AEMC unveiled plans for storage integration in the NEM

What you need to know

• The AEMC published its long awaited final determination and rule in relation to the integration of energy storage into the NEM on 2 December 2021.
• The final rules do not materially differ from those set out in the previous draft determination.  The key changes between draft and final are:
  
  • Changes in terminology.
  • Changes to take into account other rules made since publication of the draft rules.
  • Drafting clarifications.
  • Changes arising from the later implementation date (ie, commencement of the majority of the rules will now commence in June 2024).
• The final decision creates a new participant category, an Integrated Resource Provider, to capture participants with bi-directional energy flows to avoid dual registration and other deficiencies in the NER's application to hybrid and storage facilities.
• The rules clarify that TUOS and DUOS may be payable in relation to storage or hybrid facilities, although the AEMC has flagged a further rules change process may apply in 2022-23 on how network prices are set for storage and other large flexible loads.
• The rules enable aggregators to recognise small-scale storage and provide market ancillary services from both generation and load.
• The non-energy costs recovery framework has been amended so that, irrespective of the registration category, cost recovery is based on a participant's gross consumed or sent out energy in a trading interval.
• The new rules will come into effect in full on 3 June 2024 (later than previously anticipated), other than two changes that come into effect on 31 March 2023 being:
  
  • the rule changes in relation to aggregators to provide market ancillary services from both generation and load; and
  • hybrid facilities being able to use aggregate dispatch performance.

What you need to do

Storage proponents should:

• consider their current positions under existing connection agreements, noting that the transitional arrangements in the final rules provides that the rules are not to alter existing arrangements;
• during the connection process, negotiate with the NSPs on the tariffs and service levels to apply, in order to obtain a negotiated transmission service with a negotiated outcome on UOS charges (we note that a number of submissions on the draft determination from NSPs supported this process);
• consider the practical methods for reducing potential UOS charges, including for hybrid systems by charging the battery behind the meter using the renewable generation or behind the meter at the connection point with the NSP; and
• consider methods for managing charging of the energy storage systems especially considering how to manage maximum demand charges.

Key observations

• The final rule is largely consistent with current treatment by AEMO of the registration and connection of standalone energy storage facilities and hybrid facilities (including the approach set out in AEMO's fact sheet on the registration of hybrid facilities in the NEM).  The final rule incorporates amendments to confirm the position in the fact sheet together with some other important modifications as described in this article. 
• There are some key issues that have been raised by industry that have not been addressed in the final rule.
• Issues associated with retrofitting an existing renewable generator with a storage facility (in effect, creating a hybrid facility) have not been addressed including:
  
  • the prospect of having to re-negotiate the GPS for the existing renewable generator under clause 5.3.9 of the NER, and the associated requirement to conduct system strength impact assessments – each of which may require the installation of additional equipment at the facility to comply with the latest technical requirements; and
  • the fact that separate entities may own different components of a hybrid facility, which will give rise to a person owning and operating a network (and under current requirements, one of those entities would need to be a registered Network Service Provider and would need to separately connect each component of a hybrid facility to its registered network, which creates a significant barrier to implementation of a retrofit).
• The final rule does not change the current approach of setting performance standards at the connection point (rather than at the asset level), which means an IRP's facility will still be subject to a single GPS.  However the final determination notes that the GPS "would reflect the technical and performance capabilities of each unit behind the connection point".  The AEMC notes this issue is being considered as part of the Connection Reform Initiative, jointly sponsored by AEMO and the Clean Energy Council
• The final determination confirms existing arrangements for payment of TUOS and DUOS charges and require IRPs to pay TUOS and DUOS for the load components of their facilities. We understand that current storage facilities are treated differently with respect to payment of TUOS/DUOS charges (depending on what is negotiated and the connecting Network Service Provider's own interpretation of the NER). We also understand that the AER has issued a number of "no-action letters" in respect of some storage facilities, which have allowed the  TNSPs  to not impose TUOS charges. 

This is a significant change given AEMO's rule change request sought an exemption for storage from the TUOS and DUOS charges. This could have a significant financial impact on projects. It also remains to be seen whether networks will start imposing charges on those existing storage facilities at this time. 

Background

On 2 December 2021, the Australian Energy Market Commission (AEMC) published its final determination and rule in relation to the Integrating energy storage systems into the NEM rule change. The final rule is a significant development in the broader market reform piece currently underway to prepare a future-proof framework suitable to the energy transition. 

Storage and hybrid facilities are experiencing huge momentum, supported by the need to provide system security due to the upcoming retirement of ageing thermal generation assets, and to firm growing amounts of renewable generation. 

The AEMC's final rule intends to better integrate storage and hybrid facilities into the National Electricity Market (NEM), and resolve some of the deficiencies in the application of the National Electricity Rules (NER) to these technologies.

The final rule changes are to commence in March 2023 with the majority of rule changes to come into effect in June 2024.

Existing arrangements – Hybrid and energy storage facilities

Registration

The NER do not define storage technologies, and were traditionally based on a one-way flow of electricity. As a result, there are no specific registration categories and classifications for storage units and hybrid facilities, meaning that participants must register and participate in the NEM under two separate categories (Market Generator and Market Customer) in relation to storage units.

TUOS/DUOS

Under the existing framework, there is a lack of clarity around how transmission use of system (TUOS) and distribution use of system (DUOS) charges apply to storage and hybrid facilities.  As a result, storage is being treated different depending on the connecting Network Service Provider's own interpretation of the NER (meaning that not all storage facilities currently pay TUOS or DUOS).

Dispatch

In order to participate in central dispatch run by the Australian Energy Market Operator (AEMO), a storage participant must provide both an offer to generate electricity and a bid to consume electricity, and will receive separate dispatch targets. AEMO's systems currently require two separate dispatchable unit identifiers (DUIDs) for the generation and load components of a facility, which add considerable administrative and regulatory complexity.

