INSIGHT

Seeking certainty during the energy transition

By Melissa Keane, Jazmine Elmolla
Energy Renewables

Immediate reforms to prepare for ageing thermal retirement 8 min read

There are several recommendations aimed at ensuring readiness for the retirement of ageing thermal generation in the Final Advice on the Post 2025 Market Design of the National Electricity Market (the NEM).

In this Insight, we analyse two of the most important, and imminent, reforms.

Key takeaways

  • The Energy Security Board's (the ESB) Final Advice on the Post 2025 Market Design (the Final Advice) of the NEM makes a number of recommendations to ensure that the NEM is prepared for the retirement of ageing thermal generation, such as coal-fired power stations.
  • Recommendations for immediate reforms include requiring generators to provide further information to the market around mothballing and seasonal shutdowns, and the introduction of a jurisdictional strategic reserve (JSR).
  • Rule change projects are likely to be initiated as a priority.

Background

In March 2019, the former Council of Australian Governments (COAG) Energy Council tasked the ESB with advising on what changes would be required to the NEM to ensure that it can accommodate an increasingly diverse and distributed generation mix, while still ensuring ongoing reliability of supply.

After completing a work plan over a period of more than two years, the ESB handed its Final Advice to the Energy National Cabinet Reform Committee. The Final Advice, which was publicly released on 26 August 2021, broadly provides for four reform pathways, one of which is resource adequacy and ageing thermal generation retirement. As part of the Final Advice, the ESB has recommended the introduction of a capacity mechanism (see our take on this fundamental market change); as well as more immediate reforms aiming to provide greater confidence that reliability will be maintained in the short term, whilst simultaneously preserving market signals so as not to undermine investor confidence.

This Insight provides an overview of two of these more immediate reforms proposed by the ESB.


Managing orderly exits

The problem

The ESB considers that existing information processes may not be fit for purpose for the future, as they were created without the exit of thermal generation or the need for transparency in mind. Under existing arrangements, generators are required to provide the Australian Energy Market Operator (AEMO) with information on their expected operations via two key processes:

  • the Medium-Term Projected Assessment of System Adequacy (MT PASA)1; and
  • AEMO’s Generator Information Surveys.2

Neither process provides sufficient information to allow the market to gain an understanding of a generator's unavailability or how long it would take to return a generator to service.

The proposed reform

The ESB has therefore proposed reforms to the information that a generator is required to provide to AEMO. It has recommended that additional information be provided, given a generator submits its availabilities for inclusion in the MT PASA, under a new framework that requires a generator report on:

  • a unit's status through reason codes, using internationally recognised reporting codes to report on electric generating unit reliability, availability and productivity; and
  • recall times, when triggered through a reason code.

AEMO prepares and publishes MT PASA outputs – they are publicly available and can be downloaded from its website. The ESB considers that the inclusion of the new reporting requirements in the MT PASA will provide granular information to stakeholders, including in relation to how existing participants' availability may change if units are recalled.

The framework is intended to provide greater transparency around when generators are available to supply, and the lead time required for recall from an outage, giving certainty to investors around the closures of ageing thermal plans.

The ESB did not propose to amend the Generator Information Survey for a number of reasons, including that the survey does not provide the 'near-term granularity that can be provided by the MT PASA.'

The amendments to the MT PASA will need to be made using the AEMC's rule change process. As at the date of this Insight, there is no open rule change to introduce these amendments.

Alternative reforms considered and seemingly dismissed

In April of this year, before publishing its Final Advice, the ESB prepared a report titled Post 2025 Market Design Options – A Paper for Consultation (the April Options Paper). In the April Options Paper, the ESB considered a number of reforms to increase transparency in the market and facilitate early exits, which it ultimately did not propose in its Final Advice:

