INSIGHT

The new 'fit-for-purpose' electricity system – four critical reforms

By Melissa Keane, Karla Drinkwater, Jazmine Elmolla
Energy Renewables

The ESB's Post-2025 Market Design Project focuses on a number of key reform options

The uptake of small and large-scale renewable energy, and the growth of demand-side technologies, has necessitated a new, fit-for-purpose electricity system that can recognise and respond to the changing energy landscape.

At Allens, we are considering the implications of the proposed reforms for our clients and the sector more broadly, and will shortly be publishing further Insights on the implications of, and opportunities in, this space, including for:

  • generators and network service providers, arising out of the proposed frameworks for system services; and
  • retailers and suppliers of new energy technologies, arising out of the proposed arrangements for distributed energy resources, and the unbundling of services.

Background

In March 2019, the former Council of Australian Governments Energy Council tasked the Energy Security Board (ESB) with advising on the required changes to the National Electricity Market (NEM), to ensure that the NEM can accommodate an increasingly diverse and distributed generation mix, while ensuring ongoing reliability of supply (see our overview).

Following the Consultation Paper released in September 2020 and Directions Paper released in January 2021, the ESB has published an Options Paper, which builds on its previous deliverables, and sets out a shortlist of options, or 'pathways for reforms', to address the following four critical reform directions – all of which have potential far-reaching implications for the electricity industry.

The reform directions

Resource adequacy and aging thermal generator retirement

Australia's energy system is transitioning from one based on centralised coal fired power generation to a more decentralised model involving a diverse set of technological solutions, including higher concentrations of renewables. The pace of change is rapid, and there is a need to ensure the timely and orderly entry of new technologies and exit of old coal plants, so as to deliver reliability and security of supply.

The ESB is exploring reforms that encourage efficient and coordinated commercial investment in, and the construction of, new resources, potentially through national market mechanisms.

Eg the ESB is considering:

  • modifying the Retailer Reliability Obligation (RRO) by either removing the T-3 trigger for gap identification, or creating a new 'physical' RRO by redefining qualifying contracts to ensure these are more closely linked with physical generation (eg by enabling generators to create physical certificates that liable entities can use to meet their RRO obligations);
  • developing national principles for contract structures to inform the design and implementation of reverse auctions for long-duration government contracts.
Essential system services, scheduling and ahead mechanisms

The rapidly changing nature of the NEM generation mix, and, in particular, the influx of renewables, has had fundamental impacts on electricity networks, and created inefficiencies in the supply of system services needed to maintain system security.

To date, shortfalls in system services have been managed through increasing interventions by AEMO to procure the necessary capabilities. To address these inefficiencies, the ESB proposes to introduce new frameworks for the procurement of the four essential system services identified by the ESB (frequency control, inertia, system strength and ramping capabilities /operating reserves) to ensure the availability of these system services at least cost to consumers.

A number of the 'immediate term' reforms proposed by the ESB are already under development, eg:

  • for frequency control services, the proposals to develop an enduring primary frequency response arrangement and a new fast frequency response market; and
  • the proposed amendments to the managing system strength framework.1
Integration of distributed energy resources and flexible demand

The proliferation of distributed energy resources, and particularly solar PV, have changed the way that customers participate in the electricity market.

To enable increasingly active demand-side participation, and facilitate the ongoing evolution of end-users not only consuming electricity but also producing it, new frameworks and arrangements are required to protect customers and to ensure that the benefits of distributed energy resources can be maximised.

In addition to the work that has already been commenced in this space,2 the ESB is considering creating a universal participant or 'trader-services' registration category, to allow for service providers to offer a range of products and services (without needing to register in multiple participant categories), and allow consumers to contract with multiple service providers for different services at their premises.

Transmission and access

The AEMC (and ESB) have, for some time now, been considering reforms to the transmission access framework to address inefficiencies in the network connection framework and accommodate the increasing concentration of renewable generation, while ensuring reliability of supply, including by:

  • developing renewable energy zones (REZ) as a means of coordinating, and co-locating, the construction of generation and network infrastructure;
  • creating new regulatory frameworks to fast-track key network expansion projects; and
  • exploring new ways to provide essential system services.

The ESB proposes to prioritise establishing a framework for REZ developments, but has also indicated that further reforms will be required in the medium term in order to address and manage network congestion, as well as other inefficiencies that can arise from the open transmission access regime.

Next steps

  • The ESB is seeking submissions from stakeholders on its proposed pathways for reform. Submissions are due by 9 June 2021.
  • Final recommendations on the Market Design are expected to be delivered to Energy Ministers in mid-2021.

Footnotes

  1. Each of these reforms is currently being progressed by the AEMC via separate rule change processes.

  2. Eg the minimum technical standards for DER and the rule change process regarding governance of DER technical standards.

Stay informed

Subscribe to our insights and updates