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.
- 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.
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.
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:
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:
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:
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:
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.
- 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.
The MT PASA is AEMO's principal method of forecasting the medium-term adequacy of the power system to stay within the reliability standard.
This is a key input into AEMO’s Electricity Statement of Opportunities.