Market Review: Open

Overview

The AEMC published three papers on transmission access reform on 7 September 2020, alongside the ESB’s 2025 consultation paper.
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The AEMC published three papers on transmission access reform on 7 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.
  • 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.

We received 38 written submissions on the interim report (which were due on 19 October 2020) which are available below.

In addition, the ESB’s 2025 consultation paper received 92 submissions, which are available on the ESB’s website. Many of them also provided views on transmission access reform.

In general:

  • Stakeholders generally agreed that the current arrangements are not delivering optimal outcomes and recognised challenges associated with congestion. 
  • However, there was opposition from many generators/investors to locational marginal pricing (LMP) and financial transmission rights (FTRs).
  • A number of stakeholders supported REZs and many sought additional information on their design.

Having taken into consideration stakeholders’ feedback, the AEMC will not publish a final report in December on transmission access reform as was previously proposed.

Instead, the AEMC – as part of the ESB - is now focusing as a priority on progressing the work on renewable energy zones, as we see REZs as a key interim step, that will build towards the long-term solution of LMPs/FTRs.

Therefore, in December, the ESB will publish two papers:

  • A directions paper that will update stakeholders on the transmission access MDI, with a clear commitment from ESB regarding need for access reform and clarity re problems it is seeking to solve in the long-term.
  • A REZ stage 2 consultation paper, focusing on delivering REZ arrangements as priority in the interim, with these as stepping-stones on the implementation pathway to LMP/FTR.

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. 

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 the AEMC 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 contains the two core elements of transmission access reform: locational marginal pricing and financial transmission rights. 

During 2020, the AEMC has done the following to progress the reform:

  • Conducted modelling work and incorporated 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
  • Held multiple public forums to discuss the modelling, work being undertaken and gain stakeholder input
  • Developed the detailed design of the model in consultation with a technical working group with more than 50 market body, industry, investor and consumer representatives
  • Worked with the ESB to coordinate this with other workstreams of the post-2025 market design, in particular two-sided markets and ahead markets

Stakeholder Engagement

Public forums

In addition to two public forums held in 2019, we have now held three public forums during 2020:

The international experience of Locational Marginal Pricing (LMP) and Financial Transmission Rights (FTR) markets, held on 29 May. 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. 

The results of quantitative modelling conducted by NERA Economic Consulting on the impact of the reforms in the NEM, held on 17 September. This forum provided participants with a summary of the results of detailed bottom-up modelling of the benefits of the reform in the NEM, reflecting $6.2-8.2bn of total consumer benefit expected from the implementation of the reform till 2040. The forum also took a number of questions from participants on the approach to the modelling and the outcomes. 

A simplified model of the proposed reforms in action, held on 22 September. This forum helped to explain to stakeholders how the model for LMP and FTRs will work, using a simplified 4 node market model, and what its benefits are.

The transcripts to the forums held in September 2020 can be found below, along with the video on the simplified model presentation.

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 thirteen 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. 

The most recent technical working group, held on 25 September, addressed the complete updated design for the proposed reform, which was published on the 7 September 2020 in the interim paper. 

Materials from the technical working groups can be found below. 

Bilateral engagement

Throughout 2020 the project team held 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. Over eleven papers have been published to date as part of this process, with the various papers being found below. 

Other resources

The AEMC has prepared a list of frequently asked question, which can be found here

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

PUBLIC FORUM AND WORKING GROUP

AEMC Documents

Simplified model Simplified model - Installation and user guide
Technical working group notes - 28 May 2019 Technical working group notes - 14 June 2019
Public forum agenda - 8 July 2019 Public forum slides - 8 July 2019
Technical working group minutes – 5 September 2019 COGATI agenda - public forum - 18 October 2019
COGATI workshop slides - 18 October 2019 Technical working group minutes – 15 November 2019
Technical working group minutes - 5 February 2020 Technical working sub group modelling minutes – 24 February 2020
Public Forum - International experiences - slides - 29 May 2020 Public forum - International experiences - transcript - 29 May 2020
Technical working group minutes - 5 June 2020 COGATI technical working group: FTR funding and procurement paper
Technical working group minutes - 12 June 2020 COGATI technical working group: Loss FTR Funding and Procurement paper
Technical working group minutes - 18 June 2020 Technical working group minutes - 9 July 2020
COGATI technical working group: Contract market liquidity paper Technical working group minutes - 24 July 2020
COGATI technical working group: Transitionals and Simplification Technical working group minutes - 30 July 2020
COGATI technical working group: Market Power Public forum 17 September 2020 – presentation slides
Technical working group 25 September 2020 – minutes Technical working group presentation – Updated specifications
Public forum 22 September 2020 – presentation slides Frequently asked questions