Intervention mechanisms and system strength in the national electricity market – AEMC consultation paper 4 April 2019 

The transformation of the electricity system is continuing to accelerate, which is presenting opportunities and challenges, including for the management of power system strength.

A growing number of directions are being issued by AEMO to synchronous generators in South Australia to maintain adequate system strength. When AEMO intervenes in this way it provides compensation to directed and affected participants and also applies ‘intervention pricing’, a practice designed to preserve market price signals that would have occurred but for the intervention.

Directions are an important part of the intervention framework. The intervention framework is the system’s safety net and includes directions, the Reliability and Emergency Reserve Trader (RERT) and instructions. The intervention framework has always been available to AEMO to keep the lights on.

However, the AEMC considers it necessary to review the interventions framework in light of the growing number of directions being issued to maintain system strength. While the intervention framework provides an important stop gap, it is not without costs and is not intended to be used to provide ongoing maintenance of power system security.

The Commission’s investigation will also consider experience to date with the current framework for managing system strength, and whether any refinements are warranted to that framework to support system security in the most efficient manner possible.

This investigation into intervention mechanisms and system strength was called for by the Commission in the final report of its Reliability frameworks review (July 2018). The Commission has closely examined how the interventions and system strength frameworks have been operating to date. Today we are releasing a consultation paper that outlines the issues that we consider need to be addressed. Submissions are due 16 May 2019.

The investigation progresses two rule requests submitted by AEMO which seek to amend both the interventions and related compensation frameworks.

Interventions built into the market to provide security safety-net

The interventions framework has been in place since the start of the national electricity market. Interventions are ‘last resort’ mechanisms and designed to operate that way. They are used to support system security and, when market responses are not adequate, reliability. Intervention mechanisms include:

  • Reliability and emergency reserve trader (RERT): this is an emergency mechanism that’s used when the power system is under extreme pressure. It allows AEMO to procure and, if need be, activate electricity reserves not otherwise available in the market.
  • Directions: AEMO has the ability to issue directions to require market participants to undertake certain actions. For example, in South Australia, AEMO uses directions to require synchronous generators to operate in order to maintain adequate system strength and keep the power system secure. These directions are mandatory and generators are compelled to comply.
  • Instructions: these generally involve AEMO requiring network service providers or large energy users to temporarily disconnect load or reduce demand if there is a risk to the secure or reliable operation of the power system.

System strength interventions come at a significant cost to consumers. 

Checking in on the AEMC’s 2017 security rules 

Declining system strength is emerging as an issue in energy systems around the world as changing technology and consumer choices, combined with government policies, encourage the take-up of renewables and drive big changes in the generation mix.

In 2017 the Commission made new rules to improve system strength and inertia conditions by placing obligations on network businesses to remedy system strength shortfalls identified by AEMO. This system strength and interventions review is checking in on that reform package to see if they are still optimally targeted given the speed of change underway. 

As the Reliability Panel’s 2018 annual market performance review has noted, increasingly AEMO is issuing directions to maintain system strength in South Australia (and, on one occasion, in Victoria). 

Purpose of this investigation 

The Commission considers it necessary to review the interventions framework in light of the growing number of directions that are being issued by AEMO to maintain minimum levels of system strength in South Australia. The use of directions in South Australia has important implications for wholesale prices, both in South Australia and across the national electricity market. This affects market signals to investors and the energy costs faced by consumers. 

The Commission also wants to consult on how well the existing frameworks accommodate emerging system strength issues in other regions. The application of established frameworks should mean there is no need for AEMO to maintain system strength by intervening in the market’s operation. We intend to explore whether adjustments could be made to existing frameworks to improve their timely and flexible application as we address the challenge of declining system strength across the national electricity market. We want to avoid the need for increasing use of directions as well as the intervention pricing mechanisms which are used when interventions are triggered, and which can have unintended impacts on wholesale prices and investment signals.

Media: Prudence Anderson, Communication Director, 0404 821 935