Submissions Received to the 2022 Reliability Standards and Settings Review
Fast Facts.
The Reliability Panel has commenced its 2022 review of the reliability standard and settings (the RSS review) with the release of an Issues Paper on 27 January 2022.
Under the National Electricity Rules (the Rules), the Reliability Panel (the Panel) is required to undertake a review of the reliability standard and settings every four years. The Panel is required to consider whether the form and level of the standard and settings are appropriate for expected and evolving market conditions between 1 July 2024 and 30 June 2028.
The RSS review must be conducted in accordance with the Rules and the Reliability Standard and Settings Guidelines. The Panel published updated RSS Guidelines in July 2021, which set out the principles, assessment approach and assumptions that the Panel must comply with through its current review.
Submissions to the RSS Review Issues Paper were due by 3 March 2022. 16 submissions were received. These were from AEMO, the AER, Aluminium Council of Australia, Energy Users Association of Australia, AGL, Energy Australia, Shell, Alinta Energy, Engie, Origin Energy, Clean Energy Council, Australian Energy Council, Hydro Tasmania, Snowy Hydro, CS Energy and the SA Government.
Background
For a full background of the review, see out previous article at 2022 Reliability Standards and Settings Review — Rennie Partners.
Summary of the Submissions Received
There were 16 submissions received
Issues Raised in Relation to the Future Market and Supply/Demand Mix
All submissions noted the rapid changes underway in the NEM and cautioned the Panel to plan for scenarios of faster transition. The Aluminium Council of Australia, and the Energy Users Association of Australia took issue with assumptions made of declining demand in that industry.
The Council noted it is: ” concerned that the Paper references the exits of large industrial loads, such as aluminium smelters; and believes this view is erroneous. All of Australia’s aluminium smelters have long term existing contracts. The expiry of these contracts for Australian smelters varies from 2025 to 2029 (with Bell Bay Aluminium in Tasmania the first to finish). The owners of Australia’s four smelters have not given any indication of intentions for these loads to exit and have signalled their desire recontract renewable electricity at the end of the current terms. The Council and its members would like this reference to the exit of aluminium smelters removed as it has no basis.”
This was echoed by the EUAA, which was “..puzzled by the comments around the implicit assumption that aluminium smelters will not have a continuing role at the end of their current electricity supply contracts. We would have thought that the significant renewable energy resources in Australia, combined with technology developments that are dramatically reducing the costs of zero emissions electricity would suggest a potentially bright future for large smelter loads. Rio Tinto, Tomago and Alcoa have recently announced a series of initiatives to ensure that future”.
Issues Related to the ESB Post-2025 Market Design Reforms
Most submissions acknowledged the broader reform timetable, and the current work being done by the Energy Security Board on capacity mechanisms. Most submissions supported the Panel approaching the Review on the basis of the current market design, i.e. not assuming a capacity mechanism will be introduced by the ESB. Some submissions took the opportunity to pass views on the capacity mechanism more generally – eg the AEC noted that “the controversy surrounding introduction of a capacity mechanisms, and some of the constraints placed on its work by the National Cabinet, (means that) there is no certainty that a reform will be implemented”, and also noted that “There are doubts that the deterministic capacity mechanism that the ESB is developing will be capable of providing the investment and operating incentives necessary for an energy limited power system. In this case lowering the value of the energy-only signals in lieu of a capacity mechanism could endanger the market’s ability to clear in renewable energy droughts”.
Snowy Hydro also noted that:
“The ESB has acknowledged that adjusting reliability settings could improve resource adequacy, but has proffered its view that this approach is unfeasible because, it believes, reliance on scarcity pricing, would be politically unacceptable. Snowy Hydro believes that that is not a valid or correct justification for the adoption of a capacity mechanism. Capacity mechanisms are not an economic imperative and have serious drawbacks which have not been adequately acknowledged by the ESB. The experience of every jurisdiction that has adopted them has been that they are more expensive, result in over-procurement and transfer investment risk from shareholders to consumers. Given that the ESB will not examine the efficacy of adjusting market settings in improving resource adequacy, it is critical that the Reliability Panel do so. Adjusting market settings will allow the NEM to retain the dynamism and efficiency benefits associated with current market structure. It also avoids the imposition of an expensive regulatory bureaucracy which would be required to manage and regulate a capacity mechanism.”
