Independent Review into the Future Security of the National Electricity Market Blueprint for the Future, Jun 2017

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A blueprint for reform

The Energy Council must agree to a strategic energy plan to guide the operation and evolution of the NEM to navigate the transition to a low emissions future. It is clear from the Panel’s international consultations that Australia is behind other countries in developing a clear, national strategy to ensure that our electricity and gas sectors operate and transition effectively and efficiently.

Central to Australia’s strategic energy plan must be a credible, stable emissions reduction policy for the electricity sector. Stakeholders have identified the absence of such a policy as the critical challenge facing the electricity sector.

This Review provides a blueprint for reform, as a balanced and mutually reinforcing set of actions that are designed to restore certainty and facilitate a smooth transition to a lower emissions future. By committing to the blueprint, governments will facilitate a NEM that is innovative, responsive, affordable and that will provide investor confidence. There is every reason to expect that the NEM will, once again, be a world-class electricity system and a source of competitive advantage for the Australian economy. The elements of the blueprint are shown in Figure i.1.

Figure i.1: Elements of the blueprint

figure i.1 shows the elements of the blueprint for a secure, reliable and affordable national electricity market. these elements are: increased system security; delivering a reliable, low emissions electricity supply; securing adequate and affordable gas supply; better system planning; rewarding consumers and; stronger governance.

Preparing for next summer

Severe heatwave conditions in south-east Australia in February 2017 and the need for involuntary load shedding of consumers highlighted the challenges associated with maintaining electricity supply during extreme weather conditions. Australian Energy Market Operator (AEMO) forecasts a potential supply shortfall in Victoria and South Australia following the closure of the Hazelwood Power Station. This has raised concerns about the NEM’s ability to maintain a reliable electricity supply during the FY2018 summer. Prudent actions are required to manage this risk.

AEMO and governments are implementing a range of measures to address this issue, including seeking assurance that generators have sufficient fuel and are available to run. AEMO will also be working with the Australian Renewable Energy Agency (ARENA) to pilot a new demand response market. In addition to the measures underway, AEMO should commission and publish an independent third party review of its short-term demand forecasts and preparedness for the FY2018 summer.

The need for increased security

Increased penetration of VRE generators and the withdrawal of synchronous generators is reducing the supply of essential security services, such as physical inertia, which historically have been supplied by synchronous generators. As VRE penetration grows it will be important to ensure that there remains a ready supply of security services, and that VRE generators are able to respond appropriately and predictably to power system disturbances. It will also be important to ensure that there is sufficient availability of system restart capabilities in each NEM region to cope with the possibility of a system-wide blackout. Increasing quantities of distributed energy resources (DER), such as rooftop solar photovoltaic, also presents challenges. At present, AEMO lacks sufficient visibility of DER, which makes it difficult to manage the power system effectively.

Technical solutions exist to address many of these issues and ensure power system security is maintained. AEMO and the Australian Energy Market Commission (AEMC) have already started developing and implementing measures to deliver essential security services. These should be complemented with additional security obligations imposed on new generators to strengthen technical performance, including through revised connection standards. Regulatory changes are required to enable DER to be coordinated to provide security services.

The environment in which the NEM operates is also changing. The power system will need to be robust in order to cope with new and emerging threats, such as cyber attacks and an increased frequency of extreme weather events. Action is required to increase the NEM’s resilience in the face of these threats.

A reliable and low emissions future – the need for an orderly transition

Uncertainty related to emissions reduction policy and how the electricity sector will be expected to contribute to future emissions reduction efforts has created a challenging investment environment in the NEM. Ageing generators are retiring from the NEM, but are not being replaced by comparable dispatchable capacity. Policy stability is required to give the electricity sector confidence to invest in the NEM.

Reliability in the NEM will be strengthened by establishing a framework for an orderly transition to a low emissions future. This must include a long-term emissions reduction target for the electricity sector, a credible and enduring mechanism for the sector to achieve the emissions reduction trajectory and better management of generator closures.

New standards will also be required to give greater confidence that reliability will be maintained as technological developments continue to affect the system. New VRE generators will need to contribute to regional reliability by ensuring dispatchable capacity is brought forward to the market.

Securing adequate and affordable gas supply

Battery and pumped hydro storage will be able to support a reliable and secure NEM, as and when they are deployed at scale. For the short to medium-term the NEM is likely to require higher levels of flexible, gas-fired generation to support VRE. However, the economics of gas-fired generators are being challenged by rising gas prices and tightening gas supply. For gas-fired generators to continue to have a role in affordable electricity supply, they will need to be highly efficient. Gas-fired generation typically sets the spot price for the wholesale electricity market when VRE generation is low or demand is high, and this flows through to consumers as higher electricity prices.

