The Energy Security Board releases its opus on energy market reform!


Co-ordination and cohesion are the guiding principles of the Australian Energy Security Board’s Post 2025 Market Design Consultation Paper released this morning by ESB Independent Chair, Dr Kerry Schott. The proposed reforms are open to feedback from the public until 19 October 2020, and will be refined in line with responses, to be presented as recommendations to the country’s energy ministers by mid-2021.

A collaborative work of the ESB, the Australian Energy Market Commission (AEMC), the Australian Energy Regulator (AER) and the Australian Energy Market Operator (AEMO), the reforms are aimed at “systematically modernising the market design and regulatory frameworks to meet the needs of the energy transition”, an accompany statement said today.

“It’s a big agenda,” said Schott of the potential solutions, which are organised into seven categories:

  • Resource Adequacy Mechanisms
  • Aging Thermal Generation Strategy
  • Essential System Services
  • Ahead Mechanisms
  • Two-sided Markets
  • Distributed energy Resources (DER) Integration
  • Transmission Access and the Coordination of Generation and Transmission

But she added, “The scale of the challenges mean it is imperative that this package be considered holistically. No reform will be left behind.”

The initiatives encompass virtually every aspect of how electricity is generated and dispatched, in tandem with how consumers will access services, and provides timely and efficient investment strategies designed to arrive at least-cost solutions.

“It is clear that the rules and market frameworks need to evolve to keep up with the accelerating pace of change” in the energy landscape, said Schott, “which is leading to security and reliability challenges and less than ideal outcomes for consumers”.

The paper seeks to address the fact that market participants and investors are poised to provide the services and resources needed to replace coal generation at scale over the coming two decades and maintain stability in the grid, but who rightly assert that “the current market is not ‘investable’” for these services.

The exit of coal generation from Australia’s national Electricity Market “is not in itself a problem”, write the authors of the Post-2025 Market Design Consultation Paper, released today. “The challenge now is that the block nature of the tranches of capacity departing the grid may create gaps in dispatchable capacity (and erode available reserves), and departure of the essential services that are currently required to support the system.”

Image: Energy Security Board

Decoupling system services from baseload power for greater value

Under the reforms labelled Essential System Services, the paper outlines the capabilities that have been provided as a byproduct of thermal generators, and which in a system powered by variable renewable generation will need to be provided separately but in step with generators that harness wind, sun and water.

Among these capabilities are inertia, system strength, reserve generation and rapidly responding frequency control services.

The ESB declares its preference “to move towards real-time markets for services where the system and technologies allow,” in order to provide clear price signals. 

It also acknowledges that some services, such as system strength may be better suited to “structured procurement arrangements, such as TNSP provision, bilateral contracts between AEMO or NSPs and providers, and generator access standards or mandatory technical limits”.

Other options set out for discussion in this category include: development over the longer term of a co-optimised spot market for inertia; and exploration of how to incentivise primary frequency response in the NEM, ahead of the 2023 expiry of the requirement for generators to provide this capability as a condition of connection the National Electricity Market.

Establishing market mechanisms for such services will reduce and eventually negate the need for AEMO to intervene to stabilise the system or impose such responsibilities on generators, which the paper says results in “less efficient outcomes, inefficient investment signals, more complex operational decisions and higher costs to consumers”.

Each section of the paper progresses through context for the required reforms in that category, describes work carried out to date, and proposes staged changes to the current system.

Enabling an equitable and flexible two-sided market

In the section that seeks to enable two-sided markets and greater consumer participation in demand response and provision of services to the grid, the short term (two-year) objectives for establishing participation frameworks include:

  • An expanded aggregator framework that would allow for easier aggregation of DER for participation in energy and FCAS markets. 
  • Consider the appropriate treatment of technical requirements for participating in central dispatch and forecasting processes and market interface requirements, e.g. the telemetry and communications requirements. 
  • Consider changes to the NEM to better integrate storage devices through rule change requests submitted to the AEMC. 
The ESB writes that “At present there are only limited arrangements for owners of DER to offer services into [system services and network support] markets. This means the potential benefits of optimal market integration are foregone. It also means that future investments in DER are unlikely to be optimal.” Its proposed market reforms are now open for consultation.


Addressing transmission (code red)

On the all-important topic of Transmission Access and Coordination of Generation and Transmission, which will be critical to incorporating large quantities of renewable generation and storage into the grid over the coming two decades years, the paper refers to work by the AEMC to develop a model for reform with two core elements:

  • Locational marginal pricing (LMP) – scheduled market participants would receive/pay a price that would more accurately reflect the value of supplying electricity at each location in the network and make the physical elements of the system more transparent. 
  • Financial transmission rights (FTRs) – these would allow participants to manage the risks of congestion by allowing them to purchase an FTR which would pay out on the differences in wholesale market prices arising due to congestion. Reforms are intended to support efficient and timely capital investment, efficient system operation and reduce costs to consumers. 

Aggregating stakeholder thoughts on reform

Each section of the consultation paper also offers potential food for thought and further enquiry in the form of questions posed to stakeholders. They typically aim to link consideration of the proposed reforms to established plans such as AEMO’s Integrated System Plan (ISP) and the work in train by other agencies. For example, under Transmission Access, the paper asks:

  • The second ISP has now been released. Do you have any comments on how its implementation can be made more efficient and timely? 
  • The development of REZs is important for the transition underway in the NEM. Do you have any suggestions on how large-scale priority REZs can be more efficiently developed and connect into the network?
  • NERA Economic Consulting’s modelling of the benefits of introducing transmission access reform in the NEM has been published. What do you think about the modelling and assumptions used?

“We are very interested in feedback from all interest groups on the directions we have set out as we work toward a final set of recommendations,” said Schott.

She added that some changes will be implemented now, while others might spill beyond 2025: “This major reform is a change journey to and beyond 2025 — it is not a one ‘big bang’ reform process.”

One section of the ESB’s helpful, summarising infographic on the challenges and opportunities of energy market reform and fit-for-purpose design.

Image: Energy Security Board

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