Others, such as Origin Energy, noted the need for the Panel’s review process to inform the ESB’s broader work, stating that “A key area of focus for the Panel should be to evaluate the likely effectiveness of changes to the settings in incentivising investment in the resources needed to balance the system. The output of this analysis could help inform the Energy Security Board’s (ESB) work on the design of a capacity mechanism”.
The AEC also noted that it: “..prefers that the Panel focus on the economics as anticipated in the National Electricity Objective and not attempt to second guess the desires of governments to pursue levels of reliability that are not in the long-term interests of customers. The Panel should leave to the ESB’s capacity mechanism work any question of achieving levels of reliability beyond the standard”.
Issues raised in relation to the Impact of Government Policy
Only a few submissions made mention of Government policy and how it might be considered in this Review.
The CEC noted that “The Panel must also consider the impacts of schemes such as the NSW Roadmap and associated REZ developments, and the implications of this for reliability both indirectly and directly. On the one hand, the Panel must consider how the MW volumes supported by the REZ schemes will enhance reliability outcomes, by increasing supply. On the other, the Panel will also need to turn its mind to the wholesale price implications of this inrush of supply. This must include consideration of the likely nature of the any LTESA agreements struck, particularly in terms of whether they are based around a wholesale price swap, or whether they are structured more around LGC offtake”
Alinta noted that “Uncertain government policy on emissions policy remains a concern for investment in the NEM and the modelling of the RSS. However, emissions targets for NEM jurisdictions are known and this provides an envelope for the Panel’s medium-term model task in assessing the RSS”.
Issues Raised on the form and level of the reliability standard and VCR
All submissions that directly addressed this issue supported the use of unserved energy. While supporting USE, AEMO noted the need for a higher standard, stating that “AEMO suggests a higher standard of 0.0006% is justified and the challenge for this review is to how to achieve this higher standard, meet environmental goals, without “breaking the bank”. This would assist in allaying governments concern of reliability during the energy transition and address AEMO’s concerns on “tail risk”.
Issues Raised in relation to the Market Price Cap
Market participants were guarded as to whether to increase the MPC, either through indexation or via review.
Snowy Hydro and Engie submitted in favour of increasing the MPC:
Snowy Hydro stated that the Panel should “model increasing the MPC in a range from $20,000/MWh to $30,000/MWh, and then assess the extent to which this influences the price of $300/MWh caps. We note that the RERT has been dispatched at well above the MPC, as high as $60,000/MWh in 2018, and $27,000/MWh as recently as February 2022. Consumers are, in effect, already exposed to a quasi-MPC well above the MPC. Snowy Hydro’s analysis suggests that resource adequacy could be improved by a modest increase in the MPC, which would ultimately save customers money as it avoids usage of more expensive AEMO-procured RERT capacity”
Engie noted that “there are multiple ways to interpret the introduction of additional reliability mechanisms over and above the existing EOM settings. One is that the energy transition is stretching the functioning of the EOM to breaking point. Another is that - with the benefit of hindsight – key reliability settings such as the market price cap (MPC) and cumulative price threshold (CPT) have been set too low, and these additional mechanisms have been set to compensate for that. While the Panel’s decision should be guided by the modelling, ENGIE considers that market trends indicate a higher rather than lower MPC is likely to be most appropriate. Further, since any material increase is likely to be introduced progressively (whether or not that is necessary), the Panel should be sure to be avoid being caught behind the curve if modelling indicates upward pressure on the equilibrium MPC”.
Alinta and the AEC noted the need for indexation of the MPC, with Alinta noting that “The emergence of new generation technologies does not of itself warrant a change in the MPC. The current setting is technology neutral in our view. New markets may, over time, impact the appropriate setting of the MPC, however we do not believe the impact of new markets will be material enough over the review period to materially influence the Panel’s modelling and considerations in setting the MPC between 2025-28. Alinta Energy supports the Panel’s proposed approach to indexation of the MPC and CPT for the review”.
The AEC noted that “its prior assumption is that the overall trends in the power system would imply an increase in the real MPC in order to retain USE within the standard. If this is the recommendation, the AEC considers that well-telegraphed progressive increases would be manageable by the industry. Importantly, the AEC believes there is no case for reducing the real MPC”.
Shell Energy supported no change, stating that “The current approach to the market price cap balances risk with a technology neutral price signal that encourages efficient market operation and investment”.
