In March 2017, the South Australian State Government (State) announced its new energy plan (Energy Plan).[1] Under the Energy Plan, the State intends to commission a new government-owned gas-fired power station and large battery array, incentivise new privately-owned generation, introduce new local powers to strengthen control over aspects of the National Electricity Market (NEM), and introduce new regulation requiring energy retailers to source a percentage of their electricity from generators located within South Australia.

The goal of the Energy Plan is clear: the State is seeking to urgently address the issues affecting the State's energy security, including systemic failures such as those which resulted in volatile prices and load shedding events during 2016 and early 2017, and the unprecedented state-wide "system black" event which occurred on 28 September 2016.

When introducing these new measures, South Australian Premier Jay Weatherill made it clear that the State considers the Energy Plan a protective measure, made necessary due to the lack of flexibility and resilience of the NEM to adequately respond to Australia's looming energy crisis.

The release of the Energy Plan has prompted a flurry of reactions; from government, industry and the public at large. While a number of industry players and pundits have expressed support for the Energy Plan, many others, including the Federal Government and the Grattan Institute, have cautioned that the State's "go it alone" strategy could undermine the NEM, drive up prices, and further exacerbate the issues affecting the national market.

In this article, we unpack the key points of the Energy Plan, look at the steps taken by the State to implement the plan, and consider these new policies within the context of the NEM as a whole.

This article does not address the aspects of the Energy Plan concerning the State's new gas policies.

Issues affecting the NEM

For all of the controversy surrounding the Energy Plan, few dispute the contention that there are a number of serious issues affecting the NEM. The risk of a looming energy crisis is widely acknowledged by stakeholders on all sides. Rather, the key points of contention appear to be "what is responsible for the present state of the NEM?" and "what can be done to fix it?". The scope of this article precludes the authors from detailing what commentators have identified as the current issues with the NEM, or plans to address them. For a comprehensive discussion of these issues, we refer to the recently published Final Report from the Independent Review into the Future Security of the National Electricity Market (Finkel Review).[2] 

South Australia's Energy Plan and the NEM

New generation and storage plan

The State has indicated that it will commission a new government-owned 250 megawatt (MW) gas-fired power station, which will operate to prevent shortfalls in supply by ramping up generation in times of peak demand.

While private investment will be sought to partially fund the $360 million project, the power station will remain principally owned by the State, and operated under State direction.

The State has indicated that the generator will provide stabilisation and secure supply in South Australia by:

  • generating a large volume of electricity to replace the capacity of retired and retiring coal-fired generation assets, including generators located in South Australia (such as the 240 MW Playford B Power Station and the 520 MW Northern Power Station) and those in Victoria which currently supply electricity to South Australia (such as the 1,600 MW Hazelwood Power Station);
  • reducing the State's reliance on interstate generation during times when intermittent sources are not generating;
  • being capable of quick ramp-up and throttling to meet sudden changes in demand; and
  • stabilising the system to ease frequency volatility.

Accompanying the power station will be a 100 MW battery storage array which, when built, will be among the largest of its kind in the world. The batteries are intended to smooth out the intermittency of South Australia's renewable generation sources and, with clever planning, the array could also be used to simulate the stabilising inertial effects of large conventional generators. The State has indicated that the batteries will be among the projects funded by its new $150 million Renewable Technology Fund; a fund which the State has said will support investment in "clean, dispatchable and affordable power".

It remains to be seen how the State Government intends to structure the new assets within the NEM, but it is quite possible that they will be held by a government-owned corporation incorporated under its own enabling legislation.

In order to sell electricity into the NEM, the government-owned entity would first need to obtain a generation authority from the Australian Energy Market Operator (AEMO) in accordance with the National Electricity Rules (NER). Provided that the entity holds all other relevant authorisations and operates in accordance with the NER, then from a regulatory standpoint the entity would be treated like any other generator in the NEM. This structure would be relatively simple for current NEM regulations to accommodate.

In addition to the above, the State has indicated that it will enter into one or more large-scale agreements to attract investment in new power generation in South Australia. The State has launched a tender for additional power projects, which could provide up to 75% of the government's own electricity needs.

