Finkel Report released: What's in store for Australia's energy future?

What you need to know

• Australian Chief Scientist Dr Alan Finkel AO has released his Independent Review into the Future Security of the National Electricity Market. 
• As expected, the report recommends the introduction of a clean energy target to encourage the development of low emissions generators. 
• Among an extensive list of recommendations, the report also recommends the adoption of a package of energy security obligations, the implementation of a generator reliability obligation, and the creation of a "last resort" power for AEMO to procure and enter into arrangements with gas-fired generators to make them available to maintain reliability (but without adopting a capacity market mechanism).

What you need to do

• Electricity generators should begin reviewing existing offtake contracts to determine the financial benefits or impacts of the proposed clean energy target and generator reliability obligations. 
• Industry participants should bear in mind that the Finkel Report is only one in a series of reviews into Australia's energy market and it will be some time before its recommendations become law. 
• Stay tuned for future alerts on the remainder of the report's extensive recommendations and outcomes of other reviews into Australia's energy and emissions reduction frameworks.

What led to the Finkel Report?

In October 2016, the COAG Energy Council commissioned an expert panel led by Australian Chief Scientist Dr Alan Finkel AO to conduct an independent review into the future security of the National Electricity Market (NEM).  

The review arose out of the black system event that struck South Australia on 29 September 2016, the first state-wide blackout since the creation of the NEM. 

The findings of the final report (Report) build on the issues identified in the preliminary report released in December 2016. 

Key recommendations 

The Report contains a number of recommendations to ensure the future security and reliability of the NEM, including:

• the adoption of a clean energy target (CET) to drive investment in low emissions generators across Australia;
• the introduction of a package of energy security obligations, including inertia requirements in each region or sub-region of the NEM, generator fast frequency response capabilities, and a wholesale update to connection standards; 
• a shift towards a market-based mechanism for procuring fast frequency response services where there is a demonstrated benefit in doing so; 
• the implementation of a generator reliability obligation to ensure the each region of the NEM retains adequate dispatchable capacity; and
• giving the Australian Energy Market Operator (AEMO) a "last resort" power to procure or enter into commercial arrangements to have gas-fired generators available to maintain reliable supply (but without a broader shift to a capacity market).

Of these recommendations, the CET scheme has received the most publicity to date.  Significantly however, the Report does not recommend any major reform to the operation of the wholesale electricity market. 

Implementation of a Clean Energy Target

Chief among the Report's recommendations is the introduction of a CET by 2020, which is intended to have similar operation to the existing renewable energy target (RET).  The CET is intended to assist Australia in reaching its Paris COP21 emissions reduction target of 28% by 2030 based on 2005 levels. 

The CET is widely seen as a pragmatic policy compromise given previous statements by the Prime Minister ruling out the introduction of an emissions intensity scheme (EIS) or an emissions trading scheme. 

Design of the CET

The Report suggests that the CET operate by:

• permitting eligible generators to create certificates for each MWh of electricity produced in proportion to how far the emissions of the generator fall below an emissions intensity threshold; and
• requiring electricity retailers to acquire a number of those certificates each year so that a proportion of their electricity is purchased from low emissions generators. 

The Report proposes a fuel-neutral CET in which all generators would be eligible to participate provided their emissions intensity meets or is below the threshold.  It flags further consideration of a mechanism to prevent renewable generators from benefitting from both the RET and the CET.

Other policy options

The Report also considers: 

• the implementation of an EIS, in which generators with an emissions intensity below a baseline receive credits and generators with an emissions intensity above a baseline are required to purchase and surrender credits; 
• a lifetime limit for coal-fired generators approximately consistent with the expected investment life of the generator; and
• combinations of the above.

In light of the Government ruling out the implementation of an EIS in Australia, the Report comments that the CET has a similar ability to an EIS to achieve emissions reductions while maintaining system security and reliability, and has the advantage of being able to be built on the existing design of the RET.

Energy security obligations

The Report proposes the adoption of a package of energy security obligations, which would:

• require transmission network service providers to provide and maintain fixed levels of inertia in each region or sub-region of the NEM, which could include a portion substituted by fast frequency response services;
• require new generators to have a fast frequency response capability; and
• require the Australian Energy Market Commission (AEMC) to review and update existing connection standards, to address matters such as system strength, reactive power and voltage control capabilities, performance during and after contingency events, and active power control capabilities.

