Power & Utilities - Year in Review
Effect of COVID-19
2020 was a pivotal time for the energy sector in Australia. Extensive Government-imposed restrictions made it challenging for many industries to follow a "business as usual" approach - this was also true for the energy sector, despite energy supply being an essential service for all Australian businesses and households. 2020 saw AEMO and network operators faced with the challenge of "keeping the lights on" in response to the increasing penetration of renewables, distributed energy resources and network stability issues.
In response to the COVID-19 pandemic: the Australian Energy Market Operator (AEMO) enacted its full pandemic response plan to ensure it could continue to operate Australia's energy markets safely, three energy market bodies (AEMO, the Australian Energy Regulator (AER) and Australian Energy Market Commission (AEMC) released a joint market body prioritisation framework for upcoming regulatory reforms, and the AER released and twice-updated its Statement of Expectations of Energy Businesses, setting out the steps energy businesses are expected to take to protect customers and the market (the Statement will continue to apply until 31 March 2021).
The Energy Transition continues
Ashurst is proud to partner with clients shaping tomorrow and leading the charge across all areas of the energy transition. We have assisted in developing carbon trading strategies for major emitters as well as helping our clients play their part in achieving net zero CO2 emissions, specifically with the development of carbon neutral products and Climate Active certification.
See our two major global reports on Oil & Gas and Energy Transition here:
The Future of LNG and Natural Gas Infrastructure
Powering Change – Energy in Transition
This year, the Federal Government announced its Technology Investment Roadmap and the first Low Emissions Technology Statement (Statement) (to be released annually going forward). The 2020 Statement identified major opportunities and challenges in the technology space, specific economic stretch goals (including clean hydrogen at under $2 per kilogram) and priority low emissions technologies, with a distinct focus on clean hydrogen, energy storage, low carbon materials, carbon capture and storage and soil carbon. The 2020 Statement signalled that, in principle, the Federal Government will not undertake new investments in mature technologies (being coal, gas, solar, wind and hydro projects).
To gauge what the Australian energy sector thought of the initiative, Ashurst ran a series of webinars to explore the key themes and barriers to the successful implementation of chosen technologies. View the series here:
Technology Roadmap Event Series
Implementation of Australia's National Hydrogen Strategy (announced in November 2019) has now commenced and the high level of interest in hydrogen projects has continued throughout 2020. In March, the Council of Australian Governments (COAG) Energy Council established the Hydrogen Project Team, marking a major step towards the advancement of Australia's hydrogen industry. Six months later, Australia and Germany signed a new agreement for a joint feasibility study to investigate a new supply chain between the two countries for hydrogen produced from renewable sources (ie green hydrogen). In July, the Australian Renewable Energy Agency (ARENA) shortlisted 7 projects for its $70 million Renewable Hydrogen Deployment Funding Round, with results expected mid-2021. This compliments the Clean Energy Finance Corporation (CEFC)'s $300 million Advancing Hydrogen Fund, as well as State-based programs designed to incentivise and facilitate investment in hydrogen projects. We are proud to support a number of clients participating in all aspects of the hydrogen supply chain across Australia.
2020 has also seen a focus on creating Renewable Energy Zones (REZ) in NSW and Victoria. REZs are areas with significant renewable energy potential, but many are currently limited by network connection issues (including absence of sufficient transmission capacity) or other barriers. In NSW, the Energy Corporation of NSW will coordinate the development of transmission and generation in the Central-West Orana region (where the NSW Government has committed to investing more than $40 million, and has attracted more than 27GW of interest from developers), the New England region (where the NSW Government has committed to investing $78.9 million), the South-West region and the Hunter-Central Coast and Illawarra region (each of which are in early stages of development). The Victorian Government has set aside $540 million to develop six dedicated REZs from Mildura to the east Coast. In August, the Queensland Government announced it would invest $145 million to establish three REZs in southern, central and northern Queensland.