While these policies are certainly significant, much of the detail around how they may be put into practice remains unknown. Until such time as this information is released, it is difficult to say with any certainty how the proposed new power station and battery storage array might impact the NEM. We understand that the two Expression of Interest processes which the State ran in March/April this year attracted considerable interest. The State is now running Request for Proposal processes, and is expected to award tenders later this year.

New local powers over the NEM

On 24 April 2017, the South Australian Parliament amended the Emergency Management Act 2004 (SA) (Act) to give effect to one of the more controversial components of the Energy Plan –- the grant of new ministerial powers to intervene in the NEM to address emergency supply shortfalls within the state.

By making these amendments, it appears that the State is seeking to avoid a repeat of the February 2017 load shedding incident, in which AEMO did not order the Pelican Point generation plant to run at full capacity. This resulted in a power outage throughout significant portions of South Australia (although later reports indicated that electricity may have been cut off to as many as 60,000 people unnecessarily).

These amendments provide that the South Australian Energy Minister (Minister) may declare an "electricity supply emergency" if the Minister considers, on reasonable grounds, that the supply of electricity to all or part of the South Australian community is disrupted to a significant degree, or that there is a real risk that it will be.

The declared period may be for up to 14 days, and may be extended with the approval of the Governor of South Australia.

During an electricity supply emergency, the Minister (or a delegate of the Minister) may:

  • restrict electricity flow on an interconnector;
    • give a direction (of a kind which AEMO has power to do so under other legislation) to any other participant in the NEM; and
    • suspend the NEM spot market in South Australia; and
  • direct any person who engages in the generation of electricity to generate and dispatch that electricity in accordance with the requirements in the direction.

Where the Minister provides a direction under the Act, the Minister may also consult with the relevant participant on the direction. The Minister must take steps to avoid unduly interfering with the NEM, the National Electricity Law (NEL) and NER where it is reasonably practicable to do so.

Any generator the subject of a Ministerial direction will be compelled to comply with it. Failure to comply can result in a penalty of up to $250,000, and can also result in criminal penalties. This duty is expressed to apply despite any other law, including the NEL.

The Minister may also direct any person to provide such information and documents as are reasonably required by the Minister to determine whether there is (or whether there is likely to be) an electricity supply emergency, to plan for the future exercise of powers, and to otherwise administer these laws. Non-compliance with a request for information or documents carries a penalty of up to $100,000 and may also attract criminal liability.

While the purpose of the legislation is understandable, there a number of issues which remain unclear. This lack of clarity is particularly concerning, given the serious penalties which may apply for non-compliance. In particular:

  • there is a question of whether, and to what extent, the South Australian Parliament can pass legislation with extra-territorial application broad enough to impact on the NEM as a whole, including AEMO's operations outside of South Australia and market participants in other states. A similar question arises as to whether the Minister's discretionary powers can also extend this far;
  • the provisions governing the circumstances and manner in which these powers may be used are subject to uncertain terminology, such as “significant degree”, “reasonably required” and “reasonably practicable”;
  • the State maintains that these powers are intended to be used as a last resort, only "if the market does not act in South Australia's best interest". However, it is not clear what this means, and further, it is not the role of the market to act in the best interest of any government and it is impractical to expect market participants to do so; and
  • what example this may set for other NEM jurisdictions (who may wish to introduce similar legislation), and how conflicts in law between these jurisdictions may be settled.

Soon after the introduction of the Energy Plan, Federal Energy Minister Josh Frydenberg indicated that the Federal Government was seeking advice as to whether these broad powers are in breach of the NER.

Electricity Security Target Scheme

As part of the Energy Plan, the State unveiled plans to introduce an Electricity Security Target Scheme (EST Scheme). According to the State, the EST Scheme is designed to reduce South Australia's reliance on electricity derived from coal-fired power stations in Victoria (supplied through the interconnector), while also encouraging "cleaner" energy generation within the State.

The State has produced draft legislation called the Electricity (General) (Electricity Security Target) Variation Regulations 2017 (SA), which would amend the Electricity (General) Regulations 2012 (SA) to give effect to the EST Scheme.