  • Expanding the notice of closure exemption requirements: The current notice of closure requirements provides that a generator is able to seek an exemption to the 42 months advance notice period that is generally required when a generator intends to close. The ESB considered expanding the notice of closure exemption arrangements to include additional provisions targeting mothballing and/or seasonal shutdowns, such that an exemption would be required for any significant early withdrawal of capacity from the market. Stakeholders opposed the proposed reform, noting that it 'could easily become onerous and a barrier to efficient operational decisions by diminishing the flexibility of participants to operate their plant in response to prevailing market dynamics'. In acknowledging stakeholders' concerns, the ESB ultimately reached the view that any amendment to the notice of closure requirements would place an undue regulatory burden on participants, market bodies and jurisdictions.
  • Integrated process for early exits: The ESB proposed a new process under which additional information would be collated to allow a complete System and Market Impact Assessment to take place alongside the Australian Energy Market's exemption from notice of closure decision. This process would gather information on the operational risks and challenges arising out of an early closure, as well as the likely impact on wholesale prices. Under this proposal, all relevant information would be gathered as early as possible to allow state governments to assess the risks and take action if they are considered too great. As a last resort, a state government would have the option of entering into an Orderly Exit Management Contract with a retiring generator, under which the parties to the contract agree to keep the generator running until the risks of exit reduce to an acceptable level. Stakeholders were concerned that this integrated process would ultimately lead to an Orderly Exit Management Contract, which would further undermine the role of the market. The ESB acknowledged this concern and noted that the proposal is not without considerable costs and additional regulatory burden.

Jurisdictional Strategic Reserve

The problem

The ESB noted that a number of jurisdictions in the NEM are concerned about the increasing risk of unforeseen reliability events, citing exit of some generators in recent time within the 42 month notice of closure period.

Reform is considered to be particularly important in order to limit the instances of jurisdictions intervening in the market to ensure that supply meets reliability, given that interventions increase uncertainty in the market. There is a concern that, without reform, participants in the market do not have sufficient incentive to manage long-term capacity risk, leading to an outcome where consumers are bearing the risk of a failure to invest over the long term.

The proposed reform

In response to this concern, the ESB has recommended the introduction of a jurisdictional strategic reserve (JSR) which aims to provide jurisdictions with an additional risk management tool or a 'back stop', pending the introduction of a capacity mechanism.  The JSR would do this by facilitating the procurement of additional reserves to meet the requirements of a jurisdiction beyond the market wide reliability standard.

The key features of the JSR are as follows:

  • Each jurisdiction is responsible for determining the level of reserve (if any) it considers appropriate to its circumstances. This reserve is additional to AEMO's Retailer and Emergency Reserve Trader (RERT) portfolio.
  • If a jurisdiction decides that a reserve is required, then it can procure the additional reserve. Presumably the rules might also permit or require AEMO to procure the reserve as 'top up' RERT.
  • Whilst the ESB does not detail how the additional reserves might be established, jurisdictions (or AEMO) will presumably enter into reserve contracts in the same way that AEMO does to procure reserve for its RERT portfolio.
  • Additional reserve requested under the JSR will form part of AEMO's RERT. The ESB notes that in procuring additional reserves, jurisdictions are making a 'trade-off between the risk of load shedding and the cost of procuring additional reserves, above those needed to meet the market wide reliability standard.'
  • Because the JSR is an out of market mechanism, any reserves requested would not be relevant to considering the reliability gaps in AEMO’s reliability forecast contained within the Electricity Statement of Opportunities.
  • Any jurisdiction requesting a reserve is required to meet the fixed costs of the reserve. The ESB suggests these fixed costs would include the establishment and set up costs, as well as committed availability charges. It is possible that the fixed costs may be able to be shared with a neighbouring jurisdiction where there are benefits to that jurisdiction. In addition, it is open to jurisdictions to recover the fixed costs of reserves through separate mechanisms.
  • Variable costs of a JSR provider (for example fuel costs) are to be recovered under current RERT arrangements. This means that electricity consumers will only be required to cover the variable costs where the reserve is actually activated.
  • Any dispatch of reserves would occur in accordance with AEMO's Procedure for the Exercise of the RERT.

Noting that this reform was not included in the April Options Paper, the ESB proposes to implement the JSR using the AEMC's rule change process in order to allow for consultation with stakeholders on the final design. As at the date of this article, there is no open rule change to introduce the JRS.

Next steps

  • Energy Ministers met on 24 September to agree on the final package of reforms for consideration by National Cabinet. The final package is said to include 'enhancements to the transparency of generator availability' and the implementation of a JSR.
  • The ESB categorised the amendments to the MT PASA and the JSR as immediate reforms. On this basis, and subject to the views of and National Cabinet, we expect that rule change projects will be initiated as a priority.
  • Energy Ministers also agreed to progress further design work on a capacity mechanism. You can read more on what the future electricity market might look like with a capacity market here.

Footnotes

  1. The MT PASA is AEMO's principal method of forecasting the medium-term adequacy of the power system to stay within the reliability standard.

  2. This is a key input into AEMO’s Electricity Statement of Opportunities.

Stay informed

Subscribe to our insights and updates