Generator Reliability Obligation: Do wind and solar need to beat the tax?

Figure 2 The new Governance structure for the NEM. Source: Finkel Report

“I was a young man and sure to go astray

You walked into my life and told me love would find a way

To keep on growing, keep on growing, keep on growing” Derek & the Dominos 1970

Need to know

Caution. This note was originated with a view to analysing how renewable developers would behave in the face of the forthcoming Generator Reliablity Obligation [GRO]. It quickly became apparent that this was a bit of a mine field and that some basic knowledge of power engineering might have helped.

Still in the spirit of publish and perish…

In the end today’s view. but without much confidence, is that the cost of the GRO, everywhere other than South Australia, to new developers, will be relatively small. This view is based around what we take from what might be one of the more useful reports published in Australia in recent years Power system security assessment

One thing for sure though is it will be a cost increase and not a reduction. As such our basic premise remains that there is an incentive to get renewable projects “approved” for connection to the grid, before the GRO procedures are introduced. That incentive would appear to be strongest in South Australia. However, this is just one of many factors.

GRO- Will developers shoot first, ask questions later?

Your correspondent knows very little. And certainly nothing about how the Generator Reliability Obligation is going to work.

Based on what we heard at the CEC Summit no one seemed to be expressing too strong a view on what it means…..If anything. At this stage what we read is that the Coag Energy Council has handed the job to the AEMO and it will then go back to the AEMC for a rule change.

We also understand from comments made at the CEC Summit that the AEMC already has a process under way.

However two points seem very clear.

  1. Finkel recommended that the GRO be implemented within 12 months
  2. It will increase costs of putting in new renewable generation. Not only will there be actual extra costs, perhaps accompanied by extra revenue, but there will be more agreements, negotiations and documentation required for every project. Great business for lawyers. We don’t know how much costs will increase, but we are highly confident they will be higher.

So if you are a project developer what do you do?

Possibly you try and accelerate your project to get in in front of the GRO.

This will still leave you the option but not the obligation to firm up your renewable supply after the GRO becomes law.

So our thought is that we might expect to see some acceleration of projects reaching FID and perhaps even starting operation ahead of when the GRO comes into force.

Generator reliability obligation (GRO) driven by minimum dispatchable capacity

The Finkel Report’s recommendation 3.3 states:

To complement the orderly transition policy package, by mid-2018 the Australian Energy Market Commission and the Australian Energy Market Operator should develop and implement a Generator Reliability Obligation.

The Generator Reliability Obligation should include undertaking a forward looking regional reliability assessment, taking into account emerging system needs, to inform requirements on new generators to ensure adequate dispatchable capacity is present in each region

No actual theoretical justification was offered for this recommendation. Nor was there any review of how it is done elsewhere in the world.

As part of the GRO “the market bodies” will take regional reliability assessments aimed at measuring

Minimum dispatchable capacity” including:

  • Total VRE generation as a proportion of dispatchable generation;
  • Network strength.
  • Variation in VRE;
  • Interconnections
  • Load profile
  • Wholesale and contract market consideration’
  • Expected future trends.

Your analyst had to smile at these last two as they would seem to allow for just about anything.

Melbourne Institute Security report may prove more useful than Jacobs modelling

At the same time as Finkel was recommending the GRO Finkel also commissioned a report by the Melbourne Institute titled “Power system security of the future electricity market.”

Although unavoidably technical the report can almost, I say almost, be read by a determined amateur.

To this reader, it seems to be a first class piece of analysis. We quote from the horse’s mouth (so to speak).

Whilst a comprehensive analysis of system security is beyond the scope of this work, these analyses highlight two main points:

  1. Without implementation of appropriate operational measures, the NEM will experience increasing issues of frequency control in all modelled scenarios, including the Business As Usual case.
  2. There is significant potential to use several operational measures and electricity market designs to ensure frequency response adequacy in VRE- rich power systems.

Such operational measures and market designs could drive the generation portfolio’s operation so that the dynamic response of the system after a potential contingency event is constrained to return the system frequency to 50Hz. Indeed, frequency response adequacy appears achievable in all of the scenarios studied in this report.

Furthermore, whilst inertia-bearing generation is likely to remain important, our analyses also show that there are a number of other technologies and services that can provide so-called Fast Frequency Response (FFR) and therefore also legitimately play a significant role in supporting frequency regulation. This includes demand response, energy storage of several forms, and the so-called synthetic inertia in newer wind turbines, amongst others. “ MEI System security report

The report indicates, in common with other stuff we see around the world, a declining emphasis on inertia and a renewed focus on frequency.

The report recommends a dynamic approach to frequency management.

Although the report does not deal with the GRO directly, by implication one can get a sense of the appropriate NEM wide level of VRE generation as a share of total generation.

