ESB final advice highlights major reforms for Post-2025 Market Design

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Ashurst have partnered with RenewEconomy to deliver a free webinar for the energy industry on 1 September 2021 to discuss major reforms in the national electricity market. Click this link and register to attend. 

What you need to know

• There are substantial reforms ahead as described in the ESB's Post-2025 Market Design final advice to Energy Ministers dated 27 July 2021, published on 26 August 2021.
• The ESB's final recommendations to the Energy Ministers are usefully summarised on pages 19-20 of Part A.
• The ESB makes a number of recommendations across a range of issues, many of which are addressed in existing reform processes.  
• There are two key reforms that reflect a new fundamental change to the National Electricity Market (NEM), are of most interest to stakeholders and require detailed policy design: 
  • Introduction of a capacity market: This is the most substantial reform of all the ESB recommendations. The ESB has recommended that the Energy Ministers provide in-principle support for a capacity mechanism in the NEM and to instruct the ESB to work with stakeholders over the next 12-18 months to develop a detailed design of a capacity mechanism (targeted for agreement by Ministers in mid-2023). The capacity mechanism is proposed to be decentralised similar to the Physical Retailer Reliability Obligation to determine the volume of required capacity in the market and gaps for investment. It is intended to be technology neutral and is not limited to specific types of generators.
  • Congestion management model for transmission:  The ESB recommended that Energy Ministers instruct the ESB to prepare a rule change for submission to the Australian Energy Market Commission (AEMC) to progress the congestion management model, adapted for integration with renewable energy zones (REZs). This model complements the Interim REZ framework and will address the emerging congestion management needs of the system. Comprehensive consultation, with a wide range of industry, consumer and government stakeholders on the detailed design of the model will be undertaken as part of the rule change process.

• Beyond the above two key reforms, the ESB recommended a continuation of existing AEMC reform processes, including:
  • Transmission investment and planning: The reforms to improve timely investment and construction of new transmission projects will be delivered through the AEMC's Transmission Investment and Planning Review. See Ashurst's most recent Energy Alert on this here. 
  • Distributed  energy resources implementation: Effective integration of distributed energy resources (DER) and flexible demand which facilitates greater consumer engagement in distributed energy and allows consumers to be rewarded for their flexible demand and generation.  The increase in consumer engagement, including competition between DER service providers is also to be aided by a more robust consumer protection framework. The DER Implementation Plan aims to build consumer and market capability to support innovation, the integration of new business models and a more efficient supply and demand balance. See Ashurst's most recent Energy Alert on this here .

• The final ESB advice is provided in three parts:
  
  • Part A is a summary of the four key reform pathways which address:
    • Resource adequacy mechanisms and ageing thermal plant;
    • Essential system services and scheduling and ahead mechanisms;
    • Effective integration of distributed energy resources (DER) and flexible demand;
    • Transmission and access reform; and
    • Data strategy and enabling implementation.

• Part B goes into greater detail regarding the relevant reform packages, including addressing immediate, initial and long-term reforms.
• Part C includes appendices to Part A and B which includes a range of helpful insights including (but not limited to) the design choices for a capacity mechanism, analysis of the evolution of customer and retailer/aggregator roles in distributed energy and more details on congestion management in the NEM.

What you need to do

• Register here to attend Ashurst's Energy Transformed webinar and podcast series on 1 September 2021 where these new reforms will be discussed with the Hon Matt Kean, NSW Minister for Energy, Anna Collyer, Chair of the AEMC and Simon Corbell, CEO of the Clean Energy Investor Group.

• Everyone in the NEM is impacted in some way by these reforms. Stay connected with us as we track the progress of these proposed reforms and offer you the insights you need.
  
  

ESB post-2025 Market Design Final Advice

The Energy Security Board (ESB) was commissioned with the task to develop advice on reforms to the National Electricity Market (NEM) to meet the needs of the transitioning energy market up to and beyond 2025.

On 30 April 2021, the ESB published an options paper (available here) which was used as the basis for consultation with stakeholders on the detailed market design which would be recommended to the Energy Ministers in mid-2021.  The options paper addressed four key categories of reform which are continued as theme for discussion in the final advice to the Energy Ministers dated 27 July 2021.

The reform pathways are categorised into immediate, initial and next term reforms, which could also be described as short term, medium term and long term reforms. 

The final advice to the Energy Ministers was published by the ESB on 26 August 2021 and contained a number of major reforms which will have a significant impact on the design and operation of the NEM, some of which are already underway, however the most significant new are:

• the recommendation to introduce a capacity market, with an emphasis on a decentralised model using a Physical Retailer Reliability Obligation to determine the volume of required capacity in the market and gaps for investment, rather than a centralised model as currently exists in the Western Australian energy market; and
• the congestion management model which would represent a move away from the current open access model in the NEM to a model where congestion charges are placed on all generators, and congestion rebates are directed towards incumbents and REZ foundation members  

The ESB identifies four reform pathways in its final advice.

