The energy market is undergoing a once-in-a-generation transformation as large parts of the existing generation fleet reach end of life over the next 20 years. Coupled with burgeoning uptake of household solar and other technologies, this makes Australia one of the first countries in the world confronting such fast-moving change.
This upending of the energy arrangements means that in the future, we cannot just rely on the same mechanisms that we did yesterday or that we use today. If we did, reliability and power system stability would come under greater pressure and consumers could face higher bills than is necessary.
The AEMC’s focus is on truly important priority areas of reform - those that will help us come to grips with the extraordinary changes to the power system we can already see coming. We are doubling down on key strategic priorities that benefit both the energy sector and consumers over the long term, helping to support the focus of governments on the recovery from the coronavirus-driven downturn.
The need for and urgency of reform is indisputable. Dr Kerry Schott made that very clear when she released the Energy Security Board’s consultation paper earlier this month on making the national electricity market fit for the future. The seven market design initiatives are looking to address the challenges in a coordinated manner. As Kerry said, no reform can be left behind, they must be addressed together through comprehensive, expert review. So while essential system services reform is absolutely critical, we must also deal with ageing thermal generation in ways that reduce disruption, distributed energy resources need to be integrated as we move towards an emerging two-sided market while we also improve access arrangements to the grid for generation.
Even though we must meet virtually these days the AEMC’s level of engagement continues to climb in response to both the Energy Security Board’s large undertaking and our ongoing assessment of rule change requests. I am very sensitive to views from stakeholders that the volume of change activities is challenging and we are taking that feedback on with adjustments to our upcoming work program.
While we are responding to those concerns the complexity and physics of the power system demands action today in order to be able to maintain reliability and security in the new-look market of 10-15 years’ time. By 2040, an estimated 15 GW of synchronous capacity will exit the market, while 30-40 GW of non-synchronous generation will enter over that time. That’s a huge change and we are targeting comprehensive NEM-wide solutions to ensure a holistic approach. The power system needs to keep up, which is why building transmission in strategic locations as identified in the Australian Energy Market Operator’s Integrated System Plan is important, as are signals to make sure grid-scale generation investment happens in the right places on the grid.
But it’s not the only thing we need. We are building on our earlier reforms to keep frequency operating within the right limits and to strengthen the system to withstand stresses like a major generator or user disconnecting from the system. Importantly, the focus is now on re-examining mechanisms that provide incentives to industry to deliver essential system services.
Our work in this area is being done in lockstep with the Energy Security Board’s post 2025 market design project with the system services work program looking at new ways to provide the system services that were historically provided as a by-product of generating from coal, gas and hydro sources. But as thermal generators are retired, they not only no longer provide these additional services, but there is also an absence of signals to incentivise other parties to provide these services in the NEM. Consequently, interventions by AEMO to maintain security have increased by a factor of more than 10 since 2015-2016, with more than 200 in the last financial year – which means more costs for consumers.
The proposals leverage existing and new technologies to maintain the reliability and security of the system. They include work to better control the frequency of the power system, where we are coordinating action by the market bodies and ESB to ensure a secure system, including incorporating technical input from AEMO. The importance of frequency control was highlighted in August 2018 when two interconnectors between states were lost after a lightning strike, interrupting electricity supplies in Victoria, NSW and Tasmania.
Adequate levels of system strength will be needed as the transition occurs to keep these new sources of generators operating securely and to help the system withstand shocks such as lightning strikes. For this work, the AEMC has undertaken extensive consultations, including with jurisdictions and industry through technical working groups to ensure we understand the practical realities of those on the ground. We will soon release our review into system strength frameworks in the NEM.