The Aluminium Council of Australia was the only submission seeking a reduction in MPC, noting that “there should be consideration to reducing the market price cap (MPC) and other interactions with the existing market, which may otherwise result in generators double dipping for the same service. The Council believes that the Panel should consider how to best achieve this least cost to consumers in its considerations, for example introduction of a capacity mechanism should be combined with a reduction in the MPC”.
Other submissions were more circumspect, signalling the need for careful review. CS Energy noted that while the MPC “remains an effective investment signal for technologies, the AEMC may want to consider how different durations of storage (e.g. shallow vs. deep) is provided timely investment signals. For example, the MPC may provide investment signals for shallow storage, yet not for deep storage requirements in the event of low probability, high impact weather events (e.g. renewable droughts). This may, in part, be the role of the CPT (or a future capacity market), however an event must occur to trigger the CPT, which may not result in achieving a least cost outcome for consumers.”
Hydro Tasmania noted that “if recalibrated accurately, Hydro Tasmania considers adjustments to the MPC (in conjunction with suitable amendments to other reliability settings) will deliver significant benefits”, but did not express a preference for direction.
Origin Energy noted factors that the Panel should have regard to when considering the merit/implications of changes to the MPC, being “how, and to what extent, an increase in the MPC would assist with resolving the key uncertainties that may impede investment in dispatchable resources as the market transitions; the level of change required to materially improve longer term investment signals; and the trade-offs associated with any increase to the MPC, including increased financial risk for retailers / market customers.”
AEMO provided sideline commentary of sorts, noting that “AEMO is eager to understand whether the Panel considers the floor price should change to ensure the market clears at low operational demand. A much lower price floor may incentivise more DSP / utility scale batteries but in doing so may make the management of commitment/decommitment of thermal plant more expensive and difficult. AEMO anticipates market modelling to be conducted by the Reliability Panel will inform the appropriate setting of the market floor price.”
Issues Relating To The Setting Of The Market Floor Price
Submissions were divided on the issue of the market floor price.
The AEC did not see a need for change in either MFP or CPT, noting that “..other aspects of the settings are more deserving of the Panel’s focus. As the MFP appears to be well outside the range of negative clearing prices required to resolve surpluses, there seems to be no advantage of introducing the complexity of indexation. In the same vein, it is not clear there is any benefit in introducing a negative Cumulative Price Threshold (CPT)”.
CS Energy suggested an increase in the MFP (which we have assumed to mean a less negative figure based on surrounding arguments) over time noting that: “there may be benefit in reducing the MFP over time, given the changing system requirements and the original intent of the MFP. In considering changes the AEMC should maintain an awareness of any regulatory risk imposed on participants by changing reliability standards. The AEMC should ensure that appropriate operational signals, the original intent of the MFP, remain.” It did not support a negative CPT but did note “the level of the CPT may benefit from a review by the AEMC”.
Engie provided a submission in favour of an increase in the MFP (to a less negative figure), noting that:
There are two types of generation that might bid (and thus wish to be dispatched) at heavily negative prices. (Firstly)[1], utility-scale renewables operating under a PPA that pays a fixed price for all output. Newer PPAs typically include a clause that they don’t pay out at negative prices. So, the quantity of plant bidding in this way is unlikely to grow and will likely shrink as older PPAs expire, and new ones are renegotiated. (Secondly), thermal plants (primarily coal) for whom the costs and risks of shutting down to avoid dispatch are sufficiently high to outweigh the cost of dispatching at negative prices. If operating under swap contracts, the effective cost is the plant’s underlying short-run marginal cost (SRMC) – mostly its fuel cost. No-one is seriously expecting that new plants of this type will be built in the NEM, and the closure timetable is accelerating. So, the quantity of this type of plant will also shrink over time. As the panel notes, minimum demand events are a security rather than a reliability issue, and they are caused by price-insensitive rooftop solar. So, the MPF is not a solution to these events. With these trends in mind, the Panel should consider increasing the level of the MPF (i.e., to a less negative figure). The market will still typically clear, but the absence of very low negative prices may assist the transition. ENGIE sees no pressing need for an alternative price and consequently does not support indexation”.
Engie also supported a de-coupling of the CPT from the MPC and for the panel to consider “how a CPT (or similar backstop for extreme prices) can be designed to be compatible with reliability requirements during renewable droughts and measured against market participants’ financial resilience so as to avoid cascading default”.