In addition to measures being undertaken by the Energy Council, governments have announced a number of initiatives to address supply tightness in the east coast gas market. These include an Australian Competition and Consumer Commission inquiry into gas prices, transport and supply and the Australian Domestic Gas Security Mechanism, which will give the Australian Government the power to impose export controls when there is a shortfall of gas supply in the domestic market. AEMO should have better oversight of gas supply contracts for gas-fired generators to ensure they have sufficient supply available.

Facilitating the development of additional gas resources will require a concerted effort to acknowledge and respond to community concerns about the environmental and social impacts associated with unconventional gas extraction. Increased transparency will be essential in this regard.

Better system planning

Transmission and distribution networks are essential for the operation of the NEM. As coal-fired generation exits, transmission networks will require reconfiguring to connect large-scale VRE generation in areas that are not served by the existing transmission network.6 New VRE generators will likely be smaller in scale but more numerous than coal-fired generators, so a more coordinated approach to transmission planning is required.

Transmission network planning needs to be undertaken from a whole-of-system perspective to enable the efficient development of the grid into new areas. A long-term, integrated grid plan is required to establish an optimal transmission network design to enable the connection of new renewable energy resources. Coordination of generation and transmission investment so that networks connect the areas with the best renewable energy resources, at an efficient scale, will be a critical challenge.

Transmission businesses need to be incentivised to build the network infrastructure required for the future of the NEM, but not to build unnecessarily. Similarly, it will be important to find the right balance between investment in inter-regional transmission and intra-regional transmission, and between investment in network and non-network solutions. This will require transmission network service providers to work closely with generation businesses in making investment decisions.

Rewarding consumers

The uptake of new technologies is putting residential, commercial and industrial consumers at the centre of the electricity market. DER systems installed at commercial and residential premises, energy efficiency improvements, and demand response actions by consumers can all be harnessed to improve the security and reliability of the NEM. All consumers should be rewarded for taking those actions, which will benefit them individually and also help reduce overall system costs.

Achieving this outcome requires action. The retail electricity market must operate effectively and serve consumers’ interests. Improved access to data is needed to assist consumers, service providers, system operators and policy makers. Increased use of demand response, and changes to the role of networks and how they are incentivised are required to unlock these benefits. Governments need to take steps to ensure that all consumers, including low income consumers, are able to share in the benefits of new technologies and improved energy efficiency.

Stronger governance

A strong and resilient system of energy governance will be central to ensuring a secure and reliable low emissions future. Energy market institutions, the Australian Energy Regulator (AER), AEMO and the AEMC, will need to respond in a coordinated way to the rapid changes occurring in the NEM. Good governance requires trusted, capable, empowered and accountable institutions. This will require a clear strategic direction from the Energy Council for energy policy and shared accountability for whole-of-system outcomes.

A new Energy Security Board (ESB) should drive implementation of the recommendations of this Review. It should provide a vehicle for coordinated action and accountability for whole-of-system performance. Market arrangements will also need to respond effectively to the rapid changes in the NEM. This will require changing the rule-making processes to allow a faster response to emerging issues, and consideration of whether the National Electricity Rules can be simplified.

Beyond the blueprint

Energy technologies continue to develop and evolve. A range of technologies have the potential to further transform Australia’s electricity system and deliver benefits to the Australian community. Australia is well-placed to facilitate the development and deployment of these technologies through Australian Government initiatives such as ARENA and the Clean Energy Finance Corporation (CEFC).

Consultation and engagement

Consultation for the Review within Australia was managed in a two-stage process. The Panel afforded the consultation process the utmost importance, given the significant opportunity that this Review provided. The Panel values the insights provided by submissions and through consultation sessions.

Stage one: targeted

The first stage was held during late October and early November 2016 and was a tight and targeted consultation process, owing to the 9 December 2016 deadline for delivering the Preliminary Report. The aim of this process was to collect as much knowledge as possible on the state of the NEM. These targeted consultations were held with key stakeholders, and involved both individual and roundtable meetings with the Chair, and other Panel members.

More than 50 individuals from 30 organisations were involved in these meetings, from peak bodies (across the energy industry spectrum), electricity industry businesses, consumer representatives, unions and environmental groups.

The views from these consultations were fundamental to forming the Preliminary Report, publicly presented as an Issues Paper.

Stage two: comprehensive consultation

The second stage of consultations was held during late January and through February 2017.

Meetings were held between stakeholders and the Chair and Panel members with the aim of involving as many individuals, companies and groups as possible. Public invitations for these meetings were advertised online and in the print media, and sessions were held in Adelaide, Brisbane, Melbourne, Hobart and Sydney. Approximately 450 people from across the energy industry, including market participants, technology experts, consumer and business representatives, and the public attended, providing the Panel with a wide breadth of views.

