In brief
Following the release of the National Energy Guarantee draft design consultation paper by the Energy Security Board, Partner Anna Collyer and Associate Mark Leersnyder report on the NEG's proposed Reliability Guarantee component (which gives a greater role to regulatory institutions to plan and manage electricity supply and demand), and consider some of the risks and opportunities for industry participants, administrators and regulators that may arise from the proposed approach. This is the third of a series of articles in which Allens will examine aspects of the proposed high-level design options for the National Energy Guarantee.
How will the Reliability Guarantee work?
The National Energy Guarantee (Guarantee) scheme proposed by the Energy Security Board (ESB) includes a 'Reliability Guarantee', which aims to encourage investment in electricity generation in the regions of the National Electricity Market (NEM) that require additional generation to meet forecast peak demand.
The proposed Reliability Guarantee seeks to achieve its aims of ensuring that there is adequate dispatchable electricity supply to meet peak demand by:
- having AEMO forecast peak electricity supply and demand in each of the NEM's regions;
- allowing some time for the market to resolve any shortfall in supply during times of peak demand;
- setting pre-defined 'triggers', which, if triggered after a persistent shortfall in supply, will result in certain retailers being allocated an obligation to 'respond', and alleviate the shortfall in supply by making investments or entering into contracts that encourage additional generation or encourage demand side participation (Reliability Obligations);
- requiring the Australian Energy Regulator (AER) to assess whether retailers have complied with their Reliability Obligations;
- if retailers do not adequately respond to a forecast shortfall in supply, making AEMO responsible for procuring generation resources as a 'procurer of last resort'; and
- penalising retailers that fail to meet their Reliability Obligations.
An increased role for administrators and regulators
A key theme running through the proposed Reliability Guarantee is the increased involvement of AEMO and the AER in ensuring that the NEM has sufficient capacity: ie ensuring electricity supply exceeds demand. While still in the early stages of development, the Reliability Guarantee will likely require the electricity industry's administrative and regulatory bodies to:
- forecast the supply and demand for particular regions of the NEM, including the assumptions that underpin the calculation of a 'shortfall of supply', such as what types of 'dispatchable' generation will increase the system's reliability and what impact intermittent renewable generation has on reliability (the extent to which this will require additional forecasting over and above AEMO's existing planning processes is yet to be determined);
- if a supply shortfall is forecast to occur from a particular point in time in a NEM region, determine the appropriate timeframes 'the market' should be allowed to respond within and the point in time a Retailer Obligation will be 'triggered';
- develop methodologies for determining:
- which retailers are responsible for responding to any 'triggered' shortfall in supply;
- the extent of particular retailers' Reliability Obligations, including whether a retailer's Reliability Obligations should be allocated based on a forward looking estimate of the retailer's contribution to a forecast shortfall in supply (an 'ex ante' basis), or the retailer's actual contribution to a shortfall in supply that did occur in a previous compliance period (an 'ex post' basis);
- the types of 'responses' retailers must make in order to fulfil their Reliability Obligations (ie the eligible types of investment that must be made or the contracts that must be entered into);
- whether the relevant retailers have met their Reliability Obligations; and
- if a Reliability Obligation is not met by some or all responsibility retailers, whether and how any costs AEMO incurs in meeting the shortfall in supply will be passed on to the relevant retailers and what penalties should be imposed.
Each of these steps requires judgment calls to be made by the ESB and its constituent bodies when designing the Reliability Guarantee. Industry participants should form views on how these types of decisions will impact their interests and participate in the ESB's consultation process.
Next steps and points to consider
The final design of the ESB's Reliability Guarantee will have significant implications for the NEM and its participants, administrators and regulators. With the first round of consultation closed, and with the fast-tracked Guarantee due to be finalised in 2018, it will be important for industry participants to understand and participate in future consultations. Some key points for industry participants to consider include:
- Understanding the devil in the detail: Identifying and quantifying the risks and opportunities arising from the Reliability Guarantee, its administrative burden, and its effect on investment in the NEM will require parties to engage with complex concepts and detailed data. The parties who, early on, make the effort to understand how the Reliability Guarantee will impact their interests are likely to be best placed to contribute to its development, and to seize the opportunities and mitigate the risks that may arise.
- Decision making power and opportunity for review: The increased requirements on the energy industry's regulatory and administrative bodies will mean that these bodies will have more power and responsibility to plan for and ensure the NEM's capacity levels. A potential corollary of this may be that industry participants, and their investments, are more exposed to decisions made by technical experts within the electricity industry's administrative bodies. The ability for energy market participants to review and challenge decisions made by administrators and regulators should be considered by all parties as part of the development of the Guarantee.
- Deciding when to respond: The proposed Reliability Guarantee gives generators, retailers and demand side participants the opportunity and incentive to invest in generation or demand responses at different times — on release of AEMO's forecast data, on the event of a 'trigger' being met, and in response to AEMO procuring generation as a matter of last resort. Whether it is better to be the 'first mover' or wait for more lucrative opportunities will be a strategic question and will depend in part on the regulatory carrots and sticks.
- Another variable for investors to consider: The proposed Reliability Guarantee should be something that retailers or investors are considering when determining whether, or where, to expand their retail operations or generation portfolios. As part of any due diligence or strategic review, investors, generators and retailers should consider the potential likelihood and impact of a Reliability Obligation on their business or investments. The Reliability Guarantee has the potential to increase the demand for certain forms of generation in particular regions of the NEM – while increasing the potential costs to retailers.
- Focus on forecasting: It seems likely that AEMO's unenviable task of accurately forecasting electricity supply and demand will come under greater scrutiny from affected parties; particularly where obligations and penalties may be imposed on potentially unwilling participants. Neither over-investment or under-investment in generation capacity are good industry outcomes. However, the political and public outcries that will certainly follow if there are blackouts caused by undersupply may loom large in AEMO's planners' minds when making decisions.
- Interaction with other reliability reviews: The proposed Reliability Guarantee will almost certainly have impacts on, and be impacted by, other reviews into the reliability of the NEM. Indeed, the Reliability Panel's Annual Review of the Security, Reliability and Safety of the NEM, released on 20 March 2018, found that there was enough capacity in generation and demand response in the NEM to meet the reliability standard.
Another review to watch is the AEMC's Reliability Frameworks Review, which is considering, among other things, the reliability recommendations from the Finkel Review. These include the possibility of a day-ahead market, and the role of a strategic reserve and wholesale electricity demand response. A Directions Paper is due to be released in March 2018 and, given the overlapping subject matter and common objectives, it will be important to understand the interactions between the AEMC's reliability proposals and the ESB's Reliability Guarantee.