The report seems to indicate, to this reader, that VRE could be as high as 75%. Fig 1 below taken from section 5.3 shows a NEM wide graph detailing the minimum online synchronous (ie thermal) generation from a static point of view to maintain frequency in the even of a sudden loss of 700 MW generator. In 2020 its just 7GW, provided there are 3 GW of other forms of frequency support.

Of course in South Australia where wind output can get to 100% of demand the situation is different.

NEM wide though the big $ question is whether there is much need for VRE support right now.

Figure 1 Minmum synchronous generation for system security, static view under CET scenario. Source: MEI
Figure 1 Minmum synchronous generation for system security, static view under CET scenario. Source: MEI

Finkel puts fast frequency response market in the three year time frame

Other jurisdictions, most notably perhaps in the UK, have already started a fast frequency response market but in Finkel’s estimation this is something that only needs to be considered in a three year time frame.

One interpretation of this is that there aren’t any urgent problems with frequency. As such why will there be much cost for generator reliability?

The AEMC and AEMO both could have done better, but that’s history

We’ve been critical of some aspects of the AEMC and indeed we argue that the lack of direction and failure to advise COAG on the scale of change and adjustment required is one of the root causes of the adjustment process.

More fundamentally there is a lack of executive chain of command. Governance but no management. We also think that the philosphical reliance on markets, which we share, nevertheless fails to sufficiently account for.

  • Electricity is an essential service, and gas just about is. What this means is that the markets won’t be allowed to work fully. Prices are allowed to go down but public pressure will stop them going up for any extended period. We’ve already seen this in gas and we are going to see it in electricity.
  • By their nature markets produce booms and busts. With an essential service that can be a problem. In many products and services a shortage leads to high prices but if a shortage leads to blackouts that’s a different kettle of fish. Even more importantly we argue that booms and busts increase the cost of capital. So although the risks are borne by the private sector and as the AEMC argues the private sector is best placed to judge and bear the risk, the fact is that the price of that risk is borne by consumers. Further more the overall level of risk is arguably higher than it needs to be if a more centrally planned approach is taken to the “quantity of new investment”. In the case of reverse auctions the price is still set by competition and the market and to some extent the technology. However the quantity of new investment and perhaps its characteristics (ie dispatchable or not) are set by central policy.
  • In any case there is no real market. Half the price is set by regulation of wires and poles, and not set very well and the other half is set by a vertically and horizontally integrated oligopoly.

Similarly we’ve been critical of AEMO’s responsibility for the South Australian blackout.

In our view its an absolute core competency of AEMO to be aware of the ride through settings of the wind farms in South Australia.

Our understanding is the AEMO was aware of the islanding risk in South Australia, just as the South Australian Govt was aware of the risk.

The problems with ride through settings on wind farms had been known and fixed in both Europe and the USA years ago. It was the AEMO’s job to understand the mission critical nature of those settings and get them adjusted.

However that’s history – Only sympathy for the work load going forward

Whatever the past you have to feel a bit for both organisations regarding the workload over the next 18 months.

50 Recommendations from Finkel as well as a new management and governance structure.

Finkel provided little or no detail, and indeed not much justification, for many of the recommendations.

Lets start with the new governance.

Management need to be empowered and accountable, but are they?

Our view is that the NEM needs a CEO empowered and accountable. Nothing in the Finkel structure gives confidence that such a role exists.

The new NEM governance structure is:

Figure 2 The new Governance structure for the NEM. Source: Finkel Report
Figure 2 The new Governance structure for the NEM. Source: Finkel Report

We’ve heard arguments both for and against the structure. However, in our view it’s not clear still who is reporting to who.

The heads of the AEMO, AEMC and the AER are members the ESB, but do the CEO’s of those organisations report to the ESB? Almost certainly not.

We think the particular area of concern will be the division of responsibilities between the AEMO and the ESB.

However, the real point though is the time delay it introduces into the change process.

Not only do the ESB people have to be appointed they need to take time to work out who is doing what. But time is relatively short.

Is there enough accountability?

Or will there just be murky buck shifting and endless bureaucratic style reports? It will probably come down to the people.

Far too much homework

Figure 3 is recreated from the Finkel report. We have highlighted some of the recommendations that we think could directly impact the renewable energy. Most of them will one way or another increase costs.

Everyone has their pet projects but we find it disappointing that the generation transmission and renewable zones wasn’t even mentioned in the timetable, as we see this as one of the most fundamental building blocks of NEM 2.0

Finkel’s Timeline

Figure 3 Finkel recommendations timeline.. Source: FInkel report
Figure 3 Finkel recommendations timeline.. Source: FInkel report

David Leitch is principal of ITK. He was formerly a Utility Analyst for leading investment banks over the past 30 years. The views expressed are his own. Please note our new section, Energy Markets, which will include analysis from Leitch on the energy markets and broader energy issues. And also note our live generation widget, and the APVI solar contribution. 

