Seeking certainty during the energy transition

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 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.

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.

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.

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.