Supporting a reliable supply of electricity as the power system transforms: new AEMC review of reliability frameworks

11 July 2017

The Australian Energy Market Commission (AEMC) today published Terms of Reference for a review of the regulatory and market frameworks needed to support a reliable supply of electricity as the power system transforms to include more variable, intermittent generation and demand-side innovation.

Reliability of the power system is about having sufficient capacity to produce and transport electricity to meet consumer demand. A reliable system requires an adequate supply of dispatchable ‘on demand’ energy, as well as reliable transmission and distribution networks, and a secure operating state (‘system security’).

This review will focus on one element of reliability: how the market and regulatory frameworks operate to deliver an adequate supply of dispatchable energy. It will consider whether any changes are needed to regulatory and market frameworks to support investment in dispatchable energy, to better allow for energy to be supplied when consumers need it.

Dispatchable energy can be supplied through:

  • generation, including large-scale coal, gas and solar plants, wind farms, and distributed energy resources such as rooftop solar and battery storage
  • demand response and other demand-side mechanisms, for example when customers are paid to curtail their electricity consumption.

An adequate supply of dispatchable energy in the national electricity market is underpinned by investment decisions by market participants on the basis of market signals: expectations of future spot prices and the need for investors in new capacity to enter into contracts to hedge against future price risk. 

The changing generation mix, with increasing penetration of non-dispatchable variable generation as well as the exit of thermal generators, and a decrease in the liquidity and duration of hedge contracts, has implications for maintaining reliability of the system, particularly on extreme weather days.

The review will take into account learnings from initiatives such as the demand response pilot program being trialled by Australian Renewable Energy Agency (ARENA) and AEMO. It will also consider recommendations from the Finkel review such as the Generator Reliability Obligation, day ahead markets and mechanisms to address demand response priorities.

The AEMC will work collaboratively with AEMO, the Reliability Panel and the AER on the development of proposals and recommendations. In particular, the Reliability Panel’s Reliability Standards and Settings Review will be an important input. This review is considering whether the reliability standard and settings – a set of parameters that bear on price, investment and ultimately reliability in the national electricity market – will remain suitable for the market from July 2020.

We will publish an issues paper for stakeholder feedback later this year. We will also establish a technical working group, including representatives from conventional and renewable generators, energy service providers, networks, retailers and consumer groups, to help develop the recommendations.

We will provide a progress report to the COAG Energy Council by the end of 2017, with a final report due in mid 2018.

Media: Prudence Anderson, 0404 821 935 or (02) 8296 7817

EXPLAINER OF TECHNICAL TERMS

How is reliability and security managed in the national electricity market?

To keep the lights on, the power system needs to be:

  • secure – able to operate within defined technical limits, even if there is an incident such as the loss of a major transmission line or large generator
  • reliable - have enough capacity (generation and networks) to supply customers.

The Australian Energy Market Operator (AEMO) is responsible for maintaining power system security and reliability in accordance with standards and guidelines, including those set by the AEMC’s Reliability Panel.

What is a secure power system?

The power system is in a secure and safe operating state if it is capable of withstanding the failure of a single network element or generating unit.

Security events are caused by sudden equipment failure (often associated with extreme weather or bushfires) that results in the system operating outside of defined technical limits, such as voltage and frequency.

The AEMC is undertaking a comprehensive work program on system security. In June 2017, the AEMC published a report with a package of reforms to guard against technical failures that lead to cascading blackouts, and to deliver a more stable and secure power supply to Australian homes and businesses. Work in the area of system security is continuing (see overview below).

What is a reliable power system?

A reliable power system has sufficient generation and network capacity to meet the consumer load in that region.

Reliability events are caused by insufficient generation or network capacity to meet consumer load.

Reliability events due to insufficient generation and interconnector capacity are usually predicted ahead of time by supply and demand forecasting. The associated consumer load shedding may be shared across parts of the NEM.

What is dispatchable energy?

Dispatchable energy is guaranteed to be available when consumers need it. It includes dispatchable generation (eg. coal, gas, hydro) and storage (eg. batteries, pumped hydro), as well as dispatchable load, for example when an aluminium smelter reduces its consumption, or other types of demand response.

Variable, intermittent generation sources, such as wind and solar, are not dispatchable, as they may not be available if the wind isn’t blowing or sun isn’t shining.

Reliability of the electricity system is maintained through having a certain level of dispatchable energy available at all times.

What is demand response?

Demand response is all about consumers making informed choices about the quantity and timing of their electricity use.

In the national electricity market, the supply side of the market provides electricity at the wholesale price. On the demand side, consumers have an opportunity to change their consumption of electricity if the price exceeds the value they gain from consumption.

By actively participating in the market through such options, demand for electricity services is efficiently met through the lowest cost combinations of demand and supply side options.

Reduced energy consumption at certain times can create savings in the costs of meeting Australia’s energy needs; in particular, the need for investment in peak generation and more poles and wires. Where such investments are efficiently avoided, the overall costs of supplying electricity can be reduced.

OVERVIEW OF AEMC'S SECURITY AND RELIABILITY WORK PROGRAM