggest coal unit tripped, as coal units so often do, meaning it could no longer send power to the grid and meet its AEMO dispatch obligations.

The market operator then calls in the cavalry. Hornsdale responds but doesn’t send as many horses in the time expected. It turns out that enough horses were dispatched to solve the problem, but in the wash-up it is not the coal generator that caused the problem that is penalised, but the big battery that rushed in to help.

Some note that Hornsdale and other batteries are only being paid for part of the services they deliver because the arcane rules and the regulations don’t yet allow it. And they say the case misrepresents the state of the power system.

“This event was in response to a thermal generator tripping off! Those generators don’t get fined. In fact, I’ve never seen a thermal generator persecuted like this,” said one.

Another engineer agreed, and pointed to a deep-seated problem, one that places priority on market, legal and political considerations rather than the physics, an approach likely to put the pace and the scale of the transition at risk, not to mention power supplies themselves.

“It’s outrageous,” this engineer said. “People think that practical problems can be solved through markets and through contracts.

“This is an Angus Taylor-type approach to solve the politics by beating up on renewables. We have a regulatory environment of blame, and they have got taxpayer pockets behind them. There is a fundamental bias in all of this.

“The new technologies are pretty amazing. The fundamental problem is that we have a market, not a control philosophy, for the system. And if you depend on market systems and not the automatic and dynamic response of the control systems of the generators, the lights will go out!”

Note: This story has been updated to correct an error in the amount of FCAS dispatched by Hornsdale on October 9.