The Finkel Review into the Future Security of the National Electricity Market was released on 9 June. The Report makes some 50 policy recommendations to address the so-called “energy trilemma” – providing affordable, reliable and low emissions electricity for the country.
We have reviewed the recommendations by sector to bring you the probable, real-world implications of this “Blueprint for the Future”. The detail is in the Report, however, and we suggest reading the relatively short sections before each recommendation to understand them fully. What is clear is that Finkel’s ambitious timeframes will put a strain on industry as much as they will the governments and regulators trying to achieve them. The Finkel Review is not the only reform package in town, competing with reviews such as the Vertigan Report of last year, the AEMC reviews and the upcoming ACCC inquiry into retail prices. Find out more about Australia’s new energy future in our Guide to new energy market transition.
The Report identifies the lack of a credible and lasting emissions reduction mechanism for the electricity sector as “the key threat to system reliability”. The solution offered is a new Clean Energy Target (CET), built off the back of the existing Renewable Energy Target (RET), to incentivise new low emissions investment. The CET and other market-wide reform recommendations in the Report are:
- Clean Energy Target. A CET, capable of achieving Australia’s Paris commitments whilst minimising cost impacts for consumers, should be implemented. The CET will award new eligible generators of all fuel types with emissions below a certain threshold with certificates, which retailers will be required to purchase. Existing low emissions generators will also receive certificates for any electricity produced above their historic output. Finkel recognises that the actual threshold will be a matter for government. Let the politics begin! The existing RET will remain unchanged, but not be extended. Renewable generators will not be able to receive LGCs and CET certificates. How the two schemes will interrelate will be closely watched by industry.
- Energy Security Board. A new, non-statutory body called the Energy Security Board (ESB), with members from AEMO, AER and AEMC and an independent Chair should be created to implement the Report’s recommendations. The ESB will be tasked with developing the data collection strategy below by the end of 2018. The role of the ESB needs to be carefully defined, given the potential overlap with existing bodies. More bodies do not necessarily mean greater accountability .
The Report’s recommendations which would have serious implications for generators are:
- Notice of closure requirement. All types of large-scale (not defined) generators should be required to give enforceable three years’ notice of closure. With the expected retirement of Australia’s coal generating plants and their replacement by variable renewable electricity (VRE), including Distributed Energy Resources (DER), in the near future, better transition planning is needed.
- New generator requirements. The AEMC should require new generators to have fast frequency response (FFR) capabilities. It should also assess if the licensing arrangements in South Australia should be rolled out across the NEM. A Generator Reliability Obligation should be implemented, requiring new generators to provide minimum levels of new (ie not contract existing) dispatchable capacity in regions where reliability is at risk in coming years. Wind and solar coupled with batteries (whether onsite or offsite), or gas fired generation, look like becoming the norm going forward.
- Connection standards. The standards for generators to connect to the NEM should be updated to address system strength, reactive power and voltage control capabilities. To be approved for connection, new generators must fully disclose any software or physical parameters that could affect security of reliability. This is aimed at those VRE generators, namely wind and solar, seen to be creating these security issues.
- Frequency response services. Existing synchronous generators should be required to change their governor settings to provide a more continuous control of frequency with a deadband similar to comparable international jurisdictions. Eventually, a market for FFR should be created, if there is demonstrated benefit. There may also be a tightening of frequency operating standards. If generators are subject to tighter obligations and required to provide more frequency control, this may reduce their ability to participate in a future FFR market.
- Strategic Reserve and a ‘day-ahead’ market. To supplement the CET, a Strategic Reserve mechanism should be created which allows AEMO to contract for a level of capacity to be held in reserve, outside the market. The mechanism should either enhance or replace the existing, ineffective Reliability and Emergency Reserve Trader and provide greater incentive for distributed demand response aggregation services. A ‘day-ahead’ market, whereby committed generation can be bid in for the following day, should also be considered.
Networks should prepare for greater regulation of their businesses, if the following are implemented:
- TNSPs to maintain sufficient levels of inertia. TNSPs should be required to maintain a level of inertia specified by AEMO for each region or sub-region, as well as a portion that could be substituted with Fast Frequency Response (FFR). Increased levels of VRE have driven this and standards for them will be the focus. Later on, an incentive framework for TNSPs to provide additional inertia could be implemented.
- Networks to maintain minimum local short circuit ratios. Networks should be required to maintain a minimum short circuit ratio to connected generators, and be allowed to implement a ‘causer-pays’ approach where the connection of a new generator causes the local short circuit ratio to drop below its minimum. Newly connecting generators should be required to prove they can meet all performance standards at the minimum short circuit ratio expected at their location in the future.
- Limited Merits Review. COAG Energy Council’s proposed reforms to Limited Merits Review, including a binding rate-of-return guideline with non-reviewable elements of the regulator’s decision, should be finalised and implemented ASAP.
- RIT-T and RIT-D tests. The RIT-T should be reviewed in 2020 to ensure that the COAG Energy Council’s reforms are having their intended effect. A review of the RIT-D should be undertaken at the same time.
- Totex approach to revenue setting. AEMC should undertake financial modelling to see whether or not networks have a capex bias. If so, an alternative model of economic regulation should be implemented. This is consistent with the current AEMC rule change request for a single network estimate (totex), rather than separate treatment of capex and opex. Finkel was clearly inspired by the UK leg of the Review’s tour, where the move to totex in 2013 has been considered a success.
The Report stresses that gas-fired generation is critical in providing energy reliability. Accordingly, the technology-neutral CET should benefit gas-fired generators as well as renewable players. The Report does concede, however, that even with the benefit of its suggested reforms, higher gas prices are likely to stay. Focussing on gas market reform, the Report’s recommendations are:
- Contractual Visibility. AEMO should have access to generators’ gas supply information so that it can better predict shortfalls in fuel supply. This will presumably allow AEMO to better assist the Minister for Resources in making export-control decisions under the new Domestic Gas Security Mechanism (draft regulations released last week).
- Last Resort Power. AEMO should be given a ‘last resort’ power to enter into commercial arrangements with generators to make them available during ‘emergency situations’. No details on what would constitute ‘last resort’ or an ‘emergency situation’.
- Exploration and Supply. Governments should prioritise gas exploration and development and avoid blanket bans and restrictions that are not evidence-based. Better access to scientific data and improved compensation and land access regimes may ease community angst.
Retailers, consumers and DER
Retailers should consider the impact of the following recommendations:
- Distributed energy participation. DERs can have benefits for network security by providing services such as frequency control, reactive power and voltage control. However, clusters of DERs can also cause voltage spikes, flicker and reverse power flows. The AEMC should propose rules changes to better incentivise and orchestrate DERs. DNSPs will welcome some certainty in this area, as will the DER industry, although it will come at a cost.
- Data collection. COAG’s Energy Council should develop a data collection framework to provide static and real-time aggregated data on DER, which currently lack visibility. Consumer access to energy data should be increased, allowing consumers to make more informed decisions about retail offers, investment and fuel choices. Concerns about data security and privacy should be considered by others later on.
- Demand Response. The AEMC should undertake a review to recommend a measure to facilitate demand response in the wholesale market, with the intention of a rule change by mid-2018.
- Cyber-Security. The following actions on cyber-security should be accelerated: voluntary good practice guidelines and industry standards, enhanced detection, speed and automation of threat intelligence and clarity on responses to nationally significant cyber-attacks. An annual cyber security preparedness report, including an assessment of the “cyber maturity” of all energy market participants and an update on their testing procedures, awareness and detection should be undertaken.