ESB Capacity Mechanism High-level Design Paper released

What you need to know

The Energy Security Board (ESB) has released a high-level design paper outlining the proposed capacity mechanism for the National Electricity Market (NEM), including its proposed direction on fundamental design decisions and the key considerations informing these positions to be submitted to federal and State .

The design paper proposes a capacity mechanism which pays providers of capacity to keep capacity available during certain periods to ensure there is a sufficient energy mix to deliver affordable and reliable power to consumers. 

Some of the key features of the proposed mechanism are set out below:

• All resources contributing to capacity requirements (whether new or existing) would be eligible to participate in the capacity mechanism. This means that thermal plants, as well as batteries, hydro, pumped hydro storage and demand-side resources would be eligible for payment under the mechanism. However, the ESB has flagged that the final choice as to the mix of eligible resources would be a decision of each State based on the specific capacity needs of that State.
• A centralised approach with AEMO forecasting the capacity requirements and purchasing the capacity required. However, the ESB intends to consider further opportunities for market participants to contribute to forecasting by AEMO, such as a hybrid model where retailers have a role in forecasting their own needs and procuring capacity. 
• Capacity providers will be required to meet performance obligations to ensure that the mechanism's objectives are met. The design paper proposes that the obligation is tied to availability across the delivery year and bidding during periods of stress (such as lack of reserve periods) with weighted payments tied to both of these obligations, meaning that it covers all periods of system stress throughout the year and not just peak periods.
• The ESB is still considering how to account for transmission network constraints which may limit the ability of capacity providers in one part of the grid to meet demand in another location. Although two approaches have been proposed in the design paper, the ESB has not yet formed a view and is seeking feedback on the appropriate approach. 
• AEMO would hold capacity auctions, award contracts and make payments to capacity providers.  Costs would be passed through to consumers via either networks or retailers.
  
  A copy of the design paper can be found here.

What you need to do

Stakeholders can submit submissions on the design paper via email to info@esb.org.au. Any confidentiality claims should be clearly indicated by noting "confidential" in the document name and body of the email. The ESB will then publish submissions on the Energy Minister's website, subject to confidentiality. 

Submissions on the paper are due by 25 July 2022, with details of a stakeholder webinar to be confirmed in coming days. 

The ESB will return a draft detailed capacity mechanism design to the Energy Ministers by December 2022, which will then be put to stakeholders for further consultation. The final detailed capacity mechanism design will be presented to the Energy Ministers in February 2023.