Creation of local renewable zones is the game changer Australia’s energy transition needs

The Queensland government’s launch of ‘Local Renewable Energy Zones’ (L-REZ) in Caloundra and Townsville may prove to be a significant opportunity for energy market realignment and innovation.

The recently released Integrated System Plan shows that customer-owned distributed energy resources (DERs) such as rooftop solar, electric vehicles, and batteries have the potential to be the largest source of generation, storage, and firming capacity by 2050.

As Australians enthusiastically adopt DERs, the urgency to integrate them into the electricity system becomes increasingly apparent. DERs are shaping the future of the electricity system, and the National Energy Market (NEM) rules must evolve to use them most efficiently. Failure to do so would lead to stranded assets, inefficient large-scale investments, and increased electricity bills. 

Organisations such as Rewiring Australia have been calling for L-REZ-type initiatives. The local level needs the same focus, planning, and funding as the transmission connected to renewable energy zones (REZs).

L-REZ is an opportunity to develop and test methods to manage DERs at saturation levels and change the NEM rules that lockout and don’t value their contribution. 

Queensland’s lead needs to be followed by declarations of L-REZs in each State and Territory, with Australian government support and local government involvement. 

While there is some detail emerging, any design of the L-REZ pilot project will need to be able to:

– Engage the community support through One-Stop shops, information and incentives at the point of sale, and a Community Benefit fund.

– Split the DNSP’s functions into Distribution Network Operator and Distribution System Operator and align incentives for DER participation. 

– Test the Distribution System Operator (DSO) and Distribution Network Operator (DNO) roles and responsibilities in action.

– Value the services DERs can provide and extend participation in the Wholesale Demand Response Mechanism and energy, frequency, and reliability markets.

– Create an investment environment for new market entrants with new business models that assist customers in adapting to these new circumstances.

– Support innovation around DER integration.

What is a distribution system operator?

Confirmed as part of the L-REZ pilots is the announcement that Energy Queensland will assume and test the role of Distribution System Operator. As the roles and responsibilities of a DSO have yet to be defined or agreed upon by the Australian energy market rule makers, this announcement is a significant step forward in energy market reform.

The need for a DSO is driven by the increased levels of DERs and the challenges of maintaining the power system within safe limits and transforming the grid into a ‘smart grid’. The DSO manages technical challenges like distribution network congestion, reverse and bidirectional energy flows, and unpredictable voltage fluctuations. 

The DSO model proposes to achieve this by incentivising customers to operate their DERs in a way that results in demand flexibility, electricity, and other services where and when required. These customer-produced DER services can then be traded for the benefit of the electricity system.

This can only be achieved by engaging, enabling, and incentivising customers to share access to their solar, EVs, battery storage devices, and appliances. Valuing currently unvalued DER services will support new market entrants in addressing barriers to customers’ owning and operating DERs and handling market matters on the customers’ behalf.

There is an international trend towards introducing a Distribution System Operator (DSO) and the corresponding Distribution Market Operator (DMO). Supply and demand are balanced at the wholesale market level and by AEMO, who acts as the Transmission System Operator (TSO) and Transmission Market Operator (TMO). By introducing the DSO, supply and demand will also be balanced at the local distribution level.

The DSO-DMO and TSO-TMO can then coordinate and optimise energy transfers between the distribution and transmission-level markets. Without this, there is a significant risk of curtailing and wasting renewable energy at both the local and transmission levels.

Need for regulatory innovation and future system operation reforms

Despite the widespread recognition of the crucial role of DERs in achieving Australia’s clean energy goals, policymakers and NEM rule-makers are grappling with the intricate task of integrating consumer-owned DER assets into the energy mix. 

While AEMO identifies with the DMO role, there is a divide between them and key stakeholders on how to achieve this. This is based on AEMO’s stated preference for DERs to be aggregated and coordinated to look like large power stations and bidding for scheduling positions in the wholesale electricity market merit order.

However, controlling consumer distribution-level assets from AEMO’s central control room is neither conceptually, computationally, nor technically feasible. 

The transition to renewable energy has both challenges and risks. However, this impasse raises questions about the feasibility of the current AEMO business model and its current roles, responsibilities and remit.

The current rules of the NEM define what is valued and what is not. Not to value customer-owned DERs and the services they can provide is inconsistent with the future energy system. Therefore, a review of the NEM is needed to ensure its consistency and ability to operate in the future energy system. 

With the right regulatory conditions, design, and support, the Queensland L-REZ trials have the potential to be a game-changer in energy market reform.

Dr Vikki McLeod is energy market reform adviser at Rewiring Australia