ESB proposes major changes to reliability framework of NEG

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The NEG may have gone through Coalition party room, but the ESB wants to make significant changes to the nature of the reliability option – in case a coal generator fails.

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The Energy Security Board has admitted that it is still not yet settled on the design of the reliability obligation within the proposed National Energy Guarantee, and will canvass significant changes to its design in a new options paper to be released later this week.

The changes come just days after the Coalition party room agreed by majority, and certainly not unanimously, to support the NEG and its modelled investment strike in new wind and solar projects, and CoAG energy ministers withheld their final approval pending discussions over the design.

Those discussions are mostly centred around the emissions obligation, and the need for flexibility in adjusting those targets in the future, but there is also a major debate happening around the timing mechanisms for when the reliability obligation can be triggered.

The prevailing wisdom was that a three-year notice (T-3) should be given by AEMO, resulting in obligated parties having to contract supply to ensure they have sufficient capacity to meet forecast peaks, and then followed by a T-1 trigger one year out that would require details and contracts down to the last five minutes of trade.

But concern has been raised that this may not fully account for dramatic changes in Australia’s generation mix – such as the sudden and irreversible failure of one of Australia’s ageing and increasingly decrepit coal fired generators, or ageing gas generators, which are becoming more costly to maintain.

This led to fears expressed at the CoAG energy ministers meeting last Friday that a reliability gap could emerge at any time across the 10 year forecast period.

So now the ESB is putting together a new options paper that will look at changes, including replacing the 3-year notice (T-3) for triggering the reliability obligation with a 5-year notice (T-5). This is likely to result in increased contracting requirements by retailers with providers of “firm” capacity.

The ESB is also looking at options that may allow AEMO – the market operator – to invoke a T-1 trigger at any time without having to go through the T-3. This will give it the flexibility to respond to any major changes.

Further, the ESB will consult on two additional options: the inclusion of an additional trigger at T-5, and the removal of the T-3 trigger.

As an alternative to the second option (the removal of the T-3 trigger) the ESB is also interested in stakeholder views on a proposed ability for a jurisdiction to trigger the reliability obligation as a transitional arrangement. Consultation on these options will be supported by a policy paper to be released before the close of trade tomorrow.

Further concerns are expressed about the proposed “ability for a jurisdiction (i.e. individual state ministers) to trigger the reliability obligation as a transitional arrangement”, suggesting that individual states could impose the mechanism.

All of which appears to attack the long standing “reliability” standard of 0.002% “unserved” energy, or 99.998% reliability.

This has led to some major gold plating of the network, but critics say that energy minister Josh Frydenberg has been systematically undermining it for 2 years, ever since the South Australia blackout and that this, in turn, could lead to major gold plating of the generation fleet too.

The new position will be open to submissions for another three weeks, with submissions due by September 12. The overall legislation is now in an exposure period, lasting four weeks, with CoAG then expected to have two weeks to finalise their positions before Victoria goes into caretaker period.

Quite what impact such changes would have is not clear. Under the current arrangements, the ESB has forecast no reliability concerns over the next decade, based around AEMO 10-year forecasts. But it is known that AEMO is concerned about unexpected events, such as the failure of removal of a major generator without notice.

Update: The Australian Energy Market Commission also issued a draft rule on Thursday requiring generators to provide at least three years notice of closure. This rule, which originated in the Finkel Review, followed the abrupt closure of both the Hazelwood and Northern coal generators over the past two years.

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