Transmission transformed: Customers only care about the delivered cost of electricity. Reshaping the grid around renewables will cut waste and boost efficiency.

by AEMC Chairman John Pierce
Published in the Australian Financial Review on 14 October 2019

In the seemingly endless debate about Australia’s energy market, there is one thing that stands out – too often the wrong questions are being asked.

The focus on the nuts and bolts of energy policy has intensified. But there are layers to the debate which are not always clear. There are different, passionately held, views on what the power system should look like in terms of new generation sources and how fast we can get there.

At the same time there is not much understanding of what it takes to deal with the physics of a new generation mix. We are moving from a system of fewer, bigger generators concentrated in regions next to coalmines to one with lots of smaller generators that are far more geographically dispersed in places where the wind blows and the sun shines. To keep the lights on we are already changing the way we manage voltage and frequency and other technical parameters that keep the power system secure.

The conversation on our energy future is a classic tale of not being able to see the forest for the trees.

Proposed generation roughly equal to the current size of the national electricity market (50 GW) is foreshadowed for connection to the grid over the next decade. It requires significant investment in transmission networks to get the benefits of new generation, including large-scale renewables and battery storage to consumers as quickly and efficiently as possible especially as older coal-fired generation comes to the end of their technical and economic lives.

While this is going on we can’t lose sight of what matters most for consumers and that’s keeping the lights on at an affordable price.

Consumers see only one bill. We know from years of research they don’t really care if upward pressure on prices is coming from wholesale generators, or retailers, or regulated networks, or various external factors that add costs to the system. To truly address the long-term interests of consumers, we need to think about the energy market in the same way they do. As one system working together to deliver an essential service. 

Instead of just asking how much does it cost to produce electricity from this or that technology we need to also be asking how that generation gets to market, and what does it do to the costs of the generation and transmission system. And we need to address both questions at the same time so that the generation mix and transmission can both be considered as part of the whole. 

That’s why it’s time for a comprehensive overhaul of the way generation and transmission investment and operational decisions are made. 

This largely comes down to how generation gets access to the market both physically and financially.

Generators have no control over where and when connections are made around them, and currently do not have a way of insuring the risks of being congested and exposure to changes in marginal loss factors as a result of their location which impacts on the spot prices they receive. The transmission costs of getting this generation to where it is needed are borne by consumers through the regulated network charge on their bills. The regulatory system incentivises networks to make sure customers have a reliable supply, the cost of which is recouped from consumers via a larger asset base over decades to come.

With more and more geographically-spread generation, the pressure on costs is potentially set to grow considerably. Beyond direct costs in building new networks, the generators are increasingly exposed to the risks of being congested off the network or having critical investment delayed. 

More than that, the lack of coordination between generation and transmission investment decisions is slowing down the integration of new generation, limiting AEMO’s ability to dispatch the lowest cost generation to consumers, and increasing the risk of bandaid fixes to keep the lights on.

Today the AEMC announces a reform package to address both the costs and risks of integrating new generation into the grid in a wholistic, comprehensive way. They are major reforms, that complement and strengthen the rollout of the integrated system plan. The package includes special mechanisms which have been proposed to fast-track the connection of renewable energy zones in line with those proposed by AEMO. 

These reforms complement the Energy Security Board’s work on implementing the integrated system plan (ISP), which is needed to make sure the transmission investment process is fit for purpose in a new regime where transmission infrastructure takes longer to build than new generation like wind farms and large-scale solar.

The AEMC has been working on this for some time. In 2015 we identified potential changes to the way generators accessed the grid and were asked by the COAG Energy Council to let the ministers know when those changes became necessary. That time is now. 

Today we released two discussion papers as part of our review on the coordination of generation and transmission investment to outline proposed changes so further consultation can happen before the review concludes at the end of the year. 

It is time for generators, especially innovative generators, to be rewarded for locating where their energy has the most value to those who need it. And when congestion occurs, instead of complaining about the inability to connect, generators would be in a position to do something about it.

Anything less than comprehensive reform risks a continuation of short-term, piecemeal changes that that are likely to result in higher prices and less reliability in the long-term.