In essence, the EST Scheme would require local electricity retailers who sell under the National Electricity Retail Law to source a minimum percentage of their power from local generators.

Under the EST Scheme, NEM-scheduled generators that use gas or certain renewable sources may apply to be registered as an “accredited electricity generating plant”. Operators of accredited generating plants may create a certificate for each megawatt hour (MWh) of electricity they generate, which retailers must then purchase from the operators, and surrender to the Essential Services Commission of South Australia (ESCOSA) at the end of each financial year for review. The liability of each relevant retailer to surrender certificates will be calculated with reference to that retailer's liable load for the year (as a proportion of the total amount of electricity purchased by relevant retailers operating in South Australia) against an "electricity security target". In the first year of the EST Scheme (2017/18) the electricity security target will be equivalent to approximately 36% of South Australia's electricity demand. This target will rise annually, until it reaches 6,000 gigawatt hours by 2025.

A liable retailer will be in breach of this obligation if it fails to surrender certificates equal to 90% or more of its liability in any one financial year. The maximum penalty for non-compliance is $1 million.

The price of each certificate will be capped at $50 per MWh under the legislation. While retailers may recover the cost of purchasing certificates from customers through their retail electricity prices, the State has indicated that the impact from the increase in competition from local generation "should offset any cost recovered by retailers from consumers".

Controversially, the legislation specifically requires "accredited electricity generating plant" to be capable of supplementing South Australia's electricity system with "real inertia" (energy generated by the kinetic movement of things such as turbines) as opposed to "synthetic inertia" (also called "fast frequency response") which wind, solar PV and modern battery storage systems can provide. At present, the only renewable generation sources which provide "real inertia" are solar thermal and pumped hydroelectric generators – but there are no such generators (of any material size) in South Australia at present, nor expected in the next few years. In the short to mid-term, this limits the practical effect of the proposed legislation to South Australia's gas-fired generators.

Critics of the EST Scheme argue that it unjustifiably favours "real inertia" as a solution to system frequency volatility, over a more technology-neutral approach which recognises the strengths which synthetic inertia can offer. In particular, some have cautioned against sole reliance on gas generation for frequency response, indicating that gas plant may be too slow to provide an adequate response to frequency dips, and that some may even be particularly sensitive to frequency disturbance. Further, others are concerned that incentivising gas generation will encourage the construction of new plant which will only serve to increase the demand for gas at a time where supply is already critically insufficient.

Consultation on the proposed amendments closed at the end of May this year.

New licencing requirements

In addition to the above, the State has introduced additional mandatory conditions to State-issued generation licenses, requiring proponents of new generation projects in the South Australia to demonstrate how they add to local system security. It is proposed that licence applications for new generators above 5 MW capacity will undergo additional assessment by South Australia's Office of the Technical Regulator.

These changes coincide with ESCOSA's own inquiry into updating the conditions of its generation licences to include additional technical conditions for wind and other inverter-connected generation plants. AEMO, as a technical advisor to ESCOSA, released a report in March this year recommending that all future generation licences for such generators include conditions requiring (among other things) that generators maintain minimum levels of performance during and after contingency events, improve system performance by maintaining stable interactions with the grid, and include active power control capabilities.

ESCOSA has already begun imposing the conditions recommended by AEMO on new applications. Interestingly, the Finkel Review includes recommendations that AEMO and the Australian Energy Market Commission (AEMC) continue to assess the effectiveness of South Australia's new licensing requirements and consider whether they should be applied to licenses in other NEM regions.

The practical impact of these new conditions may take some time to be felt in industry. Even so, additional licence conditions invariably means greater compliance costs for new licence holders, who may face disciplinary action and statutory penalties for non-compliance.

Conclusion

Much has happened in the energy sector in the months since the State introduced its Energy Plan. Despite the controversy surrounding the State's policies, it is hard not to draw parallels between the State's dissatisfaction with the NEM and the feelings shared by other governments, industry participants and stakeholders.

While the State has demonstrated an admirable commitment to achieving greater electricity security for its constituents, the NEM remains a system designed upon a foundation of cooperation between the states and federal governments; and continued cooperation will be needed to give the NEM the flexibility to transition into the future.