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

With the pace of change in the type of technology deployed and where it is located, Australia has outgrown the way it prices and delivers energy.  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 therefore likely to be required. 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 integral to Australia taking the cheapest, fastest and fairest path on its transition to a low-emissions power system. It will integrate new technologies into the national grid in a way that is reliable, secure and works in consumers’ best interests, while also providing increased certainty and better information for market participants.

Work through 2020

In March 2020 the COAG Energy Council tasked the AEMC with developing draft rules by December 2020 for an access 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 26 March 2020:

  • A transmission access reform update paper that gives an overview of the access model’s features and explains how the Commission will further develop and model the proposed access reform as part of Energy Security Board (ESB) market design work during 2020.
  • A technical specifications report that provides a blueprint of the current transmission access model. This blueprint incorporates stakeholder feedback and is the starting point for continuing design work with stakeholders during 2020.
  • A benchmarking study conducted by NERA Economic Consulting on the benefits and costs of transmission access reform based on the implementation of similar reforms in other jurisdictions. The study estimates reform benefits that considerably outweigh the costs and also provides commentary on learnings from other jurisdictions.

The blueprint provides specifications to make sure the core features of locational marginal pricing and financial transmission rights are fit for purpose for the NEM, which have been shaped by extensive engagement with stakeholders. 

Locational marginal pricing and financial transmission rights are also highly interdependent with two other key areas of the ESB’s 2025 market design. They are a necessary feature of two-sided and ahead markets. Without the means to manage congestion risk, parties may not be willing to provide as much capacity as they could in a two-sided and ahead market. Therefore, the changes recommended in COGATI are critical elements for achieving a two-sided and ahead market.

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 consultation papers, conducted six technical working group meetings, held two public forums and more than 130150 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 before rule drafting later in the year. To register your interest in any of the below events, please email russell.pendlebury@aemc.gov.au.

Public forums

In addition to two public forums held in 2019, in 2020, we have 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 planning to hold two further public forums:

  1. Results of quantitative modelling conducted by NERA Economic Consulting on the impact of the reforms in the NEM - August.
  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 – August. 

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 eight 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 further technical working group discussions during July and August on key topics associated with the technical development 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 COGATI 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