Resource Adequacy Mechanisms – a new capacity market

The ESB recommendations centre on the delivery of market based arrangements to value capacity as the generation mix of the NEM changes.

The most significant change in this area is the recommendation for the development of a new capacity market, or Physical Retailer Reliability Obligation.  The ESB has prepared a straw proposal for this market using a certificate model where:

• certificates are allocated to resources based on their ability to generate during "at risk" reliability periods (where there is a "reliability shortfall").
• The certificates value both existing dispatchable fleet and new assets able to respond flexibly to support high penetration of variable generation.
• Liable entities are required to hold sufficient certificates to meet demand during pre-identified periods.

While the ESB has explored a certificate framework, the ESB does note that the use of existing contracts as the basis for a capacity mechanism is an alternative to the proposed certificate scheme, and that the assessment of this option will be a priority during the detailed design of the mechanism.

Transmission and Access

The options paper discusses a number of reforms to transmission and access.  This adopts Renewable Energy Zone (REZ) Planning Rules and the Principles for an Interim REZ framework to address urgent planning restrictions for REZs, as well as other key measures set out below.

The Congestion Management Model (CMM) 

The ESB has asked the Energy Ministers to instruct the ESB to prepare a rule change for submission to the AEMC to progress the congestion management model, adapted for integration with the REZs.  The congestion management model aims to encourage new generation and storage in the REZs but also lessen the likelihood that grid access is degraded by the connection of other generators outside the REZ. 

At its heart, the CMM introduces a dual mechanism of: 

• congestion charges across all scheduled and semi-scheduled generators reflecting their impact on congestion during a dispatch interval; and
• congestion rebates calculated at each dispatch interval.

The rebates would broadly be available to incumbents, and generators which locate in accordance with the planning framework (i.e. a REZ). Where the network hosting capacity is reached, even in a REZ, new generators connecting once capacity is reached will not be eligible for the congestion rebates.

Importantly, the locational marginal pricing and firm transmission rights which discussed in the Coordination of Generation and Transmission Investment market review by the AEMC do not form a part of the reforms proposed by the ESB.  However, elements of these proposals will be seen in the CMM.

Greater efficiency in investment in and delivery of large transmission projects 

The ESB observed that work is underway to develop committed and actionable Integrated System Plan projects but there are challenges arising in building the new network relating to a range of planning, community, biodiversity, indigenous heritage and other concerns and the reluctance of network businesses to take on risk and cope with financing very large projects. There are larger questions about the network planning framework, the role of the ISP and the Regulatory Investment Test for Transmission (RIT-T). There is a question whether RIT-T could be streamlined and whether large transmission projects could be delivered more efficiently through competition rather than by incumbent transmission network service providers.  This will form a part of the AEMC's current Transmission Investment and Planning Review.  Ashurst recently released an Energy Alert on this review available here.

System Services Mechanisms

Essential system services and scheduling and ahead mechanisms which become increasingly more necessary with greater thermal generation retirement.  Essential system services like frequency control (including fast frequency response service and enduring primary frequency response arrangements), operating reserve services and system security services need to be unbundled from existing arrangements in the spot market. ESB reforms identify the creation of an integrated ahead market or development of an inertia spot market.

Support Distributed Energy Resources (DER) Implementation Plan

Effective integration of distributed energy resources (DER) and flexible demand which facilitates greater consumer engagement in distributed energy and allows consumers to be rewarded for their flexible demand and generation.  The increase in consumer engagement, including competition between DER service providers is also to be aided by a more robust consumer protection framework. The DER Implementation Plan aims to build consumer and market capability to support innovation, the integration of new business models and a more efficient supply and demand balance.

The DER Implementation Plan sequences immediate and initial regulatory, technical and market reforms that address emerging risks and builds capability to deliver benefits to all consumers from high levels of distributed energy resources and new energy services. The DER Implementation Plan aims to deliver the following outcomes:

• Consumers are rewarded for their flexible demand and generation without options for how they want to engage with a fit-for-purpose consumer protection framework;
• wholesale market supports innovation, the integration of new business models and has a more efficient supply and demand balance;
• Networks are able to accommodate the continued uptake of DER and two-way flows and are able to manage the security of the network in a cost-effective way;
• AEMO has the visibility and tools it needs to continue to operate a safe, secure and reliable system, including maintaining system security associated with minimum load conditions.

Next steps

Watch this space as there are exciting times ahead in the NEM. We encourage all interested stakeholders to:

• be involved in consultation processes offered from time to time;
• click here to subscribe to receive Ashurst Energy Alerts; and
• click here to register to attend the Ashurst and RenewEconomy webinar on 1 September 2021.

Authors: Kate Phillips, Partner and Danielle Davidson, Senior Associate