Ashurst continues to play a key role in the renewable energy sector, having advised on over 50 renewable energy projects across Australia in 2020, from project development and offtake, to regulatory and financing aspects. Some examples include the Urannah Pumped Hydro-Electric Scheme project, Infrastructure Capital Group's co-investment in an Australian renewable energy investment platform, Vena Energy's Wandoan South Battery Energy Storage System, power purchase agreements for CleanCo Queensland for offtake from the Western Downs Solar Project and the Macintyre Wind Farm, and for EnergyAustralia for an energy storage services agreement relating to the Kidston Pumped Storage Hydro Project. We have assisted with innovative funding arrangements for Brighte Capital and worked to develop a number of innovative customer purchasing models. Ashurst also advised on the project financing for the Snowtown 2 Wind Farm in South Australia and the Murra Warra Wind Farm (Stage 2) in Victoria.
Ashurst's involvement in reshaping the Australian energy industry throughout 2020 has included advising on M&A transactions and strategic agreements valued in excess of $1 billion.
Regulatory reform
Some key reforms implemented in the National Energy Market (NEM) this year, or proposed to be implemented, included:
- June – The AEMC's decision to implement a wholesale demand response mechanism, under which large customers will be able to actively participate in central dispatch by selling demand response in the wholesale market either directly or through a "Demand Response Service Provider". Wholesale demand response will commence in the NEM on 24 October 2021.
- July - The AEMC's decision to begin consultation on six proposed rule changes to deliver essential system services, relating to the introduction of:
- a synchronous services market;
- an operating reserve market;
- a fast frequency response market ancillary service;
- reforms to the system strength framework;
- a capacity commitment mechanism for system security and reliability services; and
- ramping services.
These proposed changes are closely aligned with the intent of the work of the Energy Security Board (ESB) in developing its post-2025 NEM market design.
- August - the AEMC's decision to begin consultation on the "Integrating Energy Storage Systems into the NEM" rule change request submitted by AEMO. This proposal seeks to change how grid-scale batteries, aggregations of smaller batteries, and new business models with a mix of technologies behind the connection point (ie hybrid generating systems) register and participate in the NEM. For more information on the integration of energy storage and hybrid facilities, see AEMC seeks feedback on integrating energy storage into the NEM.
- September - the ESB's release of a consultation paper, as part of its post-2025 NEM market design work, covering seven market design initiatives. The market design program has three key phases of development, setting out with a number of 12-18 month deliverables, intermediate term deliverables (to be implemented before 2025), and longer term deliverables (likely to be implemented after 2025). For more information on the post-2025 market design, see NEM Post-2025 Market Design: ESB releases Consultation Paper.
- the AEMC's continued development of the Coordination of Generation and Transmission Investment (COGATI) reforms, which propose to (among other things) introduce dynamic regional pricing, facilitate REZs through generators funding transmission infrastructure, and introduce financial transmission rights. The COGATI reforms are being progressed as part of the ESB's post-2025 market design work.
- November - AEMO requested that the AER make a T-3 reliability instrument, applicable to the NSW region of the NEM for trading intervals between 3pm and 8pm (AEST) each weekday from 1 Jan to 29 Feb 2024. The decision must be made by 31 December 2020.
In November, following the introduction of interim reliability measures, AEMO requested that the AER make a T-3 reliability instrument, applicable to the NSW region of the NEM for trading intervals between 3pm and 8pm (AEST) each weekday from 1 Jan to 29 Feb 2024. The AER must make its decision by 31 December 2020 and, if triggered, could result in a wave of new offtake agreement opportunities for reliable generation (such as energy storage services agreements for batteries) in New South Wales being offered by retailers.
Looking beyond the NEM, there has also been significant change in the Western Australian electricity market, with the Pilbara Reforms to the North West Interconnected System reaching the implementation phase and with the continuation of the Western Australian Government's Energy Transformation Strategy, which will see substantial reforms to a number of key aspects of the Wholesale Electricity Market introduced in October 2022.
