Submissions to Australia’s energy market rule maker on proposed changes to the way transmission losses are accounted for have revealed an emerging rift between established players and those seeking to enter the market with new wind and solar projects.
The Australian Energy Market Commission is currently considering reforms to the way transmission loss factors (TLF) are calculated in the National Electricity Market, with the current ‘marginal loss factor’ approach contributing to a massive decline in new project investments.
The rule change request proposed by Adani Renewables, seeks to change the way transmission losses are accounted for in the National Electricity Market by shifting from a “marginal” loss factor (MLF) methodology to an “average” loss factor (ALF) methodology.
The request follows dramatic changes in loss factor calculations for several wind and solar projects, which saw project revenues slashed by more than 20 per cent overnight, often due to factors well outside the project developer’s controls.
A group of 25 wind and solar developers made a scathing submission to the AEMC, under the banner of the Clean Energy Investor Group, which includes project developer John Laing, Australian banking giant Macquarie Group, Neoen, Bay.Wa, FRV, Pacific Hydro and others.
The group particularly criticised the AEMC for the lack of analysis the rule-maker as undertaken in reaching its draft decision to retain the marginal loss factor methodology.
“The AEMC’s approach and level of analysis is not commensurate with the importance of the issue under consideration,” the group’s submissions said.
In its submission to the AEMC’s draft decision on the rule change request, the Clean Energy Council argued that the AEMC must undertake further analysis to understand the impacts of the loss factor issues before making a final decision.
“This MLF volatility has been detrimental to the clean energy industry and in particular, a number of edge-of-grid renewable investments as a result of growing network congestion and other factors. In our November 2019 survey of our member company CEOs, MLF issues were recognised in the top five business challenges facing the industry,” the CEC submission states.
“The CEC therefore encourages the AEMC to review its TLF draft determination to assess if any further changes can be made to minimise MLF volatility risk and better protect generator investments once they become operational.”
Arguing against changes to the methodology are the large incumbent players within the energy market, represented by the Australian Energy Council, told the AEMC that it supported the retention of the existing marginal loss factor methodology, arguing that it provided an appropriate market signal for where new projects should be located.
“Most importantly, the retention of marginal loss pricing will maintain the NEM’s existing levels of dispatch efficiency and locational incentives. A move to the proposed alternative forms of loss pricing would be a backward step,” the Australian Energy Council said.
In its own submission, AGL Energy supported the views of the Australian Energy Council, saying that an overhaul of the loss factor methodology was not necessary.
“AGL therefore supports the AEMC’s draft determination and preferable draft rule to retain the existing MLF framework and provide AEMO with flexibility to refine and improve the existing MLF methodology,” AGL said.
Intriguingly, the Powering Australian Renewables Fund (PARF), which was created by AGL Energy in 2016, in partnership with QIC and the Future Fund to spur new investments in wind and solar projects, advocated for changes to the transmission loss factor methodology.
“PARF Group therefore proposes moving to the ALF methodology, to achieve an optimal balance between the need for investor certainty and the need for accurate calculation and apportionment of losses in electricity supply; as well as balancing key stakeholder objectives, being the need for investment certainty, efficient locational signalling, calculation simplicity and ease of implementation,” PARF said.
Consumer advocates, the Public Interest Advocacy Centre (PIAC) told the AEMC that while it wasn’t necessarily convinced of the specific reforms to the loss factor methodology proposed by Adani Renewables, it argued that reforms were necessary as the current rules did not serve the best interests of consumers in an energy system undergoing a shift to new technologies.
“The National Electricity Market is undergoing a structural transformation in generation and operation, which the current regulatory framework is not well-designed to deliver. The inadequacy of the planning and investment signals for new, large-scale generation has been a growing issue, with the volatility of Marginal Loss Factors (MLF) just one symptom,” PIAC said.
The marginal loss factor issues have massively dented investor confidence in new projects in certain parts of the energy market, with project backers waiting to see how the AEMC may respond to the transmission loss factor issue.
As has been reported widely in RenewEconomy, the marginal loss factor unexpectedly emerged as a major issue for many solar and wind projects last year, with many completed projects being hit with revenue write-downs shortly after commissioning.
In just one example, British project developer John Laing copped a $120 million write-down across three projects that were under construction as a result of the marginal loss factor issue.
The published submissions mirror the stances taken at an AEMC facilitated hearing held in Sydney in December. At the hearing, wind and solar developers argued that without a shift away from the marginal loss factor methodology, new investment in clean energy projects would be stymied as investors demanded risk premiums that drove the cost of projects higher.
At the hearing, project developers that included the Clean Energy Investment Group, called for the AEMC to consider a shift to ‘average’ loss factors, that would minimise the impact of loss factor changes.
Established wind farm operator, Infigen Energy, which has been little impacted by recent MLF changes, argued at the hearing that no change to the loss factor methodology was necessary.
The AEMC expects to make a final determination on the rule change request by the end of February.
