Finkle Preliminary Report – National Electricity Reform

Energy Sector News

Jan 10
Finkle Preliminary Report – National Electricity Reform

In October 2016, the Council of Australian Governments (COAG) Energy Council agreed to an independent review of security and reliability in the National Electricity Market (NEM) and from this provide advice to Government (a Blueprint) on coordinated, national electricity market reform.  The independent Panel, Chaired by the Chief Scientist Dr Alan Finkle AO, presented its Preliminary Report to COAG on 9 December 2016.

The impetus for the review is recognition of the numerous forces driving rapid change in the Australian electricity market, including but not limited to:

  • National emission reduction targets and particularly the lack of an emissions reduction policy beyond 2020, when the Renewable Energy Target (RET) ends.  The report notes that the absence of a long term emissions policy has stalled investment in renewable energy sources and increased the cost of traded Large-scale Generation Certificates (LGCs) above the level theoretically required to make renewable generation competitive.
  • Emergent technologies such as rooftop PV, battery storage and peer-to-peer trading platforms empowering customers to become more active in the management of their electricity requirements.  However, the report cautions that without efficient integration of these technologies, there will be an increasing detrimental impact upon network reliability, security and affordability.
  • The provision of ancillary services to maintain network reliability in a market with rising levels of variable renewable generation.  The report suggests a review of the pricing of existing ancillary services and to understand why alternative technologies to support frequency control are not being adopted.
  • Seizing the opportunity to consider electricity market governance from a “whole of system” perspective and to ensure that current electricity market policy, legislation, rule changes and initiatives such as the Electricity Network Transformation Roadmap (ENA/CSIRO), COAG’s own Energy Market Transformation Programme and National Energy Productivity Plan, the Power of Choice Reforms and the Federal Government’s 2017 Climate Policy Review are aligned and drive common, efficient market outcomes.

The Report acknowledges that all of the above issues have been ‘brought into focus by the system black event in South Australia’ at the end of September 2016.

This report takes the form of an issues paper and under seven key themes poses questions for interested parties to address.  Submissions are due by 21 February 2017.  The key themes and related questions from the report are listed below for information.

Seven key themes and questions

1.  Technology is transforming the electricity sector
The energy market is changing. New technologies create opportunities for a more integrated, predictable and responsive system, including to better manage peak congestion and provide reliability at lower cost. There are opportunities for new businesses and service models to meet this need. But if the integration of these technologies is not well managed, they could have a detrimental impact on security.

  • How do we anticipate the impacts, influences and limitations of new technologies on system operations, and address these ahead of time?
  • How can innovation in electricity generation, distribution and consumption improve services and reduce costs?
  • What other electricity innovations are you aware of that may impact the market in the future?

2.  Consumers are driving change
Consumers are helping to drive electricity sector transition by embracing new technologies, choosing ways to better manage their energy costs and help reduce our emissions. The increasingly active role of consumers will be important in supporting the future security and affordability of the power system, but this requires the right prices and incentives. It will be important to address the needs of vulnerable groups.

  • How do we ensure that consumers retain choice and control through the transition?
  • How do we best meet the needs of vulnerable and hardship consumers?
  • How do we ensure the needs of large-scale industrial consumers are met?
  • How can price structures be made more equitable when consumers are making different demands on the grid according to their electricity use and their investments behind the meter?
  • How do we ensure data sharing benefits and privacy are appropriately balanced?

3.  The transition to a low emissions economy is underway
The world is acting to reduce greenhouse gas emissions. Australia has a target to reduce emissions by 26 to 28 per cent below 2005 levels by 2030. The electricity sector has an important role to play in achieving Australia’s emissions reduction targets. Not only is it Australia’s largest source of emissions, but also a large source of opportunity for abatement and innovation. This will require stable and effective emissions reduction policies to support the necessary investment in long-lived generation and network assets while maintaining security and reliability.

  • What role should the electricity sector play in meeting Australia’s greenhouse gas reduction targets?
  • What is the role for natural gas in reducing greenhouse gas emissions in the electricity sector?
  • What are the barriers to investment in the electricity sector?
  • What are the key elements of an emissions reduction policy to support investor confidence and a transition to a low emissions system?
  • What is the role for low emissions coal technologies, such as ultra-supercritical combustion?