David Leitch is a regular contributor to Renew Economy and co-host of the weekly Energy Insiders Podcast. He is principal at ITK, specialising in analysis of electricity, gas and decarbonisation drawn from 33 years experience in stockbroking research & analysis for UBS, JPMorgan and predecessor firms.

Comments

12 responses to “Generator Reliability Obligation: Do wind and solar need to beat the tax?”

  1. Renew4future Avatar
    Renew4future

    I think that the security obligation is going to have an impact before the rel

  2. George Michaelson Avatar
    George Michaelson

    A proper regulator would announce that all new builds after June 1 incur the cost.

    I’m sorry, but your economic rationalism (which btw I believe is probably accurate) is ultimately both a-social (seeking to avoid a societal need) and self-abgnating (it will blacken PV and Wind, by avoiding a neccessary functional change, which makes the role of variable power even more politicized.

    Selfish acts are not needed here. Don’t do it, and don’t promote it.

    1. juxx0r Avatar
      juxx0r

      A proper regulator would be able to demonstrate a need for it first.

  3. Cooma Doug Avatar
    Cooma Doug

    I remember being on shift some time in the 1990s. My offsider came to me and took me into a locked room and introduced me to the internet.
    I thought about it a lot over the next few days and could see a lot of potential. Compared to a couple of years later it was virtually useless at that time.
    How many money making products gradually/rapidly became apparent?
    The electricity market is in this space now. I think things will change quickly.

  4. Bill Holliday Avatar
    Bill Holliday

    To hell with them all, I will install more PV and storage.

  5. Scottish Scientist Avatar

    Do the calculations to transform the intermittent output from wind power into a reliable generator with the Wind, storage and back-up system designer
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  6. Roger Brown Avatar
    Roger Brown

    By having more storage for wind and solar , won’t that help to kill off gas and coal ? , by taking more cream (peaks ) off the dirty power mobs?More than 1 way to skin a cat!

    1. Mike Westerman Avatar
      Mike Westerman

      Solar and wind at $50/MWh, 6-10h pumped hydro at $70-100/MWh, 20GW of solar and batteries behind the meter – yep, they won’t be in the market for long.

  7. Sally Noel Triggell Avatar
    Sally Noel Triggell

    We,the coal ilition will do whatever it takes to make renewable energy as expensive as possible. Oh, did we say that out loud.

  8. Ray Miller Avatar
    Ray Miller

    GRO some quality research is needed or as you point out David maybe has been started into how much and where storage is required. I posted on another article; it seems to me the most bang for buck is likely to be storage close to the load where we multiply the benefits to the customers (and NEM) that can be extracted from the storage investment.
    By targeting the substations for storage, it is likely to be the sweet spot for all the benefits.
    – it is the location where communications and control equipment already exists
    – it can be scaled making use of a common design allowing mass production economics of scale
    – power factor, phase balancing, voltage regulation and quality can all be improved by modern electronics associated with the battery storage electronic inverters
    – provides short term resilience during major grid events
    – reduce the peak demand on the NEM transmission line delaying expensive upgrades
    – by the vary nature being local, allows for finer grain optimisations of the local loads, demand management, matching to local Variable Renewable Energy.
    – could be charged from remote VRE during times of excess and low prices.
    – being in modules every one installed will have an effect and more units can be added when needed or price comes down or need arises.
    – reduction of transmission losses.
    While it is early days for grid storage the placement of and benefits need to be carefully worked through to prevent the previous very expensive poles and wire poor investment of the past. It should not be about random placement but very calculated placement of investment for the optimised ROI and customer benefits.
    In summary the future is distributed resources, placing energy storage close to loads is in keeping with Grid 2.0. Who pays for it? Well, in the end the customers, so everything should be done to lower our carbon emissions in line with the science and decarbonise as quick as possible and energy storage close to the load is worthy of consideration for its benefits.

  9. solarguy Avatar
    solarguy

    Sounds like a recipe for a nervous break down. Surely somebody could design a more streamlined system.

  10. Peter F Avatar
    Peter F

    I am not sure it is a tax. Without hugely complex models no-one can be certain, but if a wind farm can shift 10-20% of its sales from low price, high wind periods to high price low wind times and also participate in the FCAS market it can increase annual revenue by 40-60% so, in SA it is probably already economically sensible to install storage.
    I will also make a bet that we will introduce a limited capacity market, another very attractive revenue stream for batteries.
    As Ray says below, from an economy wide perspective, most storage should be located at or near the meter. There are market design questions about how a wind farm can work with distributed storage that have to be resolved but if storage prices only fall another 10-20%, it is hard to imagine why renewable generators won’t start installing storage anyway. It directly improves their revenue but also indirectly makes them more attractive partners for retailers, so they will either find it easier to sign PPA’s and/or get higher average prices .

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