INSIGHT

Maintaining a REZ-ilient electricity grid

By Karla Drinkwater, Georgia Jones
Energy

Key solutions across the NEM to help transform the electricity sector 10 min read

The case for investment in electricity network infrastructure

With forecasts indicating that:

  • in the next 20 years, over 60% of the coal-fired generators in the National Electricity Market will retire; and
  • each of these generators will need to be replaced by a range of smaller projects;

the attention of governments, electricity networks, the Energy Security Board, AEMO and the AEMC is now firmly fixed on how best to accommodate an increasingly diverse and distributed generation mix containing a higher concentration of renewables.

Significant investment in network infrastructure will be required to ensure there is sufficient network capacity in the National Electricity Market (NEM) to support the broader electricity system and meet the needs of new generators.

Currently garnering a lot of attention are the following two methods of facilitating the required investment in a timely and cost-efficient manner:

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The development of 'renewable energy zones' (REZ) as a means of coordinating, and co-locating, the construction of new generation and network infrastructure.

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Creating new regulatory frameworks to fast-track key network augmentation projects where the existing regulatory investment tests are perceived as creating unnecessary delays.

Different approaches are emerging across the market

We examine the key REZ initiatives being considered around the NEM and the potential implications of these approaches.

Each state has now announced initiatives to promote the development of renewable energy zones (REZs) in their states and the Energy Security Board (ESB) is evaluating options for a NEM-wide approach to establishing and maintaining REZs, while simultaneously considering wider-ranging transmission access reform (as part of the post-2025 market design project). Most recently, Infrastructure Australia included the development of REZs and transmission network augmentations as 'High Priority' initiatives in its 2021 Infrastructure Priority List.

Victoria

New South Wales

Queensland

NEM-wide approach

Victoria

In February 2021, the Victorian Government released a Directions Paper regarding its REZ Development Plan. The REZ Development Plan will complement the Victorian 2020 Renewable Energy Action Plan (which focussed primarily on fostering the development of renewable generation, firming assets, household and community energy initiatives, with a handful of distribution network-related initiatives (such as microgrids, smart grids and streamlining the network connection process for small-scale distributed generators)).

The focus of the REZ Development Plan is transmission network projects that will facilitate the development of the six planned Victorian REZs1 and, in this regard, the Victorian Government has:

  • commenced work to establish a new entity (VicGrid) that will be responsible for delivering the REZs; and
  • committed $540 million to a new REZ Fund for investment in REZ network infrastructure solutions over the next four years.

The REZ Development Plan will be implemented in the following stages:

energy-networks-icon_vic1.pngConsultation on the Directions Paper 

The Victorian Government is seeking feedback on the structure and functions of VicGrid, the potential Stage 1 projects and broader REZ Development Plan proposals outlined in the Directions Paper until 31 March 2021.

energy-networks-icon_vic2.pngFund Stage 1 Projects

The Victorian Government has identified in the Directions Paper a number of transmission network projects that are considered high priority and able to be delivered by 2025. From this list, the Government will select (by the end of May 2021) a number of projects to receive immediate funding.

The priority list projects predominantly relate to the construction of system strength assets, minor network augmentations and communications upgrades and are likely to be undertaken with public funding from the REZ Fund, which may be applied in a number of ways (including direct grant funding, funding investment gaps to fast-track RIT-T processes and financing projects that can recover costs from beneficiaries).

energy-networks-icon_vic3.pngEstablish VicGrid (by mid-2021)

VicGrid will be responsible for the planning and development of Victoria's REZs (including developing the Stage 2 projects identified in the Implementation Plan). The Victorian Government is currently consulting on the potential functions and powers of VicGrid and so it remains to be seen:

  • how VicGrid will interact with AEMO (in the context of its declared shared network functions), including in particular the new functions conferred on AEMO by the National Electricity (Victoria) Amendment Act 2020 (the Victorian Derogation Act); and
  • whether VicGrid will be structured more like a contestable transmission system operator within the geographical limits of the proposed REZs (and therefore constituting a prospective declared transmission system operator contemplated by the Victorian Derogation Act) or a planning and advisory body (similar to the 'infrastructure planner' under the NSW Electricity Infrastructure Roadmap).

energy-networks-icon_vic4.pngImplementation Plan (to be released July 2021)

This plan will include the final REZ Development Plan, VicGrid's structure and mandate as well as the framework for the funding of additional Development Plan Projects (potential candidates for which are also outlined in the Directions Paper).

Stage 2 projects are likely to be undertaken under the derogations framework established under the Victorian Derogation Act, with public funding from the REZ Fund and/or via private investment.

Stakeholders monitoring the development of the REZ Implementation Plan, or interested in providing feedback on the initial Development Plan set out in the Directions Paper, may wish to consider the following matters:

  • the impact (if any) the potential projects being considered for Stage 1 and Stage 2 may have on stakeholders, including stakeholder generation or network infrastructure projects;
  • which of these potential projects should be prioritised by the Victorian Government;
  • stakeholder preferences as to the procurement, asset ownership, financing or cost recovery options for the Stage 1 and/or Stage 2 projects; and
  • stakeholder preferences for the functions, governance and structure of VicGrid, including having regard to experience and models in other jurisdictions.

