Finkel Review - Distributed Energy Resources Unlocking potential and future

In brief

In the second of our series analysing the Finkel Review, we look at Dr Finkel's assessment on the growth of distributed energy resources (DERs) in the Australian energy landscape and his suggestions for future incentivisation and 'orchestration'. These suggestions have raised a number of considerations and opportunities, particularly in relation to the pioneering of business and government programs and partnerships to incentivise DER. Partner Andrew Mansour, Senior Associate Emily Gerrard and Law Graduate Sarah Dobbie report.

Incentivise participation: Rule changes should be implemented to incentivise DER participation to provide services such as frequency and voltage control. More attention should also be paid to rewarding consumers for demand management and distributed generation.
Facilitate access: Opportunities should be identified to improve access by low income households to DERs.
Increase visibility: New data collection frameworks or mechanisms should be used to increase the visibility of all forms of DERs.
Orchestrate services: New communications infrastructure should be utilised in order to coordinate and optimise DER dispatch in a dynamic manner.

Background

The Finkel Report is the product of an extensive examination of all aspects of the future of the National Electricity Market (NEM). (See our previous Client Updates Finkel: the solution for our energy future? for a broad overview, and Finkel Review – Gas: A revolving door or real change? for a more specific look into gas.)

While not the major focus of the Finkel Report, considerations and opportunities relating to DER are still firmly on the horizon. As Dr Finkel notes, the NEM is on a path to increasingly smaller, distributed and non-synchronous generators, and the uptake of new technologies is putting residential, commercial and industrial consumers at the centre – by 2050, an estimated 30 to 45 per cent of annual electricity consumption could be supplied from consumer-owned generators.

What did Dr Finkel say about distributed energy resources?

Set out below are the key recommendations outlined in the Finkel Report relating to DERs. We have also considered the opportunities flowing from both these recommendations and the Finkel Review at large.

Recommendations	Opportunities
Broadly, DERs can have benefits for network security by providing services such as frequency control, reactive power and voltage control. However, clusters of DERs can also present challenges to system security, carrying the potential to cause voltage spikes, flicker and reverse power flows. As such, policy and regulatory frameworks should: *incentivise* and *orchestrate* DER participation and services; and facilitate the increased visibility of DER. Specific recommendations include: by mid-2018, COAG Energy Council should direct the Australian Energy Market Commission (*AEMC) to review the regulatory framework* for power system security in respect of DER participation. by mid-2019, the AEMC should report to the COAG Energy Council on proposed draft rule changes to incentivise and orchestrate DER participation to provide services such as frequency and voltage control. by mid-2018, the COAG Energy Council, in addition to its project on energy storage systems, should *develop a* *data collection framework* (or other mechanism) to provide static and real-time data for all forms of DERs at a suitable level of aggregation. The COAG Energy Council should engage with relevant portfolio areas, including housing, and with state, territory and local governments, to identify: opportunities to accelerate the roll out of programs that improve *access by low income households to DERs* and improvements in energy efficiency; and options for *subsidised funding mechanisms* for the supply of energy efficient appliances, rooftop solar photovoltaic and battery storage systems for low income consumers.	Nestled among the more specific recommendations is general encouragement of distributed generation, and DERs more broadly. Businesses have opportunities to build upon the *emerging energy services sector, which is already packaging benefits from DER into products and services for consumers, including rooftop solar photovoltaic and larger embedded schemes for property developments. Opportunities continue to grow to provide energy storage technologies, which Dr Finkel has earmarked to provide solutions to many of the reliability and security challenges facing the NEM. The visibility of DER is a high-priority challenge. AEMO's increasing data collection* needs will include opportunities for those with: telemetry technologies, and data analytics and modelling; and existing mechanisms and frameworks for data collection. Growing data collection needs will also provide opportunities for those developing *advanced operating and communication systems, and software* for stable and efficient operation. Both industrial and commercial consumers should seek to be involved in the provision of *grid support services. Dr Finkel cites Energy Networks Australia and CSIRO's estimate which indicates that there is potential, by 2050, for industrial, commercial and residential consumers to receive a total of $2.5 billion per year in payments for these services. It will become increasingly necessary to use appropriate communications infrastructure* to coordinate and optimise DER dispatch in a dynamic manner. Using the example of a large number of households with solar panels and storage devices, Dr Finkel raises the following possibilities: Devices owned by the consumers, who contract with an aggregator who coordinates output. The aggregator *trades energy and ancillary services on the wholesale market* and enters into agreements with network businesses to *supply* *network support services. Devices owned by the consumer's retailer, or the retailer supplies them at a discount in return for control over the devices in certain circumstances. The retailer trades energy and ancillary services* and enters into network support agreements with network businesses. Devices owned by a transmission or distribution network business. The network business use the devices to *provide network support services* and enter into agreements with a third party to use the devices to *trade energy and ancillary services*.

Recommendations

Opportunities

Broadly, DERs can have benefits for network security by providing services such as frequency control, reactive power and voltage control. However, clusters of DERs can also present challenges to system security, carrying the potential to cause voltage spikes, flicker and reverse power flows. As such, policy and regulatory frameworks should:

incentivise and orchestrate DER participation and services; and
facilitate the increased visibility of DER.