The Federal Budget outlook
The 2020-21 Federal budget (Budget) reflects the Federal Government's commitment to provide reliable, secure and affordable energy. Major projects such as the Marinus Link, Project Energy Connect and VNI West have been designated up to $250 million in funding to accelerate their development – confirming the Federal Government's focus on improving transmission infrastructure.
Ashurst has led some critical energy infrastructure projects this year, including the AGL Cribb Point regassification project in Victoria, waste to energy projects in NSW and Victoria, and connections to the proposed Copperstring 2.0 transmission line in north Queensland.
The Budget allocated $67 million in the Budget to back reliable microgrids in regional and remote areas. For Western Australia, the goal of delivering cheap and reliable energy has been promoted through $28.5 million of funding for the South West Interconnected System's "Big Battery Project" being developed by Synergy, and a WA based microgrid program.
The Budget also focused on emissions reduction strategies by allocating $45.2 million to progress reforms to make it easier and cheaper for businesses to participate in the Emissions Reduction Fund, and to support investment in offshore clean energy generation and transmission.
The Federal Government also committed to setting up a Regional Hydrogen Export Hub, with $70.2 million allocated to scale-up demand and take advantage of the advancements in this low emissions energy source.
Investment in innovative technology
In 2020, the Federal Government announced a $1.9 billion investment package in future technologies to lower emissions – this will be a focus of the five priority technology areas set out in the annual Technology Investment Roadmap.
The Federal Government also committed to providing ARENA with funding of a guaranteed baseline of $1.43 billion over 10 years. This will be supplemented, together with the Clean Energy Regulator, with a portion of the $2 billion Climate Solutions Fund, and ARENA will also become a clean technology grant hub for future initiatives with a new $193.4 million grant provided to deploy targeted programs. ARENA's current funding opportunities for technology projects are the Advancing Renewables Program, Research and Development Program, Innovation Fund and Future Fuels Fund.
In partnership with our clients, Ashurst is at the forefront of developing a range of market first low-emissions technologies including utility-scale batteries, electric vehicles (EVs) and hydrogen technologies. This year, Ashurst has advised AGL on its EV & Charging Station business, which included innovative subscription offerings, software/data and a significant ARENA funding project. Other new technology projects such as microgrids, smart metering, flexible generation and grid support software have also been a highlight.
Outlook for the Australian energy sector in 2021
The appointment of a new CEO for AEMO is likely to occur in early 2021 following Audrey Zibelman stepping down after nearly four years in the role. Zibelman is taking up a job at "X", a new subsidiary of Alphabet Inc (the parent company of Google). Nico Ficca (a previous non-executive director of AEMO) has been appointed the interim CEO.
Following the recent announcement of the Regional Hydrogen Export Hub, further developments are likely to be announced early next year as the project gains traction.
The Federal Government is also reviewing the operation of the gas sector. In October 2020, the Department of Industry, Science, Energy and Resources released an issues paper for comment on whether a prospective gas reservation scheme could succeed at a national level. The resulting position is likely to be released next year.
In 2021, we can also expect to see the release of a Federal EV strategy (originally flagged for release this year) to provide policy direction in the EV sector in Australia. We also expect to see the Australian Competition and Consumer Commission finish its consultations in relation to rules for the rollout of the consumer data right in the energy sector. The consumer data right will require energy retailers to share consumer energy data with accredited service providers (such as comparison sites) and consumers, in a standardised format, subject to consumer authorisation. The consumer data right was recently introduced in the banking sector and this consultation follows the Federal Government's announcement to expand it to the energy sector, with a view to promoting competition in the sector.
On 1 October 2021 the "five minute settlement" will come into operation, followed shortly by the wholesale demand response mechanism. The ESB should also present its final preferred post-2025 NEM market design to Energy Ministers by the middle of the year, which is expected to shape regulatory change for years to come.
Ashurst has been powering change in the energy sector throughout 2020, servicing our clients on a range of innovative matters. Ashurst is looking forward to continuing to drive this conversation in the Australian energy sector in 2021.
Author: Madeleine Hay, Lawyer and Tristan Shepherd, Senior Associate.
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