Other issues

The treatment of batteries as both load and generation in the NEM has various other consequences. This includes being subject to two different marginal loss factors (MLFs) (each for generation and load), different treatment to single-category participants in relation to the recovery of non-energy costs, different treatment of load and generation under the intervention compensation framework, and the need for two NMIs (one a dummy) for load and generation. 

Further, storage facilities have a single connection agreement and Generator Performance Standard (GPS), creating complications as technical obligations for generators are more onerous than that for loads.

Final rule change – Hybrid and energy storage facilities

The centrepiece of the final rule change is the introduction of a new participant category, the Integrated Resource Provider (IRP) into the NER. The final rule also clarified the application of TUOS/DUOS, proposes significant changes to the non-energy costs recovery framework and makes considerable changes elsewhere throughout the NER in order to better integrate storage and hybrid facilities into the NEM and to update and streamline the NER.

Definition of storage in the NER

Aligning with the rationale of the Post-2025 market reforms under consideration by the Energy Security Board, the final decision uses technology-neutral language in its new definitions in the NER. As such, the new term "bidirectional unit" (or BU) has been created for a unit that has both load and generation, to avoid referring to energy storage specifically. The AEMC considers that defining storage or hybrid facilities based on their technology (i.e. based on whether a unit stores energy) is not necessary as different obligations will instead attach to a unit based on the services it provides to the market, that being, whether it can provide generation or load, or both.

New participant category

The IRP category will accommodate a variety of participants with bi-directional energy flows that may both offer and consume energy, and ancillary services, including storage, hybrid facilities and aggregators of small generation and storage units.

Under the final rule, it will be mandatory for any new participant to register as an IRP if, behind a single connection point, it has both generation capability (sufficient that on its own would see it register as a Market Generator) and consumption from the connection point above auxiliary load. The final determination would also make it mandatory for an existing participant that is registered as both a Market Generator and Market Customer in relation to the same facility to re-register as an IRP. 

Participants registered as Market Small Generation Aggregators will automatically be re-registered as IRPs, and as such would become a "Small Resource Aggregator" (SRA) in respect of each of their small generating units. SRAs (with small generating/storage units under 5 MW) will be allowed to provide market ancillary services from generation and load, where they meet technical requirements to do so. 

The IRP market participant category will be integrated into the intervention compensation framework to resolve issues that storage facilities face under the current framework as a consequence of dual registration. IRPs will also be liable entities under the Retailer Reliability Obligation (RRO) if their aggregate annual load exceeds 10GWh in a particular NEM region.

TUOS and DUOS

The final rule includes minor changes to the NER to clarify the application of TUOS and DUOS charges. This is a departure from AEMO's rule change request which sought an exemption for storage from the TUOS and DUOS charges, in part because the AEMC considered this would not fit a technology-neutral approach to the rules. 

The new market participant category, the IRP, will be treated as a Network Customer for the purposes of Chapter 6A in relation to electricity taken from the grid and therefore will pay TUOS for prescribed transmission services.

The final rule does not require the IRP to automatically pay network charges, including TUOS charges. Rather, storage participants can choose the service they need and whether they go through the process of obtaining a negotiated or prescribed shared transmission service.  IRP participants can negotiate arrangements with TNSPs in the same way storage participants have. TSNPs will negotiate prices consistent with those that have been negotiated for other transmission customers receiving the same service. 

The AEMC notes further work is needed on how network prices are set for storage and other large flexible loads (e.g. hydrogen) to provide them with efficient operational and investment incentives to support the energy market as it transitions to more renewables. The Commission anticipates a separate rule change request from interested participants that would allow them to consider those issues in more depth. The Commission will prioritise any such rule change request in the 2022-23 financial year.

Recovery of non-energy costs

The final rule will amend the non-energy costs recovery framework to align with the overarching principle to base the recovery of these costs on a beneficiary/causer pays approach, or if that is not possible then disperse the costs as broadly as possible.  To effect this, amends the non-energy costs recovery framework so that, irrespective of the participant category, cost recovery is based on a participant's gross consumed or sent out energy in that relevant interval. This amended framework will provide that consumed and sent out energy will be measured separately for all market participants and not netted at the connection point, or among a market participant's connection points (ie, non-energy cost recovery would be based on a participant's gross energy flows during relevant intervals).  

The AEMC has designed this reform to align with a move towards a two-sided market, as the costs will be recovered from participants proportionally based on how they interact with the market through the demand and supply side services they provide, not the assets themselves or participant categories that deliver them. It intends to remove the disparity between how storage participants are currently treated compared to other participants, by recovering non-energy costs from all participants in the same way they are currently recovered from storage participants. 

Ramp rates

The AEMC has decided to set a minimum ramp rate at the lower of 3 MW or 3% of scheduled load capacity and remove the 6 MW threshold for aggregating semi-scheduled units. This would see a consistent minimum ramp rate set for the following that have the same number of units and MW capacity:

• storage and non-storage participants;
• load and generation units; and
• scheduled and semi scheduled units.

This is intended to make storage participation less complex, be more equitable for scheduled generation and load, allow semi-scheduled participants to aggregate units above 6 MW and better align with the longer-term two-sided market vision of treating load and generation more consistently. 

Other changes

The final rule changes drafting throughout the NER to reduce the extent of technology, direction and participant specific language and to address ambiguity of how certain terms and concepts apply to energy storage and hybrids.  It also consolidates certain provisions in Chapter 2 of the NER.

Authors: Paul Newman, Partner; Andre Dauwalder, Senior Associate and Nicholas Berrey, Graduate.