Submissions to the Enhancement to the Reliability and Emergency Reserve Trader (RERT) options paper are now available on the AEMC’s website.

This rule change request from the Australian Energy Market Operator (AEMO) seeks broad changes to the RERT framework.

The options paper was published on 18 October 2018 and set out:

  • how the AEMC intends to assess the appropriateness of the reliability
  • three options for procuring the RERT, including the trigger and volume.

The options paper was also discussed at a public forum held in November. A webcast of the forum is available here.

The AEMC has received 19 submissions to date from a range of stakeholders including consumer representatives, new technology companies, generators, industry associations as well as AEMO, the rule change proponent. 

Appropriateness of the reliability standard

The current RERT procurement framework has been designed to balance the benefits to consumers of having reliable electricity supply against the costs associated with increasing the levels of reliability in the national electricity market. The appropriateness of the reliability standard and these trade-offs are key considerations for this rule change. If the trade-offs are not effectively balanced, then consumers will end up paying more.

In its rule change request, AEMO stated that the reliability standard may no longer be appropriate given changing system conditions, in particular, a more peaky system with more extreme weather events. 

AEMO subsequently provided the AEMC with additional information on the appropriateness of the reliability standard, stating that:

  • the risk of supply interruptions in the national electricity market is increasing
  • the existing reliability standard is not suited to increasing risk and uncertainty
  • the RERT should be delinked from the reliability standard and a standing reserve should be created to provide an insurance function in the reliability framework.

In their submissions, stakeholders gave overwhelming support for the reliability standard, stating that it remains appropriate and already takes into account the risks of load shedding, including the peakiness of the system. 

Some stakeholders noted that there is no evidence that consumers want a higher level of reliability and, in fact, are more concerned with reducing costs and electricity prices.

Stakeholders also referenced the fact that the Panel has recently reviewed the reliability standard, and deemed that it is appropriate.

Procurement options

In the options paper the Commission presented three options for how the procurement trigger and volume for the RERT could be determined:

  • Option 1 links the procurement trigger and volume explicitly to the reliability standard.
  • Option 2 is AEMO’s proposal in its rule change request, which delinks RERT from the reliability standard and enables AEMO to make procurement trigger and volume decisions through its assessment model.
  • Option 3 involves changes as per those in option 1 plus additional guidance provided to AEMO on how to operationalise the reliability standard. 

There was overwhelming support from most stakeholders for option 1. Stakeholders stated that it would increase transparency, provide clarity and minimise both direct and indirect costs (market distortions). 

Stakeholders were also supportive of this option as it would ensure that there is only one reliability standard for both the market and the RERT, maintaining consistency and minimising distortions. 

There was some interest in option 3, which stakeholders thought had potential to amplify the benefits of option 1. However, most stakeholders noted that they needed more information about this option in order to express a firm view.

AEMO reinforced its support for option 2, with some minor changes to reflect its latest thinking as set out in the additional information it provided to the AEMC last month. Most stakeholders explicitly stated that they did not support option 2 due to concerns that this option would increase direct and indirect costs, create inefficiencies and significantly reduce transparency.

Stakeholder submissions can be found on the project page.

A draft determination on the rule change request is due to be published on 31 January 2019. 

Media: Prudence Anderson, Communication Director, 0404 821 935 or (02) 8296 7817

Background

What is reliability?

‘Reliability' of the power system, at a wholesale level, is about having sufficient physical capacity in the system, through generation and demand response, to supply customers with the energy they demand, with a very high degree of confidence. Over the last 10 years wholesale reliability events have only contributed to about 0.23% of all customer interruptions.

What is the reliability standard?

The reliability standard expresses the level of reliability sought from the national electricity market’s generation and transmission interconnector assets. The reliability standard also guides various decisions made by AEMO in its role as the system operator. It is AEMO's responsibility to incorporate the reliability standard within its day-to-day operation of the market, and to inform the market of any projection that the reliability standard is expected to not be met. If a market response to a projected expectation that the reliability standard will not be met is not forthcoming, then AEMO may intervene through the intervention mechanisms that are part of the current frameworks.

The current standard, expressed in terms of the maximum expected unserved energy (USE), is set at a maximum expected USE of 0.002 per cent of the total energy demanded in each region per financial year.

‘Unserved energy’ means the amount of customer demand that cannot be supplied within a region of the NEM due to a shortage of generation or interconnector capacity. The term ‘expected’ is important – it means a statistical expectation of a future state; an average across a range of future scenarios, weighted for probability. 

Setting the level of the reliability standard involves a trade-off, made on behalf of consumers, between the prices paid for electricity and the cost of not having energy when we need it. The trade-off is between two sets of costs, both of which are ultimately borne by consumers. The key in setting the reliability standard is to strike a balance between delivering reliable electricity supplies and maintaining reasonable costs for customers. 

The reliability standard does not address the reliability provided by the electricity transmission and distribution networks as this is the responsibility of jurisdictional governments. Distribution events are by far the largest cause of customer interruptions.

What is the RERT?

The RERT is one of the tools available to AEMO to help avoid blackouts. It is a type of strategic reserve that allows AEMO to pay a premium for additional generation or demand response that is not already in the market to be on stand-by when shortages are projected. 

It is an important part of the regulatory framework that AEMO uses as a safety net at times when a supply shortfall is forecast, or, where practicable for power system security. These additional reserves may only be used as a last resort to avoid unnecessary blackouts, typically during summer when the demand and supply balance is tight. 

Prior to 2017, AEMO had only entered into RERT contracts three times and it had never been dispatched. This changed in 2017, when AEMO entered into a number of reserve contracts and dispatched the RERT twice – once in November 2017 and once in January 2018. AEMO has since entered into a number of reserve contracts in 2018.

Some form of mechanism that allows the operator to contract for reserves has existed since the start of the national electricity market and has underpinned the high levels of reliability experienced to date.

What are the costs of the RERT?

The RERT is an important safety net that underpins reliable electricity supply; however it does carry direct and indirect costs. The direct costs of the RERT last summer amounted to $52.0 million. The indirect costs are due to the distortionary effects the RERT can have on market outcomes - for example if a generator which would otherwise have participated in the wholesale market withdraws to offer its capacity to the RERT instead. This could lead to increased costs for consumers – both from the costs of the RERT, as well as higher wholesale prices due to a reduction in supply. 

The RERT has been designed to minimise these costs.  Importantly, the RERT may only be used for reliability purposes if AEMO identifies a breach of the reliability standard. The reliability standard has been set to balance the prices paid for electricity and the cost of not having energy when it is needed.