The Report recommends that new generators be required to fully disclose software or physical parameters that could affect security or reliability.  This responds to concerns raised about the voltage ride-through settings of South Australian wind turbines which contributed to the state-wide black system event in September 2016. 

Market-based fast frequency response mechanism

The Report lends conditional support to measures currently being considered by the AEMC to require new wind and large-scale solar generators to have capability to provide fast frequency response services, including "synthetic inertia", to compensate for decreases in physical inertia from traditional synchronous generators across the NEM. 

In particular, it suggests that the AEMC's proposal to establish a market for the provision of fast frequency response services requires further refinement, based on evidence that a market mechanism would procure sufficient services to avoid impacting power system security. 

Generator reliability obligation

The Report recommends that new renewable generators be subject to a range of obligations to ensure that adequate dispatchable capacity is retained in all regions of the NEM. 

In regions where dispatchable capacity falls below a predetermined minimum acceptable level, new renewable generators would be required to bring forward new dispatchable capacity in that region (expressed as a percentage of their nameplate capacity). This may increase the costs of new intermittent renewable generation projects. 

The Report suggests that this new capacity need not be located on site and multiple renewables projects could pair with one new large-scale battery or gas-fired generation project to provide new dispatchable capacity. 

In our experience, battery storage projects present unique regulatory issues when developing new renewables projects, including:

• the interaction between renewable generator and battery connection arrangements into the national grid;
• registration requirements under the National Electricity Rules; and
• the creation of LGCs by power stations that include a battery storage component.

A number of other key issues in battery storage projects are covered in the paper in the forthcoming AMPLA Yearbook 2016 co-authored by utilities partner Paul Newman entitled "Innovative Distributed Generation Solutions:  Key Drivers, Risks and Opportunities".  

Last resort power to procure gas-fired generation

A further key recommendation is that AEMO be granted a last-resort power to procure and enter into commercial arrangements with existing gas-fired generators to make them available to maintain reliability in the NEM. 

Although the Report proposes that AEMO only be permitted to exercise this right if "certain conditions" are met, it does not provide any recommendations as to what those conditions should be. 

The Report also expressly rejects any broader moves for the NEM to be reformed into a competitive capacity market, which would require a significant and costly departure from the existing design. 

Other recommendations

The Report contains a number of other recommendations touching on:

• improving system security and planning; 
• electricity prices and new energy models for consumers; and
• improving governance arrangements in the NEM, including the establishment of a new Energy Security Board to be responsible for the implementation of the Report and for providing whole-of-system oversight for energy security and reliability.

Interestingly, the Report contains little detail on a number of items previously expected to feature significantly (such as other market reviews into five minute trading intervals).  A number of recommendations simply delegate responsibility for assessing the need for reform and its development to other committees and bodies (eg the AEMC and AEMO). 

A key message, then, is "watch this space".  We will explore the Report's other recommendations in alerts to be published in the coming weeks. 

The Finkel Report is not the last word…

Given recent media coverage and encouraging signs by both major political parties, it is tempting to think of the Finkel Report as the definitive word in Australian energy and emissions policy.  

However, at this stage the Finkel Report remains a non-partisan policy proposal.  There are also a number of other key reviews underway or recently completed that, if implemented, will also significantly affect the operation of the NEM, including:

• the proposed change to the National Electricity Rules to introduce a five minute trading interval. The proposal  favours new technologies such as batteries over traditional thermal generation, but will likely have significant impacts on the existing contracting market; 
• other AEMC reviews including distribution market models (examining how household generation may be better harnessed for demand response and how future tariffs can better reflect network costs), system security market frameworks, and 2017 energy sector priorities; and
• an April 2017 CSIRO "Electricity Network Transformation Roadmap" that identified measures to enable customer choice, lower emissions, lower costs, and to ensure system security and reliability.

Stay tuned for our future Energy & Greenhouse Alerts into the transformation of Australia's energy and emissions reduction frameworks.  

Authors: Paul Newman, Partner; Tristan Shepherd, Lawyer; Carrick Brough, Graduate.