New South Wales

The transmission network aspects of the New South Wales Electricity Infrastructure Roadmap bear some similarities to the proposed Victorian approach to the extent that:

  • an entity known as the infrastructure planner (currently the Energy Corporation of NSW) will be responsible for coordinating the delivery of the NSW REZs, including line route design and determining which projects may not be connected within a REZ; and
  • the NSW Government proposes to reform the existing transmission network regulatory approval and cost recovery frameworks (including the RIT-T process) to create a 'bespoke NSW regime' to fast-track transmission networks investments identified by the NSW Government as required for the timely and scale-efficient delivery of REZ shared networks.2

While the proposed NSW regime derogates in form from the RIT-T test, the prerogative remains the same: to measure the economic merit of transmission projects and ensure the cost of these projects does not outweigh the benefits to customers. The NSW Government aims to achieve this through a staged approach to assessing REZ transmission projects, involving:

  • the NSW Government declaring a transmission line a 'declared REZ transmission line'.3 In the context of transmission network projects, the infrastructure planner will make recommendations to the consumer trustee under the Electricity Infrastructure Amendment Act 2020 (NSW), who then:
      • authorises a network operator to carry out the REZ infrastructure project; or
      • refers the matter to the Minister under the Act to make an order directing the project be carried out,

    and sets a cap on the maximum efficient capital costs that the scheme regulator (who may be the AER, IPART or another entity) may determine for the project; and

  • the scheme regulator calculating the efficient capital costs for the project (known as the 'Transmission Efficiency Test') and determining the amount payable to the network operator undertaking the project (which amount will also take into account the network operator's return on capital costs and operating costs).

At this stage there is limited detail on how this process will be structured to avoid the perceived difficulties with the RIT-T process, with the key advantage seemingly that REZ infrastructure projects could be declared in a manner that circumvents the current 'chicken and egg problem' associated with demonstrating market demand and the associated consumer benefits of transmission network projects.

Queensland

Queensland's approach is perhaps the most straightforward of the policies announced so far.

In late 2020, the Queensland Government committed $145 million to establish three REZs in Queensland (northern, central and southern). This was followed by a further announcement that Queensland would establish a Renewable Energy Fund with up to $500 million accessible to Queensland's energy government-owned corporations (CleanCo, Stanwell, CS Energy, Powerlink and Energy Queensland) over the next three years.

The Fund is expected to invest in proposals that support Queensland's 50% renewable energy target by 2030, including renewable energy, storage and (importantly) network infrastructure projects.

Further details of the Queensland approach are expected to be confirmed in the coming months as the Queensland Government develops the mandates for the energy GOCs, including the scope and operation of the Fund and the assessment criteria for investment proposals.

While there are currently fewer details available about how the Queensland policy will be implemented (as compared to the Victorian and New South Wales approaches), an advantage of the Qld approach may be that it does not require new entities or regulatory frameworks to be established and may simply be able to adopt the NEM-wide approach currently being developed by the ESB.

NEM-wide approach

For the past two years, the ESB has been considering options for transmission network access reform, including the possibility of introducing locational marginal pricing with financial transmission rights. Earlier this year, the ESB announced it would prioritise the development of REZ arrangements, which will now be the ESB's immediate focus for transmission access reforms.

The ESB has, however, indicated that it considers the introduction of REZ arrangements and the implementation of projects identified in the Integrated System Plan can only be part of the solution and that longer-term, broader transmission access reform (such as locational marginal pricing with financial transmission rights) will be required to address network congestion issues both within REZs and in the broader transmission system. For now, the ESB is considering options for broader reform as part of the post-2025 market design project.

The ESB has recognised that REZs could evolve in different ways across the NEM, including under the state-based initiatives discussed above. That said, the development model the ESB is focussing on is a 'regulated model' where the REZ is identified as an ISP project and has passed a RIT-T test.

While certain of the proposed REZs identified to date may proceed in that manner, it also remains possible that a state may wish to fast-track a proposed REZ under a state-based derogation regime rather than waiting for the ISP and RIT-T processes to play out. This means there could be a variety of approaches taken to REZs across the NEM.

Should this occur, it may give rise to greater complexity and administrative burdens (at a state and NEM-wide level, as well as potentially a participant level) in the context of future transmission access reforms, including, eg:

  • where network issues outside a REZ may impact operations within a REZ; or
  • where similar or divergent access issues arise under one or more of the regimes.

The ESB is still consulting on a number of aspects of its proposed regulated REZ development model, including:

  • the functions and powers of the REZ coordinator (similar to what Victoria is currently doing);
  • how REZ participants (eg generators) would be selected; and
  • different options for access regimes that would apply within REZs.

In the latter two cases, these are issues that do not yet appear to have been solved by the states proposing bespoke regimes, and so there may be opportunities for the states to leverage off the work being undertaken by the ESB in this regard.

Next steps

There are a number of ongoing processes underway by the states and the ESB to design and implement these reforms and, as more details surface, there will be emerging opportunities for sector participants to participate in the:

  • development of the reforms (through consultation processes); and
  • the resulting network infrastructure (and associated generation) projects themselves.

Allens is continuing to track the development of these (and other) energy reforms – our analysis of which can be found on our Energy hub.

Footnotes

  1. Murray River, Western Victoria, South West, Central North, Ovens Murray and Gippsland.

  2. Like the Victorian regime, the Electricity Infrastructure Amendment Act 2020 (NSW) also contemplates that the NSW Government may modify or disapply the National Electricity Law and Rules in NSW.

  3. The relevant Minister may also declare the access regime(s) that apply within a REZ, or part thereof.

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