Big win for Tesla and Co in push to exempt batteries from contentious reliability rule

Big batteries could soon be exempted from an energy market rule designed to plug future supply reliability gaps, after a draft decision from the market rule maker conceded it might be “preferable” to leave them out of the complicated and contentious mechanism.

The Australian Energy Market Commission (AEMC) said on Thursday it is seeking stakeholder feedback on its proposal to amend the Retailer Reliability Obligation (RRO) in response to a rule change request from Tesla, Neoen and Iberdrola made earlier this year.

“On 22 August 2024, we made a more preferable draft rule to exempt not only batteries, but also a broader set of storage assets, such as pumped hydro energy storage, from the RRO,” the AEMC said.

“In the Commission’s view, the more preferable draft rule would better contribute to achieving the NEO by improving the security of the NEM during reliability gap periods, preventing risks of higher FCAS prices and market costs and providing a low-cost and easy-to-implement solution to manage the security problem.”

The RRO was introduced in mid-2019, having been originally conceived as one half of the former Turnbull government’s ill-fated National Energy Guarantee (NEG). Or, as former AEMO market reform advisor Ben Skinner puts it, here: while “the NEG imploded, somehow the RRO survived.”

The basic idea behind the RRO, as explained here by energy market analyst Allan O’Neil, is that if a system reliability gap is forecast by AEMO in a region on the National Electricity Market for a certain period, then requirements kick in for liable entities to contract sufficient amounts of wholesale electricity over that period to meet their share of forecast maximum system demand.

In late 2020, the Australian Energy Regulator approved a request from AEMO to “trigger” the RRO for the first time, to fill a supply gap forecast to be left by the closure of the Liddell power station in 2024.

An earlier ‘trigger’ in South Australia in January 2020 was made in response to a direct request from the state’s energy minister who has specially granted powers to unilaterally request activation of the obligation.

Like so many well intentioned National Electricity Rules, the RRO has many critics. But big battery project developers and owners, in particular, complained that making their assets liable entities under the RRO did more harm than good to energy market reliability and affordability.

In their rule change request, Neoen, Tesla and Iberdrola argued that the current liability under the RRO creates a trade-off for batteries between providing critical security services and risking non-compliance with the RRO.

“In practice, the proponents argue that the RRO poses a disincentive to provide grid-supporting services and, ultimately, a risk to the security of the national electricity market (NEM) during reliability-gap periods,” the AEMC says.

In announcing its determination, the AEMC says it believes exempting storage assets from RRO liability would provide “an enduring solution to address security risks during reliability gap periods and could save a number of market costs (e.g., higher FCAS costs, directions from AEMO) that would be incurred in order to manage those risks.”

It notes that of the 19 submissions received during consultation on the proposed rule change, the “vast majority” of stakeholders supported changing the rules, with 10 out of the 19 also supporting the exclusion of pumped hydro storage as well as batteries.

“Our draft determination was also informed by further analysis of battery and PHES historical behaviour (charging vs discharging) during high-price periods, which tend to occur when reliability is tight,” the AEMC says in its determination.

“This analysis suggested that storage assets, if exempt from the RRO, would be very unlikely to operate in a way that poses risks to system reliability.”

The AEMC says stakeholders can submit feedback on the draft determination and rule up until 10 October 2024. See the link to make a submission, here.