Access reform in the national electricity market: a better way to coordinate generation and transmission investment

By Director Victoria Mollard, Senior Economist Tom Walker and Executive General Manager of Security and Reliability, Suzanne Falvi.

The Australian Energy Market Commission (AEMC) is working on a transition plan for the power system which is all about making sure there’s enough investment to build a bridge for new energy coming to the market. We must have the right amount of generation and transmission investment in the right place, and at the right time, to meet the community’s energy needs at least cost.

Renewables are an important and growing part of the power system and consumers have more technology in their hands than ever before to manage and control their energy use. The market is shifting from highly concentrated areas of generation close to coal mines to smaller, more dispersed, modular generation spread across the network.

Overall, this means the market design has to change in order to maintain our high levels of reliability, and the tools we use to keep the power system operating within technical limits have to change as well.

In this context it’s important to get generation and transmission planning right. State, territory and federal government ministers on the COAG Energy Council have asked us to monitor evolving market conditions in relation to how generators access and use the transmission network and produce a report every two years on what needs to change.

Our December report from the first Coordination of generation and transmission investment review (COGATI) took the opportunity to focus on Finkel panel recommendations around improved system planning. AEMC work is now underway across four action areas identified by last December’s report.

  1. Access – addressing the national electricity market’s significant transformation with unprecedented numbers of generators seeking to connect to the network. The new physics of the changing generation fleet has implications for the different patterns of investment that the transmission network is going to need.
  2. Charging – addressing changes needed to the way transmission infrastructure is paid for especially in light of the large amount of interconnectors being built.
  3. Connection – in order to reduce operational complexity and red-tape a stand-alone registration category for large-scale storage needs to be created
  4. Economic regulation – Given all the above we will need to consider consequential changes to regulatory arrangements.

This week we released our roadmap to implement a new framework for transmission network access and charging. Engagement with all interested stakeholders has started and submissions on the access and charging consultation paper close on 28 March.

If implemented this reform package would be one of the biggest changes to the electricity market’s design in 20 years affecting the way in which transmission and generation infrastructure is planned, funded and paid for.

We are seeking your feedback on options for how generators access and use the transmission grid – who pays and how to keep costs down. When it comes to issues of access and charges for network services it’s important to emphasise that our consideration of how to develop the market in lowest cost ways must be fair - especially for consumers.

These reforms are a necessary complement to embedding the Australian Energy Market Operator (AEMO)’s integrated system plan into transmission business planning, and improving the cost-benefit analysis processes undertaken by businesses and the Australian Energy Regulator (AER). The Energy Security Board is progressing this work, and will report back to the COAG Energy Council mid-2019. All the market bodies are working together on this coordinated approach to transmission policy development.

Consultation paper at a glance

The AEMC proposes to move away from the current model of regional electricity pricing to introduce dynamic regional pricing for generators. Generators would eventually be able to purchase firm transmission rights which provide them access to the price that consumers pay for electricity. Transmission companies would be compelled to provide transmission services consistent with the level of firm access paid for by generators.

Linking transmission capacity to access rights would extend the commercial drivers of generation investment to the transmission system. Doing so should promote more efficient investment in both generation and transmission.

The AEMC proposes that where congestion arises and transmission constraints occur, pricing regions will be dynamically created which will reflect transmission constraints that are actually occurring at that particular time.

In any individual five-minute dispatch interval, dispatched generators would be paid the new, dynamic regional price that applies where they are connected Where there are no constraints on the transmission network, prices would be the same across the existing region, so generators would all receive the existing region-wide price. Consumers will continue to be settled at the existing region-wide price regardless of their location

Dynamic regions introduce a signal to generators that reflects the short-run costs of using the network. This would provide better information to generators about where congestion occurs, which they can consider when making their locational decisions. It also removes current incentives for generators’ disorderly bidding when there is congestion. The patterns and costs of congestion revealed by the dynamic location of regions should enable better transmission planning, which would still happen through centralised processes.

While better information improves the likelihood of good transmission investment decision-making by transmission businesses, the planning of transmission would remain a fundamentally centralised approach, disconnected from the market-led approach to generation planning. To address this concern, the AEMC proposes to subsequently introduce firm transmission rights. Generators would be able to buy firm transmission rights from a transmission business in return for either being physically dispatched or paid for the lost revenue from not being dispatched.  Transmission businesses would be compelled to provide transmission services consistent with the level of firm transmission rights procured by generators.

Because the transmission rights are a firm hedge between the dynamically determined regional price and the existing region-wide price, generators would receive the full benefit of the transmission upgrade they underwrite - avoiding the free-rider problem in the current access regime, and allowing greater reliance on commercial transmission investment rather than the existing, centralised and regulated processes.

Generators that do not hold firm rights would be exposed to more of the cost of congestion (because they have not contributed to alleviating congestion through the purchase of transmission rights), while generators that hold transmission rights would be hedged against the cost of congestion. This provides an incentive for generators to underwrite the appropriate amount, location and timing of transmission investment, balancing the costs of transmission investment against the costs of congestion, as well as other locational decision factors such as fuel resources. In effect, generators would be incentivised to contribute towards the cost of transmission, allowing them to factor this into their locational decision. Allowing generators to contribute funds towards transmission infrastructure would introduce more commercial drivers on transmission businesses and more commercial financing of transmission infrastructure.

The approach would result in a closer alignment of generation and transmission investment with substantial benefits associated with better aligned processes of generation and transmission investment which can reduce costs to consumers. If, despite this better alignment, poor coordination does occur, then generators, rather than consumers, bear more of the risk and cost.

These changes have the potential to put downward pressure on prices for electricity consumers in the longer-term by minimising the total system cost of building and operating both generation and transmission over time.  They are significant reform and part of the road map put forward by the AEMC involves doing them in phases.

How to get involved in this conversation

To provide your feedback on the COGATI implementation access and charging paper please visit the project page.