New rules would hit wind and solar farms hard, but issue could be solved in 5 minutes

The AER has recently published an issues paper to discuss possible rule changes for semi-scheduled generators to address concerns of the COAG Energy Council for system security and reliability issues caused by semi-scheduled generators deviating from dispatch targets and not informing the market of possible availability restrictions.

The AER has responded in the paper with options to make semi-scheduled generators respond to dispatch targets by various means such as increased FCAS causer pays incentives, removing the semi-scheduled classification, or imposing severe restrictions on the operating flexibility of semi-scheduled generators.

Based on a preliminary analysis of the AER issues paper, the paper:

• Shows a fundamental lack of rigorous analysis of the system security problems,
• Only considers solutions that would severely restrict the operation of semi-scheduled generator,
• Does not consider efficient market based solutions, and
• Raises serious concerns that could materially affect the viability of Variable Renewable Energy (VRE) generators.

The problems identified in the paper are really short term issues or are issues that can be better managed via market arrangements rather than regulation for the following reasons:

• The examples of problem semi-scheduled behaviour are significantly influenced by the current 30-minute averaged market settlement process that would not occur when the 5-minute settlement rule change takes effect,
• VRE generators are responding to legitimate market signals, and
• As the paper points out, deviations from targets do not currently contravene the existing market rules.

The draconian rule change options discussed in the AER paper take a very heavy-handed and simplistic regulatory approach that could lead to very poor outcomes for all semi-scheduled generators and the entire National Electricity Market (NEM), resulting in:

• Substantial loss of generation revenue due to the need for each VRE generator to meet a dispatch target based on a forecast, and therefore curtailing energy generation,
• A large increase in the trading requirements and obligations for VRE generators with a need for continuous real-time trading and serious investment in forecasting, trading and storage systems,
• A severely restricted operating flexibility of the plant that significantly diminishes the financial viability of the asset in comparison to the market rules at the time of the investment decision, and
• Unnecessary disincentives for investors that leads to reduced economic investment in VRE generation.

The approach proposed in the AER issues paper seems to be an attempt to integrate new technology such as VRE generators and Battery Energy Storage Systems (BESS) into an energy and FCAS market framework designed over 20 years ago for the technology of the time, namely gas, hydro and coal generators.

VRE generation is the lowest cost form of generation available and might enable Australia to meet its obligations in COP21. It is in the interest of the industry regulatory bodies and will provide the greatest financial benefit for energy consumers to economically accommodate VRE generation into the power system at the lowest system wide cost. Investment costs, ultimately, are reflected in the prices that consumers pay, thus efficient integration of the lowest cost source of new generation, VRE generation, will lead to the lowest costs for consumers.

Power system security requirements can accommodate VRE generation systems without forcing them to behave like synchronous machines and scheduled generators. Taking a constructive least-cost approach that recognises that the NEM can accommodate and should accommodate a portfolio of BESS, VRE, hydro, gas and coal generators that have different characteristics and capabilities would allow all technologies to effectively participate in the NEM and in turn would meet the National Electricity Objective (NEO). BESS are very versatile and can readily address the issues the AER’s proposal is trying to solve, but current Rules and AEMO policies prevent these solutions from being implemented.

The principles used in the original design of the NEM were based on the doctrine of market efficiency and it is these principles that should again be used to reform the market design when new technology needs to be integrated into the NEM.

It was always anticipated that a process of continuous improvement of the market design, in particular dispatch, pricing and provision of information, would be needed to enhance market efficiency and deal with new technologies, and that the obligation to improve the market was removed from the market operator and that the market design has stagnated since the introduction of the eight FCAS markets about 20 years ago.

Much consideration has been given to the development of extremely tough technical standards and the imposition of broad performance standards on new investments. On the market side, there has been less development and the present market design and systems date from around 20 years ago, with the last significant market reform being the introduction of world-leading market-based frequency control ancillary service (FCAS) markets.

Rather than continuing to develop markets that encourage efficient delivery of products and services, recent changes show a retreat from efficient market arrangements to an increased reliance on mandated approaches, with little serious attempt to justify these impositions with reference to the NEO.

Given the substantial financial risk that semi-scheduled generators face with these proposed AER rule changes, we are proposing that semi-scheduled generators participate in a joint project to address the issues in this paper independently through analysis of the system reliability and security problems in the present systems, why the proposed rule changes are both unfair and poor mechanisms for addressing these issues and to provide alternative short and long term proposals that lead to efficient market outcomes and a fair market for VRE generators and other new technologies such as Battery Energy Storage Systems (BESS).

A joint submission from a number of market participants would:

• be considered as having more authority than an individual response to the paper,
• provide more resources that would allow for more detailed analysis and rational power system and economic arguments of the issues and proposals raised in the paper and
• avoid the perception of individual organisational self-interest.

Joint submissions on other market proposals through bodies such as the National Generators Forum (NGF) and ad hoc wind coalitions have previously been an effective means of influencing market reform and this proposed collaborative model would use the experience of those previous projects for this current AER issues paper.

This article was written by Harley Mackenzie from HARD software, in conjunction with Stephen Wallace from SW Advisory and Tim George and Jennifer Crisp from DIgSILENT Pacific.