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

Independent Review into the Future Security of the National Electricity Market: Blueprint for the Future

Independent Review into the Future Security of the National Electricity Market

Blueprint for the Future
June 2017

Dr Alan Finkel AO, Chief Scientist, Chair of the Expert Panel
Ms Karen Moses FAICD | Ms Chloe Munro | Mr Terry Effeney | Professor Mary O’Kane AC

The views and opinions expressed in this publication are those of the authors and do not necessarily reflect those of the Australian Government or the Minister for the Environment and Energy.

While reasonable efforts have been made to ensure that the contents of this publication are factually correct, the Commonwealth does not accept responsibility for the accuracy or completeness of the contents, and shall not be liable for any loss or damage that may be occasioned directly or indirectly through the use of, or reliance on, the contents of this publication.

© Copyright Commonwealth of Australia, 2017.

The Independent Review into the Future Security of the National Electricity Market: Blueprint for the Future is licensed by the Commonwealth of Australia for use under a Creative Commons Attribution 4.0 International licence with the exception of the Coat of Arms of the Commonwealth of Australia, the logo of the agency responsible for publishing the report, content supplied by third parties, and any images depicting people. For licence conditions see: https://creativecommons.org/licenses/by/4.0/

This report should be attributed as ‘Independent Review into the Future Security of the National Electricity Market: Blueprint for the Future, Commonwealth of Australia 2017’.

The Commonwealth of Australia has made all reasonable efforts to identify content supplied by third parties using the following format ‘© Copyright, [name of third party] ’.

The Independent Review into the Future Security of the National Electricity Market was agreed by the Council of Australian Governments (COAG) Energy Council on 7 October 2016. The Blueprint for the Future is published by the Department of the Environment and Energy.

Contents

Contents 3

PREFACE 4

EXECUTIVE SUMMARY 6

Vision for the National Electricity Market 8

Key outcomes 8

INCREASED SECURITY 8

FUTURE RELIABILITY 8

REWARDING CONSUMERS 8

LOWER EMISSIONS 8

Key pillars 8

ORDERLY TRANSITION 8

SYSTEM PLANNING 8

STRONGER GOVERNANCE 8

The blueprint will deliver Four Key Outcomes 9

Increased security 9

Future reliability 9

Reward consumers 9

Lower emissions 9

Enabled by Three Key Pillars 9

Orderly transition 9

System planning 9

Stronger governance 9

The blueprint will deliver Security 9

Generator security obligations 9

System security obligation 10

Strengthened risk management 10

Reliability 10

Generator reliability obligation 10

Incentives for new generation 10

Existing generators don’t close prematurely 10

Investor confidence 10

The blueprint will Reward consumers 10

Rewards for managing demand 10

Avoiding new network costs 10

Lowest cost generation 10

Price inquiry and better information 11

Lower emissions 11

International commitments 11

Electricity sector 11

Emissions reduction trajectory 11

The blueprint is enabled by An orderly transition 11

National agreement 11

Clean Energy Target 11

Three years' notice of closure 11

Supported by System planning 12

Regional assessments 12

System-wide grid plan 12

Priority projects 12

Stronger governance 12

A new Energy Security Board 12

Annual health check 12

Strengthening existing market bodies 12

Developing a national strategic energy plan 12

How did we develop the blueprint? 14

RECOMMENDATIONS 16

INTRODUCTION 21

Increased opportunities for the NEM 21

The nature of the future grid 21

The policy challenge 22

A blueprint for reform 23

Preparing for next summer 24

The need for increased security 24

A reliable and low emissions future – the need for an orderly transition 25

Securing adequate and affordable gas supply 25

Better system planning 25

Rewarding consumers 26

Stronger governance 26

Beyond the blueprint 26

Consultation and engagement 27

Stage one: targeted 27

Stage two: comprehensive consultation 27

Submissions to the Review 27

International engagement 28

Key concepts 28

Chapter 1: PREPARING FOR NEXT SUMMER 30

Overview 30

1.1 Improving the resilience of the NEM 30

1.2 FY2018 summer forecast 33

1.3 A collaborative approach for a reliable electricity supply 34

AEMO five point program to a secure FY2018 summer 34

Proof of concept – procuring demand response to manage reliability issues 35

South Australia region 35

New South Wales region 36

Victoria region 37

Tasmania region 37

1.Define energy security and responsibilities. 37

2.Strengthen independent energy security monitoring and assessment. 37

3.Establish a more rigorous and more widely understood framework for the management of water storages. 37

4.Retain the Tamar Valley Power Station as a backup power station for the present and provide clarity to the Tasmanian gas market. 38