Snowy Hydro made the case for indexation of the MFP, noting that “the falling MFP, in real terms, has weakened the ability of dispatchable assets to signal their cycling costs. If the Reliability Panel decides to leave the existing level of the MFP unchanged it is, in effect, deciding to increase it. Snowy Hydro believes, for the reasons expressed above, that the MFP should be indexed, just as the MPC is also indexed. Such a decision would not represent a change from the existing MFP but rather would preserve the status quo”.
Snowy Hydro also noted that “a CPT which is too low poses a major problem for peaking assets . They typically have low capacity factors and only generate and earn spot revenues during periods of occasional scarcity. A low CPT (and MPC) restricts their ability to recover their fixed costs. It is also a form of moral hazard, because it encourages Market Customers to take on risk - that is, unhedged exposure to the spot market - safe in the knowledge that, once administered pricing is triggered, those risks will be borne by generators. There is strong evidence that the current level of CPT is encouraging such behaviour”.
Origin supported the Panel considering whether the level/form of the MFP remains appropriate, but did not provide a directional view. It did not support a a negative CPT which it considered may “undermine the utilisation and economics of storage by reducing arbitrage potential”.
Shell noted that “The market floor price continues to provide a valuable function with no demonstrated need to adjust the level”. It did not support a negative CPT as “it is not beneficial to consumers and would remove a disincentive to excess generation to reduce output”. It supported the current approach to the CPT.
Alinta did not provide a view on the MFP but suggested a review of a negative CPT. It noted that: “This would reduce exposure to risks faced by generators that have must run and minimum generation characteristics and reduce the costs of disorderly or early exit of synchronous thermal plant. Such a measure would provide symmetry with the (positive) CPT leading to greater equity among market participants”.
The AER argued in favour of a careful review of CPT against its overall objectives, noting that “the CPT s intended to act as a risk management mechanism to limit the exposure of market participants to high spot prices over a protracted period of time. However, it is unclear whether the operation of the CPT to date has achieved this intended aim. Participants have been exposed to periods of very high prices without the CPT thresholds being breached. For example, prices over a quarter averaged over $200/MWh in Victoria and South Australia in Q1 2019. Further, as recently as last month, prices averaged in excess of $600/MWh over a week in Queensland, without the CPT threshold being breached. Given this, and that it has been nearly two decades since the design of the CPT has been reviewed in detail, we encourage the Reliability Panel to review whether the current design is fit for purpose in this rapidly evolving market”.
Issues Regarding the Administered Price Cap
Most submissions agreed with indexation of the APC (eg CS Energy, Hydro Tasmania, Engie), although some noted that the Panel should consider how the APC impacts revenue streams from the increasing amount of storage in the system (CS Energy and Alinta Energy). Alinta raised the concept of whether the APC would continue to be fit for purpose as the system changes, stating that “The increasing penetration of storage combined with the continued role of peak gas and distillate turbines with very lowcapacity factors to supply the market during APC events may warrant a change in this setting and/or a more sophisticated form of administered price”.
Origin Energy and Shell both supported retention at current levels.
Our Insights
Two issues are worthy of note. The first is that while the Panel’s assumption that there is no capacity mechanism remains valid for the purposes of structuring the review, it may be difficult for this to be maintained over time as both this process and the ESB’s broader process around the capacity mechanism mature. The second is the complete absence of the renewable generation sector from the submissions, and the absence of specific commentary on DER orchestration and the impact that negative pricing at the MFP has on retailer revenue and uncontrolled solar. This stands in contrast to the significant role forecast to be played by orchestrated DER from the latter half of this decade under the Step Change scenario.
Where to from here is interesting. As we noted in our original article, on 23 December 2021 the AEMC made a draft determination on a rule change request by Dr Kerry Schott (former chair of the Energy Security Board) to extend the timeframe for the review (to give the Panel more time to consider the ESB’s final market design advice), and to reduce the scope of the 2022 RSS Review to only consider the reliability standard (given the ESB’s capacity mechanism design would be expected to take account of optimal market settings). As an update, the AEMC has now decided in its Final Rule on 3 March to make a more preferable final rule that requires the Reliability Panel to review both the reliability standard and settings in the 2022 RSS Review, not just the standard as was proposed. The Panel is therefore required to consider the reliability standard and settings of an energy-only market to apply from 1 July 2025 to 30 June 2028 and provide its final report of the 2022 RSS Review to the AEMC by 1 September 2022.
End Notes
[1] “Firstly” has been added, as well as “Secondly” to make the point clearer as the dot points in the submission have been removed.
For more information, contact Simone Rennie at srennie@renniepartners.com.au
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