ESB final advice highlights major reforms for Post-2025 Market Design
27 August 2021
27 August 2021
Ashurst have partnered with RenewEconomy to deliver a free webinar for the energy industry on 1 September 2021 to discuss major reforms in the national electricity market. Click this link and register to attend.
The Energy Security Board (ESB) was commissioned with the task to develop advice on reforms to the National Electricity Market (NEM) to meet the needs of the transitioning energy market up to and beyond 2025.
On 30 April 2021, the ESB published an options paper (available here) which was used as the basis for consultation with stakeholders on the detailed market design which would be recommended to the Energy Ministers in mid-2021. The options paper addressed four key categories of reform which are continued as theme for discussion in the final advice to the Energy Ministers dated 27 July 2021.
The reform pathways are categorised into immediate, initial and next term reforms, which could also be described as short term, medium term and long term reforms.
The final advice to the Energy Ministers was published by the ESB on 26 August 2021 and contained a number of major reforms which will have a significant impact on the design and operation of the NEM, some of which are already underway, however the most significant new are:
The ESB identifies four reform pathways in its final advice.
The ESB recommendations centre on the delivery of market based arrangements to value capacity as the generation mix of the NEM changes.
The most significant change in this area is the recommendation for the development of a new capacity market, or Physical Retailer Reliability Obligation. The ESB has prepared a straw proposal for this market using a certificate model where:
While the ESB has explored a certificate framework, the ESB does note that the use of existing contracts as the basis for a capacity mechanism is an alternative to the proposed certificate scheme, and that the assessment of this option will be a priority during the detailed design of the mechanism.
The options paper discusses a number of reforms to transmission and access. This adopts Renewable Energy Zone (REZ) Planning Rules and the Principles for an Interim REZ framework to address urgent planning restrictions for REZs, as well as other key measures set out below.
The ESB has asked the Energy Ministers to instruct the ESB to prepare a rule change for submission to the AEMC to progress the congestion management model, adapted for integration with the REZs. The congestion management model aims to encourage new generation and storage in the REZs but also lessen the likelihood that grid access is degraded by the connection of other generators outside the REZ.
At its heart, the CMM introduces a dual mechanism of:
The rebates would broadly be available to incumbents, and generators which locate in accordance with the planning framework (i.e. a REZ). Where the network hosting capacity is reached, even in a REZ, new generators connecting once capacity is reached will not be eligible for the congestion rebates.
Importantly, the locational marginal pricing and firm transmission rights which discussed in the Coordination of Generation and Transmission Investment market review by the AEMC do not form a part of the reforms proposed by the ESB. However, elements of these proposals will be seen in the CMM.
The ESB observed that work is underway to develop committed and actionable Integrated System Plan projects but there are challenges arising in building the new network relating to a range of planning, community, biodiversity, indigenous heritage and other concerns and the reluctance of network businesses to take on risk and cope with financing very large projects. There are larger questions about the network planning framework, the role of the ISP and the Regulatory Investment Test for Transmission (RIT-T). There is a question whether RIT-T could be streamlined and whether large transmission projects could be delivered more efficiently through competition rather than by incumbent transmission network service providers. This will form a part of the AEMC's current Transmission Investment and Planning Review. Ashurst recently released an Energy Alert on this review available here.
Essential system services and scheduling and ahead mechanisms which become increasingly more necessary with greater thermal generation retirement. Essential system services like frequency control (including fast frequency response service and enduring primary frequency response arrangements), operating reserve services and system security services need to be unbundled from existing arrangements in the spot market. ESB reforms identify the creation of an integrated ahead market or development of an inertia spot market.
Effective integration of distributed energy resources (DER) and flexible demand which facilitates greater consumer engagement in distributed energy and allows consumers to be rewarded for their flexible demand and generation. The increase in consumer engagement, including competition between DER service providers is also to be aided by a more robust consumer protection framework. The DER Implementation Plan aims to build consumer and market capability to support innovation, the integration of new business models and a more efficient supply and demand balance.
The DER Implementation Plan sequences immediate and initial regulatory, technical and market reforms that address emerging risks and builds capability to deliver benefits to all consumers from high levels of distributed energy resources and new energy services. The DER Implementation Plan aims to deliver the following outcomes:
Watch this space as there are exciting times ahead in the NEM. We encourage all interested stakeholders to:
Authors: Kate Phillips, Partner and Danielle Davidson, Senior Associate
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.
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