Energy market regulators and the COAG Energy Council have sought to clarify the decision of energy ministers to introduce a new reliability “trigger” under the Retailer Reliability Obligation, after initial fears that a considerably stricter Reliability Standard would have placed an immense burden on wind and solar projects to firm up their supplies.
In the communique released following Friday’s meeting, the COAG Energy Council said that it had introduced a new reliability threshold that would be used as a trigger under the Retailer Reliability Obligation, which compels electricity retailers to ensure sufficient supplies during times of peak demand.
Following a review of the reliability standard undertaken by the Energy Security Board, energy ministers agreed to introduce a range of new interim energy security measures, during a meeting dominated by the immediate need to respond to the COVID-19 outbreak.
“Ministers agreed to implement interim measures to deliver further reliability by establishing an out-of-market capacity reserve and amending triggering arrangements for the Retailer Reliability Obligation (RRO),” the COAG Energy Council communique says.
“Both measures will be triggered to keep unserved energy to no more than 0.0006% in any region in any year. Ministers agreed that these were interim steps needed to improve reliability in the immediate term while an enduring market design is developed and that they will be reviewed as part of an expanded RRO review required by 1 July 2023.”
The announcement caught parts of the energy sector off-guard and required clarification being provided by members of the council and the Energy Security Board, via Twitter, to allay fears that a strict new standard was about to be imposed on the industry.
The new reliability threshold, which has been set at a measure of 0.0006 per cent of energy demand within any region of the National Electricity Market going unmet, is a substantially tighter threshold than the current NEM-wide Reliability Standard of 0.002 per cent unserved energy over the course of a year.
However, this new, stricter, reliability threshold will only serve as a “trigger” under the Retailer Reliability Obligation mechanism which is designed to ensure that there will be sufficient electricity supplies at times of peak demand.
The Retailer Reliability Obligation places a requirement on all electricity retailers to secure sufficient contracts for ‘firm’ generation, enough to meet their share of peak demand, and can be triggered in situations were AEMO has identified a reliability gap under its annual forecasts and it believes there has been an inadequate response from electricity retailers to address the gap.
Ministers agreed the 0.0006 only applies to RRO trigger (not compliance) and to out of market strategic reserve (basically a three year RERT). Market settings (market price cap, CPT etc) unchanged. These are interim measures while NEM 2025 work is completed.
— Clare Savage (@ClareSavage17) March 20, 2020
If triggered, electricity retailers are forced to demonstrate to AEMO that they have sufficient supply contracts in place to meet peak demand and face hefty financial penalties if found short. As clarified by the chair of the Australian Energy Regulator, the new reliability threshold will only factor into a “trigger” for the Retailer Reliability Obligation, but won’t be a factor in assessing compliance with the contract requirements.
There are a range of “qualifying contracts” under the retailer reliability obligation, which include contracts for the firm supply of electricity, such as a power purchase agreement, or financial contracts that shield a retailer from volatile wholesale electricity prices, such as price cap contracts.
Under the Retailer Reliability Obligation, a “firmness factor” will be applied to the different contracts, and is likely to be detrimental to any variable renewable energy generator, including wind and solar generators, unless they have some form of onsite storage that allows for a degree of dispatchability of power from the plant.
The new reliability threshold will increase the likelihood that the Retailer Reliability Obligation will be triggered, and according to the chief of staff for South Australian energy minister Dan van Holst Pellekaan, the changes have been designed to address changing dynamics within the energy market and to particularly avoid an increased likelihood of load shedding during crucial high-demand summer periods.
While the reliability standard has not been breached for over a decade, energy ministers have been conscious of the need to maintain electricity supplies at particularly sensitive times, including very hot summer days, following high profile instances of load-shedding over the 2018/19 summer that hit tens of thousands of customers.
New standard is an interim measure to ensure sufficient reserves acknowledging that changing risk profile means that current standard does not fully encapsulate risks to the power system as seen this summer. Doesn’t change market price cap, etc, and ties over til NEM 2025 review.
— Dominic Kelly (@RigaDimd) March 20, 2020
This all operates separately to the Reliability Standard, set at the 0.002% of unserved energy target, which is used by regulators to inform a range of settings within the National Electricity Market, including the wholesale price caps and floors, and serves to provide a market signal for the amount of investment in new generation and network infrastructure.
According to the head of the Australian Energy Regulator, Clare Savage, the new ‘out-of-market’ capacity reserve will effectively work as a three-year Reliability and Emergency Reserve Trader (RERT), which allows AEMO to directly secure emergency contracts for the supply of electricity when necessary to avoid a shortage.
The RERT was established with the ability to secure contracts up to a year in advance, but the new measure effectively extends that to three-years. It mirrors an arrangement that the Victorian government introduced unilaterally and extends it to the rest of the National Electricity Market.
As reported by RenewEconomy following the Friday meeting of energy ministers, a new Energy Coordination Mechanism will be established as a weekly forum for senior leaders within regulators and the energy industry to oversee the energy market’s response to the COVID-19 crisis.
“The Coronavirus is presenting challenges across the economy and it is important that energy retailers have plans in place to help their customers and ensure they get the information, services and support they need,” federal energy minister Angus Taylor said following the meeting.
“At the same time, governments and industry are working closely together to make sure there is no disruption to energy supplies and that the sector is following the best practice approaches to infection control to keep their workforce safe.”
It is likely that further changes to energy market rules and the decisions made on new infrastructure investment may be made through expedited processes and without the same level of comprehensive consultation that has occurred previously, as the market works to maintain secure energy supplies and manage the health of a workforce in a vital economic sector in a fast-moving environment.
The AER and AEMC have been contacted for comment.
