Wind and solar developers plead with AEMC to reconsider loss factor decision | RenewEconomy

Wind and solar developers plead with AEMC to reconsider loss factor decision

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Wind and solar investors warn of rising costs and impacts on grid stability if the energy market rule maker does not change its approach on transmission losses.

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Leading investors in Australia’s renewable energy industry have told the energy market rule maker that it will drive up prices for consumers, and put grid stability at risk by stymying investment in renewable energy projects, unless it acts on issues related to marginal loss factors.

At a hearing of Australian Energy Market Commissioners in Sydney, clean energy investors spoke in support of a proposed rule change requested by Adani Renewables, that would see the methodology used to calculate transmission loss factors within the National Electricity Market shift from a calculation based on “marginal” losses, an approach based on “average” losses.

Investors have pleaded with the AEMC to undertake further analysis of the impacts of transmission loss factors before finalising its decision deny changes to the transmission loss factor methodology. COAG energy ministers last week urged it to go back and consult with stakeholders over this and related rules.

Transmission loss factors are a complicated aspect of the national electricity market, but seek to account for the energy that is lost when electricity is through across transmission networks across the state.

However, project developers have argued that the “marginal” loss factor approach has been unfair, as it has led to substantial write-downs in revenues that solar and wind projects in certain parts of the National Electricity Market are eligible to receive. For some projects, the impact of these write-downs were in the order of 20 per cent.

These write-downs have occurred after investments in new projects have already been made, and after projects have been commissioned and are no fault of the project itself, leading to substantial and unexpected financial losses.

Investors told the AEMC that the volatility caused by the marginal loss factor issue had caused project financiers to apply an additional premium on project returns as a condition of investment in a project, increasing the minimum rate of return, the effective interest rate paid back to investors, that must be achieved by projects by around 2 per cent.

The AEMC has published a draft determination rejecting the change, saying the marginal loss factor approach remained appropriate, as it underpinned the cost-efficient dispatch of generators in the National Electricity Market, as well as providing a strong locational signal for where new electricity projects should be physically sited.

Many of the projects impacted by marginal loss factor changes have been located on the far edges of the national grid.

The AEMC had already delayed deciding on the rule change, as investors warned that the marginal loss factor issue had already wiped $1 billion off the value of existing renewable projects, and contributed to a substantial slowing in new investment.

Speaking at the hearing, the Clean Energy Council’s Lillian Patterson said they had estimated that this premium increased the levelised cost of projects in the range of $10 to $15 per megawatt-hour and would be a cost that is ultimately borne by consumers.

“No other market in the world has MLF volatility like we have in Australia. Compared with comparable markets such as the US and UK, Australia has the highest cost of capital in the world for new renewable generation build,” Patterson said.

The Clean Energy Council has rejected the claim that generators could simply mitigate the marginal loss factor risks by hedging against changes in power purchase agreements, as doing so simply resulted in even higher borrowing costs for projects.

“This, however, is not the industry standard. Customers do not want to take on MLF risk. In the handful of situations where the off-taker has agreed to take on MLF risk, 100 to 150 basis points have typically been added to the contract for this risk,” Patterson added.

Lighthouse Infrastructure’s Jevon Carding told the hearing that has been difficult to explain to investors that up to a third of the equity value of a renewables project has been lost over night, due to changes in the marginal loss factor.

Particularly as these changes occur after the project has been built, and without the ability to actually respond to the change and that the change is the result of other parties joining the network, and unrelated to the original project.

The submissions were led by the Clean Energy Investment Group, that represents a group of 20 investors with $11 billion in established investments in Australia’s clean energy sector, with its members including Macquarie, Blackrock, Windlab, Neoen and Tilt Renewbales.

The CEIG cited recently released research from the Clean Energy Council that showed the marginal loss factor issue, along with other challenges to the grid connection of new renewables projects, was one of the main barriers to investment to clean energy investment in Australia.

The CEIG’s Robert Grant said that unless the marginal loss factor issue was resolved, the risk premium being added to new projects would result in increased costs to consumers in the order of $430 per customer.

The group called on the AEMC to undertake a thorough, quantitative, analysis of the shift to average loss factors, to determine both the ultimate impact on the operation of the grid, and on energy costs for consumers, before making a final determination on the proposed rule change.

The CEIG believes the “average” loss factors will help reduce the volatility of “marginal” loss factors, and help bring down the financing costs for projects, and thus energy costs for final consumers.

Established wind farm company Infigen Energy was the sole exception during the hearing, with a company representative telling the AEMC that Infigen did not support the requested changes to the transmission loss factor methodology, and agreed with the AEMC’s preferred approach to keep the marginal loss factor approach in place.

Infigen’s position is largely reflective of its role in the energy market, which as shifted from being a developer of new projects to primarily focusing on its established portfolio of wind farms, and seeking to optimise returns from its existing investments.

Infigen’s operating wind farms have been relatively unaffected by the dramatic changes to MLFs that have impacted newer projects, and the company is less concerned with challenges to financing new projects.

Submissions on the rule change request will be received by the AEMC up until 16 January 2020.

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3 Comments
  1. Malcolm McCaskill 9 months ago

    Each article on marginal loss factors (MLF’s) should clarify that marginal losses are double the actual losses. Average loss factors more accurately reflect the actual loss to heat along the transmission lines. The AEMC is correct in arguing that MLF’s are necessary in the generator disptach process (as this covers the losses of each additional MW dispatched), but incorrect in arguing that MLF’s are the right tool for siting new generation. This is because the price signal is twice as strong as the physics says it should be. Siting based on MLF’s will result in sub-economic location of new generation to cloudier or less windy sites that are close to load centres, but these are also locations where new developments encounter more community opposition. This needs to be put to AEMC who understand economics, not finance.

  2. Shilo 9 months ago

    I would like to know, how they work out the MLF on roof top solar and going forward in time, what is the plan. Are their any study’s done on how far it can travel within a gird such as ours and what the losses are for different average distances.

  3. john rattray 9 months ago

    MLF’s do not apply to roof top solar as typically the generation never gets to the transmission system. DLF’s (Distribution Loss Factors) apply instead. These are very close to 1 for for most urban areas (both load and generation). Interestingly in rural areas, DLF’s are often significantly > 1 for roof top generation provided that the generation only satisfies local loads. For instance, loads on a SWER often incur losses of between 10% and 50%, so appropriately sized (and controlled) local generation can be economically very attractive.

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