4.  Variable renewable electricity generators, such as wind and solar PV, can be effectively integrated into the system
The closure of coal-fired generators and their replacement with wind and solar PV generators has technical implications for the security and reliability of the power system. This is because wind and solar PV generators lack spinning inertia and the ability to contribute to medium and long-term frequency control, reactive power control, system voltage control, and system restart. Gas-fired generators can help address technical challenges, but there has been a reduction in gas-fired generation capacity. Work is underway on implementing technical and market solutions to increase grid security and reliability.

  • What immediate actions could be taken to reduce the emerging risks around grid security and reliability with respect to frequency control, reduced system strength, or distributed energy resources?
  • Should the level of variable renewable electricity generation be curtailed in each region until new measures to ensure grid security are implemented?
  • Is there a need to introduce new planning and technical frameworks to complement current market operations?
  • Should there be new rules for generator connection and disconnections?
  • Should all generators be required to provide system security services or should such services continue to be procured separately by the power system operator?
  • What role can new technologies located on consumers’ premises have in improving energy security and reliability outcomes?
  • How can the regulatory framework best enable and incentivise the efficient orchestration of distributed energy resources?
  • What other non-market focus areas, such as cybersecurity, are priorities for power system security?
  • How could high speed communications and sensor technology be deployed to better detect and mitigate grid problems?
  • Should the rules for AEMO to elevate a situation from non-credible to credible be revised?

5.  Market design can support security and reliability
The design of the NEM has significant implications for maintaining security and reliability objectives in the context of the transition taking place in the electricity sector. It is critical that the design of the NEM provides appropriate incentives for efficient investments that achieve secure and reliable electricity supply.

  • Are the reliability settings in the NEM adequate?
  • Is liquidity in the forward contract market for electricity adequate for the needs of commercial and industrial consumers and, if not, what can be done?
  • Are commercial and industrial users experiencing difficulties in obtaining quotes for supply?
  • What impact will an increasing level of renewable generation have on the forward contract market and what new products might be required?
  • Rule changes are in process to make the bid interval and the settlement interval the same, both equal to 5 minutes. Are there reasons to set them to a longer or shorter duration?
  • What additional system security services such as inertia, as is currently being considered by the AEMC, should be procured through a market mechanism?
  • How can system security services be used as ‘bankable’ revenue over a sufficient period of time to allow project finance to be forthcoming?
  • How will generators and retailers mitigate price risk in such a market?

6.  Prices have risen substantially in the last five years
Australians have experienced rising electricity prices in recent years. Affordability must be an important consideration as the regulatory framework seeks to also meet the objectives of energy security and reduced emissions. Where new measures are proposed to meet security and reliability objectives, it is critical that the potential impact on affordability is minimised and any trade-off between the objectives is transparent and reflects the long term interests of consumers. This will require attention to the costs associated with each element of the NEM: distribution and transmission networks, wholesale electricity generation, and electricity retail.
The Panel is considering a number of issues regarding electricity prices and affordability:

  • What additional mechanisms, if any, could be implemented to improve the supply of natural gas for electricity generation?
  • What are the alternatives to building network infrastructure to service peak demand?
  • What are the benefits of cost reflective prices, and could the benefits be achieved by other means?
  • How can we ensure that competitive retail markets are working?
  • What outcomes of competition should we monitor?

7.  Energy market governance is critical
Effective energy market governance is essential for managing the transition that is currently underway in Australia’s energy market. The Review is considering whether the current institutional architecture can do this and support effective national coordination of energy policy.

  • Is there a need for greater whole-of-system advice and planning in Australia’s energy markets?
  • If so, what are the most appropriate governance arrangement to support whole-of-system advice and planning?
  • Do the roles of ministers and energy market institutions need further clarification?
  • What lessons can be drawn from governance and regulation of other markets that would help inform the review?
  • How should the governance of the NEM be structured to ensure transparency, accountability and effective management across the electricity supply chain?
  • Are there sufficient outcome statistics for regulators and policy makers to assess the performance of the system?
  • What governance measures are required to support the integration of energy and emissions reduction policies?
  • Should the AEMA be amended?
  • Should the NEO be amended?
  • How can decision-making be appropriately expedited to keep up with the pace of change?