Reliability obligation comes into play – but is this half a NEG really needed?

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The Retailer Reliability Obligation coming into force out of the wreckage of the NEG is a reminder of the government’s failure to act on climate change. But what will the RRO actually do?

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Credit: AAP/Dan Himbrechts
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The start of the new financial year marks the commencement of the Coalition government’s single successful attempt at addressing the reliability of electricity supply in Australia. But what does the Retailer Reliability Obligation (RRO) actually do, other than serving as a reminder of the government’s failure to act on climate change?

Not a lot more than is already current practice within the energy market, which is part of the selling pitch. But according to the Morrison government, the RRO will strengthen the reliability of the National Energy Market by placing a new obligation on electricity retailers to guarantee sufficient supply.

“The Retailer Reliability Obligation will ensure retailers are accountable for reliability by requiring energy companies to sign contracts guaranteeing enough energy is available to meet demand,” energy minister Angus Taylor said in a statement on Monday.

“This will give households and businesses confidence that enough generation will be available to meet their electricity needs.”

In short, electricity retailers will be required to secure contracts with generators or providers with demand response, to supply electricity during peak demand events, or hedge contracts that shield customers from dramatic spikes in wholesale electricity prices.

Under the RRO, AEMO will also be tasked with preparing an additional “reliability forecast” as part of its annual Electricity Statement of Opportunities (the ESOO).

Through this forecast, AEMO will identify any potential shortfalls in electricity supply, including the size of any supply gap and the amount of new generation capacity that may be needed to fill it.

According to the Energy Security Board, which designed the RRO, if AEMO identifies a reliability gap, the market is “expected to react;” through the commissioning of new generation capacity, or offering to increase the output from existing power stations in times of high demand.

AEMO may assist this process, running a “voluntary book build” mechanism, that would aid smaller retailers to secure contracts with a single large generation project.

Only if the supply gap remains unfilled less than a year before it is forecast, will retailers be called on to act. At that point, retailers must be prepared to demonstrate to the Australian Energy Regulator (AER) that it has sufficient contracts in place.

Contracts will be weighted by their degree of “firmness”, with dispatchable forms of generation, including gas generators and various storage technologies, likely to be weighted more favourably than wind and solar.

The AER may step in to fill an outstanding supply gap, acting as a ‘procurer of last resort’, with the cost of filling that gap passed on to those retailers who did not have sufficient contracts in place. Such costs could reach $100 million for delinquent retailers.

The next ESOO is due towards the end of the year and will be the first report that can be used to trigger the RRO, and the first test of the reliability obligation is likely to be triggered by the closure of the Liddell Power Station in 2022, which will withdraw 2,000MW from NSW.

While the RRO will help compel retailers to be mindful of their role in securing the reliability of the electricity grid, some have questioned whether a new mechanism was even necessary.

The Public Interest Advocacy Centre (PIAC) told the AER as much, pointing to the NEM’s otherwise good record on reliability.

“PIAC remains concerned about the need for the Retailer Reliability Obligation (RRO) in general. Despite there not having been any demonstrated problem with reliability in the NEM to date as gauged by material breaches of the reliability standard, there are multiple, potentially overlapping measures in place to achieve the Reliability Standard. These overlapping measures risk creating costs which far exceed customers’ value of reliability.” PIAC said in response to an AER consultation paper on the RRO.

Likewise, the Grattan Institute, in its ‘Keep Calm and Carry On’ report, highlighted that experience shows network faults, rather than a shortfall of generation capacity, is the key driver of electricity unreliability, suggesting that the RRO was missing the main game when it comes to securing supply.

“Over the past 10 years, more than 97 per cent of outages were due to problems with the local poles and wires that transport power to homes and businesses. If we respond to misperceptions, we are likely to add to the cost of electricity while doing little to improve reliability,” the Grattan Institute said.

The RRO is the less controversial half of the National Energy Guarantee, with the “emissions obligation” component ultimately shelved after the Federal Government faced a revolt amongst its own ranks.

The National Energy Guarantee was the final trigger that unleashed the week of “madness” that ultimately ended with the sacking of Malcolm Turnbull as prime minister.

The very prospect of being seen to be voting alongside Labor on the same emissions reduction policy was enough for almost two-dozen Coalition members to threaten to cross the floor.

The threats fatally wounded the legitimacy of Turnbull’s leadership, prompting Home Affairs minister Peter Dutton to attempt a leadership coup.

“Malcolm’s plan with the NEG was to get the states to agree through COAG, then have the states pressure Bill Shorten to support the legislation, and from there what he thought would happen was on one side would be the Liberal party and the Nationals and Labor,” said Dutton as quoted by Niki Savva in her forthcoming book ‘Plots and Prayers.’

“Sitting on the other side would be Tony Abbott and fringe-dwellers,” the quote went on, as reported in this Guardian story about the 2018 Liberal leadership spill.

“It was never going to happen. There were 20 people on our side who were not going back to their electorates with photos of them sitting next to Tanya Plibersek voting on a motion supporting climate change.”

The abandonment of the emissions reduction mechanism under the NEG has still attracted protests from members of the COAG Energy Council, notably the Liberal-held NSW government, with new energy minister Matthew Kean calling for the NEG’s revival.

In the aftermath of the challenge, the government pressed ahead with the retailer reliability obligation, having already received unanimous support from the COAG Energy Council.

Attendees of the June COAG Energy Council meeting, which signed off on the final package of rules told RenewEconomy that the Retailer Reliability Obligation passed with the unanimous support of State and Territory energy ministers, in line with recommendations from the Energy Security Board, who developed the rules.

The unanimous support is likely to be reflective of the uncontroversial design of the RRO, as much as its ability to secure reliable electricity supply.

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