The Australian Energy Market Commission has rejected a strong push by the wind and solar industry to dump the current method of assessing transmission and network losses, and has instead insisted it will plough on with its own controversial proposals.
In a draft ruling delivered on Thursday, just a week away from a critical COAG energy ministers meeting in Perth, the AEMC says it will not dump the current method known as “marginal loss factors”, and has rejected a push by the renewable energy industry to introduce “average loss factors.”
The decision has been panned by the industry which warns that new investment in Australia is now at risk because financiers and developers are losing confidence in the Australian market. The Australian Energy Market Operator has warned the AEMC’s favoured approach may be impractical.
The rule change request was put forward by Adani Renewables, the owner of a badly afflected solar farm in Queensland, and supported by other wind and solar developers, including a group of 20 or more big investors that warned that investment would dry up without the changes, and who declared the current arrangements were no longer fit for purpose.
The issue around MLFs has surfaced in the past year due to significant downgrades that have affected wind and solar farms in various parts of the grid, including north Queensland, western NSW and north western Victoria.
Some wind and solar farms have had their output calculations downgraded to an MLF of 0.75 or less, meaning only three quarters of their output will be credited with revenue, with a spill on effect to their business models.
Further downgrades have been foreshadowed by the Australian Energy Market Operator, and while some installations in northern NSW and north Queensland gained a reprieve with an increase in MLFs, investors and developers say the current method of calculations is too volatile and impossible to predict.
It has been cited as one of the main reasons – along with ongoing connection and commissioning delays, and the lack of infrastructure – for a downturn in interest in new developments.
“Some stakeholders have been concerned about recent volatility in transmission loss factors as this creates revenue variability, and have suggested that these changes have been difficult to forecast,” the AEMC says in its report.
“While the Commission understands these concerns, it also recognises the importance of maintaining clear signals for efficient dispatch and future investment in the market, even in times of change.”
The tenor of the AEMC’s rejection, and its assertion that making changes would increase prices for consumers, stunned many in the renewable energy industry, who said they were not looking to pass on transmission costs to the consumers, and point out that having more renewables is the best way to lower costs.
“We strongly believe our presence in the market has brought down prices,” said Rob Grant, the head of the investment group. “This decision will do the opposite of what the headline in the press release claims.”
They were particularly taken aback by the nature of the AEMC’s graphic illustrating its favoured proposal with numerous arrows hitting a “bullseye”, while saying that the renewables’ favoured option missed on all counts.
The AEMC favours a method known as locational pricing, or dynamic loss factors, and wants to push this through with its COGATI program, designed to co-ordinate investment in both generation and transmission.
But this COGATI process is also being panned virtually unanimously by the renewables industry, which says locational pricing will only increase volatility, and make investments less predictable.
They also say the COGATI design will not solve the immediate problem of a lack of investment in networks and transmission. But the AEMC, true to form, is pushing ahead with its favoured “market” solutions, leaving many to wonder if AEMO’s urgent program outlined in its Integrated System Plan will ever be acted upon.
The AEMC decision was likely predictable, given it had recently delayed its decision on MLFs so it could share its views about the COGATI process. But it’s interesting that it has persisted despite the enormous push-back from the industry, and just one week out from the first COAG meeting in nearly a year.
It appears to be on a collision course with AEMO, which made its views clear in its submission to AEMC’s COGATI proposals, where it said that the proposed access model acknowledges that it has not yet worked out how dynamic losses will be included in local prices and the FTR products and suggested the AEMC was confused by capacity and congestion issues.
“AEMO is not yet clear whether this will be possible, given congestion is a transmission capacity issue and losses are a network flow issue and there is limited evidence of combining losses and congestion in overseas examples,” it writes. “AEMO is open to exploring this further. However, until it is, the proposed access model cannot be read as a solution to the MLF issue.”
AEMO also says that initial indications from independent consultants highlight implementation of the proposed hedging instruments in the COGATI could cost hundreds of millions of dollars.
“This would be a substantial amount of expenditure and divert resources away from addressing other necessary reforms.
“AEMO and the Energy Security Board has also identified more pressing priorities such as ensuring the market has the range of services available for system security and consideration of ahead markets to provide the ability to manage variability in generation unit commitment to ensure the right resources are available at the right time.
“For these reasons AEMO considers it inappropriate to commit to this significant reform prior to addressing more pressing priorities in the NEM.”
Kane Thornton, the CEO of the Clean Energy Council, says the COGATI access model is hugely unpopular with key industry stakeholders, including AEMO.
“The AEMC needs to start listening to industry’s concerns,” Thornton said.
“Disappointingly, the clean energy industry is losing confidence in the Australian market. There is a real risk that the AEMC’s decisions on MLFs and COGATI will see renewable energy investors move their money overseas, at a time when investment in new generation is critical to ensure Australia’s future energy supply is secure and put downward pressure on power prices.”
The AEMC says it will give AEMO more flexibility so it can “refine and improve” the way it calculates the MLFs. These include some highly technical issues relating to “inter-regional” loss factors, and also the time periods used (suggesting longer time periods than the current 30 minute periods).
The AEMC says more regular reporting by AEMO – such as its updated warning for next year’s MLF’s released earlier this week – and the new rule that removes the “secrecy” around developments, and allows investors to see what else is going on in their part of the grid should help alleviate the issues.
Essentially, however, it has broadly handballed the issue to a wholesale redesign of the National Electricity Market that is being undertaken by the Energy Security Board, with a view to introducing changes by 2025.
This re-design, it should be hoped, will include the environmental considerations that were mysteriously dropped at the last moment from the National Electricity Objective before the rules of the National Electricity Market were adopted in the late 1990s.
As the AEMC itself notes: “This objective (the NEO) does not expressly require the Commission to have regard to the long term interests of consumers with respect to climate change or the environment.”
And therein lies the problem, along with the AEMC’s obsession about “market based” solutions treasured by outgoing chairman John Pierce, even when they were clearly not working.
Grant went further, describing the proposals made by AEMC as an “academic indulgence”, and said he hoped that COAG would reject it. “We are particularly concerned that the way it is being through the press release is quite political, rather than regulatory in nature.”