Specific recommendations include:

by mid-2018, COAG Energy Council should direct the Australian Energy Market Commission (AEMC) to review the regulatory framework for power system security in respect of DER participation.
by mid-2019, the AEMC should report to the COAG Energy Council on proposed draft rule changes to incentivise and orchestrate DER participation to provide services such as frequency and voltage control.
by mid-2018, the COAG Energy Council, in addition to its project on energy storage systems, should develop a data collection framework (or other mechanism) to provide static and real-time data for all forms of DERs at a suitable level of aggregation.
The COAG Energy Council should engage with relevant portfolio areas, including housing, and with state, territory and local governments, to identify:

opportunities to accelerate the roll out of programs that improve access by low income households to DERs and improvements in energy efficiency; and
options for subsidised funding mechanisms for the supply of energy efficient appliances, rooftop solar photovoltaic and battery storage systems for low income consumers.

Nestled among the more specific recommendations is general encouragement of distributed generation, and DERs more broadly. Businesses have opportunities to build upon the emerging energy services sector, which is already packaging benefits from DER into products and services for consumers, including rooftop solar photovoltaic and larger embedded schemes for property developments.
Opportunities continue to grow to provide energy storage technologies, which Dr Finkel has earmarked to provide solutions to many of the reliability and security challenges facing the NEM.
The visibility of DER is a high-priority challenge. AEMO's increasing data collection needs will include opportunities for those with: telemetry technologies, and data analytics and modelling; and existing mechanisms and frameworks for data collection.
Growing data collection needs will also provide opportunities for those developing advanced operating and communication systems, and software for stable and efficient operation.
Both industrial and commercial consumers should seek to be involved in the provision of grid support services. Dr Finkel cites Energy Networks Australia and CSIRO's estimate which indicates that there is potential, by 2050, for industrial, commercial and residential consumers to receive a total of $2.5 billion per year in payments for these services.
It will become increasingly necessary to use appropriate communications infrastructure to coordinate and optimise DER dispatch in a dynamic manner. Using the example of a large number of households with solar panels and storage devices, Dr Finkel raises the following possibilities:

Devices owned by the consumers, who contract with an aggregator who coordinates output. The aggregator trades energy and ancillary services on the wholesale market and enters into agreements with network businesses to supply network support services.
Devices owned by the consumer's retailer, or the retailer supplies them at a discount in return for control over the devices in certain circumstances. The retailer trades energy and ancillary services and enters into network support agreements with network businesses.
Devices owned by a transmission or distribution network business. The network business use the devices to provide network support services and enter into agreements with a third party to use the devices to trade energy and ancillary services.

These recommendations would need to be managed in the context of any applicable regulatory framework, including any ring-fencing obligations.

The takeaway point for businesses is that change and policy development bring with them significant opportunities.

Unlocking potential for distributed energy resources

The role of subnational governments around Australia is critical in supporting the expansion of DERs. As land managers and regulators of land use and development, state, territory and local governments can incentivise growth by streamlining approval or consent processes and/or revisiting hurdles to localised DERs.

At present, community-based or small-scale distributed energy projects face varying impediments and grey areas in state and local government planning laws and regulations. For example, in Victoria there are some obstacles to the development of community DERs, eg community wind energy facilities, in some local government areas, including in the Macedon Ranges, where there is strong support for a community wind farm.¹

In line with the general sentiment of the Finkel Report, however, the Victorian Government has committed to investigate and remove the hurdles to DER projects:

Notably, in late 2016, the Victorian Government committed to allow community wind farm development in the Macedon Ranges.
Further, the Victorian Government is currently investigating the PILOR rates framework in consultation with the public.²

While some impediments continue to exist in state and local government planning laws, businesses and governments are also pioneering programs and partnerships to incentivise take-up of DER.

In Canberra, for example, the ACT Government selected Capital Estate Developments (CED) to develop part of a new suburb named Denman Prospect. The Development Guidelines for Denman Prospect, which were prepared by CED, provide that each house must have a minimum 3kW solar system, which will generate around 4146kWh of electricity annually.³

CED has partnered with ACT Government-owned utility, ActewAGL Retail, for the bulk purchase and instalment of solar systems in the first 350 homes. Separately, ActewAGL Retail has also begun installing battery storage systems in Denham Prospect, under the ACT Government's Next Generation Renewables Energy Storage Scheme.

Denman Prospects provides an example of a developer-led program that increases the uptake of distributed energy.

The future of distributed energy resources – business-government partnership

The Coalition Government has adopted 49 of Dr Finkel's 50 recommendations. However, one of the most significant recommendations, the adoption of a Clean Energy Target (CET), has not been adopted. While the Energy Minister has said that the CET is still under consideration, it remains to be seen whether and how such a scheme will develop in the face of some opposition.

In light of ongoing divisions at the federal level, and the nature of the recommendations themselves, the task of actually implementing Dr Finkel's recommendations regarding DER may largely fall to the business community, and to state and local governments, which are responsible for planning laws.

As the examples above demonstrate, however, despite some obstacles, businesses and governments are pioneering programs and partnerships to incentivise take-up of DER.

Footnotes

Macedon Ranges Planning Scheme, Schedule to Clause 52.32; Victorian Government, Submission to the Parliamentary Inquiry into Community Energy Projects (December 2016)
Macedon Ranges Planning Scheme, Schedule to Clause 52.32.
Sophie Vorrath, 'Australia's new solar 'burbs' – where rooftop PV is mandatory' (One Step Off the Grid, 24 May 2017); Willow Aliento, 'Denman Prospect to be Australia's First Mandated Solar Suburb' (The Fifth Estate, 15 October 2015)

Finkel Review - Distributed Energy Resources: Unlocking potential and future partnerships

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