The AEMC has published a final report to improve the interventions framework and reduce costs for consumers. It has been released along with:
- a draft rule that introduces a new approach to pricing when generators are directed to operate to keep the grid stable, removing the use of ‘intervention pricing’ for directions related to services not traded in the market, such as system strength. This will put downward pressure on wholesale energy prices in South Australia when AEMO issues system strength directions and remove market distortion.
- a draft rule that amends the compensation threshold in relation to directed participants’ additional compensation claims so that it applies per direction and not per trading interval, enabling directed participants to recover the costs they incur when providing a service under direction.
The report recommends that AEMO submit a number of other rule change requests that would, among other things, further improve the interventions framework by changing the basis on which compensation for directed participants is calculated, and narrowing the circumstances in which other participants can be compensated following interventions.
The transformation of the electricity system is continuing to accelerate, which is presenting opportunities and challenges, including for the management of power system security. An interventions framework is in place which sets out the rules for directions and the other key intervention mechanisms - the reliability and emergency reserve trader (RERT) and instructions.
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’, which is when the wholesale spot price is adjusted to preserve market price signals that would have occurred but for the intervention.
The two draft rules published today and the recommended further rule changes aim to keep the cost of directions to a minimum and reduce distortion of investment signals.
The AEMC has been working closely with AEMO throughout the review and has benefited from the work previously undertaken by AEMO on intervention pricing.
Today’s draft rules and report are part of a broader investigation which is looking at how to reduce the need for AEMO to intervene in the first place, thereby minimising costs to consumers. While the intervention framework provides an important safety net, it is not without costs and is not intended to be used to provide ongoing maintenance of power system security.
Taking timely action to shore up declining levels of system strength can reduce reliance on interventions. To this end, the AEMC is looking at experience to date with the rules put in place by the Commission in 2017 to maintain appropriate levels of system strength and inertia.
A draft report including any recommended improvements to the system strength framework is due to be published in October 2019.
This work is part of the AEMC’s system security and reliability action plan.
Media: Prudence Anderson, Communication Director, 0404 821 935 or (02) 8296 7817
Interventions safety-net built into the market to provide security and reliability
The interventions framework has been in place since the start of the national electricity market. Interventions are ‘last resort’ mechanisms and are 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.
Reviewing experience to date with 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). As at 31 July 2019, 267 directions have been issued in the period since April 2017.
Submissions on the two draft determinations are due by 26 September 2019.