Submissions to the Review

In conjunction with the second stage of consultations, the Review called for public submissions. More than 390 submissions were received and informed the Panel’s considerations and development of recommendations. Key themes that emerged in the submissions included that:

A clear, national transition strategy is needed to aid the energy sector’s transformation and provide clear investment signals.

An ongoing and flexible gas supply is critical to the transformation and to maintain system reliability.

Leadership by the Energy Council is crucial to set the strategic direction for the energy sector; and stronger governance arrangements are required.

A variety of technologies can be adopted to provide system security services to support VRE and DER.

A breakdown of submissions received is provided in Figure i.2.

Figure i.2: Stakeholder submissions by organisation type

figure i.2 shows the number of stakeholder submissions to the review by organisation type. there were 135 submissions from individuals; 60 submissions from small to medium companies; 57 submissions from non-government organisations and community groups; 56 submissions from peak industry bodies; 31 submissions from large companies; 28 submissions from research or think tank groups; 12 submissions from local government; 5 submissions from commonwealth government agencies; 4 submissions from state government; and 4 submissions from energy market bodies.

International engagement

International engagement has been a valuable element of the Review process. The Panel has sought to learn from international experience on a range of issues, but particularly on how countries and regions have integrated VRE generation into their power systems.

A small delegation from the Panel met with policy makers, market operators and regulators for power systems across Europe and the United States – specifically, in Ireland, the United Kingdom, Denmark, Germany, New York State, the Pennsylvania-New Jersey-Maryland Interconnect, Texas and California. The delegation also met with the International Energy Agency, the European Commission, the European Consumer Organisation, the Department of Energy and the Federal Energy Regulatory Commission in the United States, and a small number of energy technology companies.

The International Energy Agency also provided valuable input to the Preliminary Report.

The information gathered through international engagement has directly informed the blueprint. The Panel appreciates the generosity shown by our international colleagues.

Going forward, continued international engagement will allow Australia to pursue and promote its energy interests and expertise globally, track fast-moving technological changes and share knowledge and experience of first adopters and new policy approaches. This allows us to gain better insights to ensure the most
cost-effective, reliable and flexible energy supply for Australia. There are significant two-way investment, business and research opportunities that can flow from international engagement. Proactive engagement by government to build on the established relationships and forge new ones will ensure Australia maintains its competitive advantage, and pursues and protects its national interests.

Key concepts

This report deals with technical issues associated with electricity systems. Some of the key concepts that are essential for understanding this report and its recommendations are provided below.

Electrical power: Electrical power is the rate at which electrical energy is generated or used to meet the electricity demand, and is measured in watts.

One kilowatt (kW) is equal to a thousand watts.

One megawatt (MW) is equal to a million watts.

One gigawatt (GW) is equal to a billion watts.

Capacity: The capacity of a generator or load represents its peak output power, usually in MW. Manufacturers of electrical equipment generally use nameplate capacity or rated capacity to represent the continuous output of a generator or a motor under certain operating conditions such as temperature, humidity and location of the equipment above sea level.

Electrical energy: Electrical energy is measured in watt-hours (Wh) or multiples such as kWh, MWh, GWh and TWh (terawatt-hours). 1 MWh is equivalent to the energy output from a 1 MW generator operating for one hour at its peak capacity.

Capacity factor: The capacity factor of a generator is the ratio of actual electrical energy generated in a year to the theoretical maximum possible energy generation if the generator were to operate 24 hours per day 365 days per year. For example, a single-axis tracking solar photovoltaic generator might have a capacity factor of 25 per cent. To generate the same annual energy as a theoretical 100 MW baseload generator operating at 100 per cent capacity factor a 400 MW solar photovoltaic generator would be needed. Of course, no real-world generators operate at 100 per cent capacity factor.

Load: An electrical load is any device (such as industrial motors, lights or home appliances) or a large collection of devices powered by electricity. This is usually expressed in watts.

Demand: Electrical demand may either refer to the rate at which electrical energy is instantaneously consumed by a load (in MW), or the amount of electrical energy consumed by a load over a given period (in MWh).

Operational demand: Operational demand in a NEM region is the electrical  load that is supplied by generators with 30 MW or more capacity and  through interconnectors from other NEM regions. It excludes the demand met by intermittent generating units of capacity less than 30 MW and rooftop solar PV.

Levelised Cost of Electricity (LCOE): The LCOE is the discounted lifetime cost of ownership and use of a generation asset, converted into the cost per MWh. It takes into account capital expenditure, fuel costs, operating hours per year, operation and maintenance costs but not costs incurred elsewhere in the system.

Synchronous generators: Synchronous generators produce alternating current electricity. They have a heavy spinning rotor that provides synchronous inertia that slows down the rate of change of frequency. Hydro generators, thermal generators such as coal, gas and biomass, and solar thermal generators are synchronous. Synchronous generators help in voltage control by producing and absorbing reactive power and also provide high fault current to improve system strength.

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