5.Support new on-island generation and customer innovation. 38

Queensland region 38

1.4 Conclusion 38

Chapter 2: INCREASED SECURITY 39

Overview 39

2.1 New challenges need new approaches 39

2.2 State of security in the NEM 41

2.3 Integrating new technologies 42

Solution design 43

Energy Security Obligations 44

Black start services 52

The security implications and opportunities of distributed energy resources 53

Visibility of DER 55

2.4 Evolving risks for a multifaceted NEM 56

Enabling innovation 58

Stronger cyber security measures 58

Foreign investment and involvement 62

Adapting to environmental changes 62

Ensuring a skilled and flexible workforce 65

Chapter 3: A RELIABLE AND LOW EMISSIONS FUTURE – THE NEED FOR AN ORDERLY TRANSITION 67

Overview 67

3.1 Policy uncertainty threatens to stall the NEM 67

3.2 A challenging and changing market environment 68

The need for dispatchable capacity 68

A changing wholesale market 70

Disruptions in the electricity financial market 73

3.3 A policy package for an orderly transition 76

An emissions reduction trajectory for the electricity sector 79

Notice of closure requirement 80

A credible and enduring emissions reduction mechanism 82

3.4 Generator Reliability Obligation 94

3.5 Additional reliability measures 96

Out of market strategic reserve 96

Ramp rates 96

Day-ahead markets 97

Chapter 4: MORE EFFICIENT GAS MARKETS 99

Overview 99

4.1 Electricity and gas markets are linked 99

4.2 The role of gas in the NEM 100

Gas contributes to a secure and reliable NEM 102

Gas contributes to emissions reduction 104

4.3 Gas markets need to be highly efficient 104

Technical efficiency 107

4.4 Long-term gas supply certainty is essential 108

Gas market reforms 111

Ensure appropriate regulatory regimes 113

Improve access to transparent and informative gas industry performance data 115

Chapter 5: IMPROVED SYSTEM PLANNING 117

Overview 117

5.1 Aligning networks with future generation needs 117

5.2 Network planning 117

A more strategic approach to transmission planning 119

Coordination of renewable generation and transmission investment 121

A way forward 123

Coordination of transmission planning between regions 123

5.3 Network regulation 126

Network incentives 126

Reducing incentives for network over-investment 126

Limited Merits Review 127

More equitable consideration of alternatives to network investment 128

Strengthening the Regulatory Investment Test for Transmission 129

Distribution network regulation 131

5.4 Improved demand forecasting 131

5.5 Dealing with the financial risk of stranded assets 133

Chapter 6: REWARDING CONSUMERS 134

Overview 134

6.1 Consumers are at the centre of the NEM 134

6.2 An effective retail electricity market 135

6.3 Maximising choice and accessibility 138

Access to data and information 139

Appropriate consumer protections 141

Enabling all consumers to share in the benefits of new technologies 142

6.4 Rewarding consumers for improving reliability and security 143

Demand response can improve reliability and reduce wholesale prices 143

The ability of demand response to provide system security benefits 146

The orchestration of distributed energy resources 146

6.5 Rewarding network providers for avoiding costs 148

Network incentives 148

Networks as platforms 149

New technologies as an alternative to traditional grid connections 150

6.6 Improved energy efficiency 152

Chapter 7: STRONGER GOVERNANCE 154

Overview 154

7.1 Clear strategic direction and shared accountability 154

The essential elements of good governance 155

Current NEM governance arrangements 156

Previous reviews of NEM governance arrangements 158

7.2 Coordination and accountability for system outcomes 159

Roles and responsibilities of market bodies 161

A new AEMA required to reaffirm national commitment 164

Energy Council annual reporting 165

Performance indicators 166

7.3 Responding to changes in the market 168

Complexity of the Rules 168

Rule change process 169

National Electricity Objective 173

7.4 Other issues limiting effective governance 174

Resourcing of market bodies 174

Human resources 175

Incumbency bias 176

Structural separation of the AER from the ACCC 177

Information management in the NEM 178

7.5 Conclusion 182

Chapter 8: BEYOND THE BLUEPRINT 183

Overview 183

8.1 A range of possible technological futures 183

8.2 Generation technologies 183

Biomass 183

Waste to energy 185

Gas alternatives 185

Carbon capture and storage 186

Hydroelectricity 188

Nuclear 188

8.3 Energy storage technologies 190

Batteries 191

Pumped hydro 192

Hydrogen 193

Concentrated solar power and thermal storage 194

Flywheels 195

Compressed air energy systems 196

8.4 Electric vehicles 197

8.5 System security technologies 197

Synchronous condensers 197

Power conversion electronics 198

8.6 Conclusion 199

List of acronyms 200

APPENDIX A – Levelised cost of electricity 201

APPENDIX B – EMISSIONS INTENSITY TABLE 203

APPENDIX C – ACKNOWLEDGEMENTS 204