Market Review: Open

Overview

As a result of the pace of change in Australia’s energy market, Australia has outgrown the way that it prices and delivers energy. It will replace most of its current generation stock by 2040. The electricity system of the future is likely to be characterised by many relatively small and geographically dispersed renewable generators, connecting to windy or sunny parts of the network which historically have not needed large amounts of transmission capacity.
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As a result of the pace of change in Australia’s energy market, Australia has outgrown the way that it prices and delivers energy. It will replace most of its current generation stock by 2040. The electricity system of the future is likely to be characterised by many relatively small and geographically dispersed renewable generators, connecting to windy or sunny parts of the network which historically have not needed large amounts of transmission capacity. 

Why we need change

This rapid change in the type of technology deployed and where it is located means, generators and storage need to be provided with the correct locational signals for their investment decisions, and the tools to manage the growing risks from transmission congestion and losses.

Substantial and timely transmission infrastructure is likely to be required as this transition continues. These changes mean that there is a need to have a better way of co-ordinating generation and transmission investment decisions in order to better facilitate the transition that is occurring.

The current transmission access arrangements do not incentivise generators and storage facilities to locate and operate in a way that is most likely to minimise costs for consumers. Decisions on where to locate, and how to operate generation are not in lock-step with spare transmission capacity in the system or decisions on where and how much additional transmission capacity should be built. This makes it harder to keep power prices down. 

These problems won’t be solved by building transmission alone. That is why the solution to the challenges facing the grid has two parts: 

  1. actioning the Integrated System Plan (ISP) so that the right transmission is built 
  2. implementing transmission access reform so that the transmission network, and any new infrastructure built, is used effectively as possible over the coming years.

Access reform is about adapting the grid for new tech like renewables and storage in a way that stands the test of time and keeps power affordable, reliable and secure. It will also see a greater proportion of renewable energy actually make it to market, accelerating emissions reduction. And, as a major rethink of price signals in the NEM, it will give generators sharper incentives to locate in ways that work better for consumers as well as providing stronger and clearer signals to facilitate battery deployment across the NEM. 

Work through 2020

In March 2020 the COAG Energy Council tasked to continue working on the developing of the transmission access reform model through the Energy Security Board’s post-2025 market design process. This model will contain the two core elements of transmission access reform: locational marginal pricing and financial transmission rights. 

During 2020, the AEMC is doing the following to progress the reform:

  • Conducting modelling work and incorporating what is learnt into the final design of the reforms – stakeholders have told us they wanted to see detailed market modelling of the reforms to give a more accurate estimate of the benefits
  • Holding multiple public forums to discuss the modelling, work being undertaken and gain stakeholder input
  • Developing the detailed design of the model in consultation with a technical working group with more than 50 market body, industry, investor and consumer representatives
  • Working with the ESB to coordinate this with other workstreams of the post-2025 market design, in particular two-sided markets and ahead markets
  • Undertaking another round of formal consultation in Q3 2020 to gain up-to-date stakeholder views 

Key current documents

The AEMC published three papers on 07 September 2020, alongside the ESB’s 2025 consultation paper:

  • A transmission access reform interim report that  highlights the need for reform and how it relates to the ESB’s 2025 market design work as well as a detailed update on the preferred design and decisions that have been taken in forming this design, as well as overview of the quantitative analysis that has been undertaken – on both the benefits and the costs.
  • The NERA Economic Consulting report on the Cost Benefit Analysis of Access Reform providing an in depth analysis of NERA’s bottom up modelling of the benefits of implementing the reform in the NEM. 
  • The HARD Software report providing preliminary indications of the implementation costs of the reform. 

The interim report provides updated  specifications, reflecting stakeholder feedback to make sure the core features of locational marginal pricing and financial transmission rights are fit for purpose for the NEM, and can be implemented in a way that is as manageable and straightforward for participants as possible, while also delivering the greatest potential benefit to the NEM and consumers. The proposed design and implementation has been shaped by extensive engagement with stakeholders. 

Submissions to the interim report are due on Monday 19 October. Feedback to the proposed design can also be provided in response to the ESB’s consultation paper on post 2025 market design, of which transmission access reform forms an integral part. Stakeholders are invited to use the attached stakeholder submissions template to provide feedback on the questions posed in the transmission access reform updated technical specifications and cost-benefit analysis, and any other issues that they would like to provide feedback on.

The AEMC has also made available the simplified model of the reforms in action, which NERA Economic Consulting will be taking participants through at the public forum scheduled for 22 September 2020

Stakeholder Engagement

Activities to date

Through the course of the second review on the Coordination of Generation and Transmission Investment (COGATI), the Commission has considered 151 public submissions to four published papers, conducted twelve technical working group meetings, held two public forums and more than 200 bilateral meetings and workshops with the ESB, AER, AEMO, consumer groups, Transmission Network Service Providers, incumbent and prospective generators, existing and prospective investors, government departments and other interested parties.  This input has been invaluable in refining the proposed reform package.

Activities planned for 2020 

The focus of our stakeholder engagement this year will be on the technical elements of design and completing quantitative modelling of the reforms. This input will help us finalise the complete model for grid access reform in coordination with the ESB’s 2025 work. 

Public forums

In addition to two public forums held in 2019, we have already held one public forum on the international experience of Locational Marginal Pricing (LMP) and Financial Transmission Rights (FTR) markets. This forum heard from participants about their experiences in other markets with LMP and FTR. While new for Australia, the changes that we’re suggesting have been successfully in place for decades in many parts of the world including New Zealand, North America and Singapore. Materials from this forum can be found below. 

We are holding two further public forums:

  1. Results of quantitative modelling conducted by NERA Economic Consulting on the impact of the reforms in the NEM – 17 September 2020
  2. A simplified model of the proposed reforms in action. This forum will help explain to stakeholders how the model will work and what its benefits are – 22 September 2020.  

Technical working group meetings 

The AEMC formed a technical working group in 2019 made up of experts from industry, market bodies and consumer groups. The group has provided technical input into the development and assessment of the proposed reforms, meeting twelve times to date through the course of the review.  Members of the ESB’s technical working group on the post-2025 reforms are also now part of this group. 

We are planning a further technical working group discussion in September on the proposed complete technical design of the model.

Materials from the technical working groups can be found below. 

Bilateral engagement

Throughout 2020 the project team is holding a series of bilateral discussions with stakeholders on the design elements of the reform package, the modelling and any other questions stakeholders have in relation to the proposed reform and the review process. 

Background

The review

The COAG Energy Council terms of reference require the AEMC to report every two years on drivers that could impact future transmission and generation investment. 

The inaugural COGATI review, completed in December 2018, made recommendations for comprehensive reform to the way investment in generation and transmission is coordinated.

In February 2019, the AEMC began the second COGATI review. This review is expected to conclude in December 2020. Over nine papers have been published to date as part of this process, with the various papers being found below. 

Resources

Audio presentation

On 11 April 2019 the AEMC published an audio presentation which provided further explanation of one of the proposed models for reform: dynamic regional pricing (also known as locational marginal pricing). The audio presentation can be found here.
 

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Documentation

DISCUSSION PAPERS

AEMC documents

Submissions

Late submissions