The NSW Government releases its consultation paper for the Central-West Orana REZ

 What you need to know

• The NSW Government’s Electricity Strategy and Electricity Infrastructure Roadmap sets out a plan to deliver five Renewable Energy Zones (REZ) in the Central-West Orana (CWO), New England, South-West, Hunter-Central Coast and Illawarra regions.
• The CWO REZ was formally declared on 5 November 2021 and the New England REZ was formally declared on 17 December 2021. A declaration formalises a REZ under section 19(1) of the Electricity Infrastructure Investment Act 2020 (NSW) (EII Act) and sets out its intended network capacity, geographical area and specified network infrastructure. For the CWO REZ, the intended network capacity is 3 GW and its geographical area can be viewed here.
• Access right schemes are key to coordinate and encourage investment in REZs and to realise the objectives of the NSW Electricity Infrastucture Roadmap. This alert sets out a summary of the proposed access rights regime that will apply to the CWO REZ, and is intended to form the basis of all future REZs, as proposed in the Department of Planning, Industry and Environment's (the Department) consultation paper on the REZ Access Rights and Scheme Design: Central-West Orana (the Consultation Paper) released in December 2021. A copy of the paper can be found here.
• Access rights will be allocated under a declared access scheme that authorises access to, and use of, the REZ network infrastructure as specified in a REZ declaration (REZ Network Infrastructure). For each REZ, the relevant access scheme declaration will nominate the transmission network that is a sub-set of the REZ Network Infrastructure that supports the intended network capacity giving rise to access rights in the REZ (REZ Scheme Network). For the CWO REZ, the REZ Scheme Network will comprise only the new transmission infrastructure that will support REZ development within its geographical boundary (New REZ Infrastructure). A REZ Network Operator will be authorised by the NSW Consumer Trustee (AEMO Services) to develop, build, own (or lease) and finance New REZ Infrastructure projects under the EII Act and in accordance with the Project Deed and subsequent Transmission Lease.
• The proposed access scheme is a physical connection model, rather than a financial access model, and is analogous to the 'connection access protection model' proposed by the ESB in its consultation paper for REZ published in January 2021. Under the proposed model, access rights are physical in nature and awarded up to an initial aggregate maximum capacity cap with a view to maintain a defined level of power transfer capability within the REZ.
• Access rights will be tendered through a combined competitive process run by AEMO Services whereby generators and storage providers will bid for Long-Term Energy Service Agreements (LTESA) and access rights, or just access rights if they are not seeking an LTESA or vice versa (see AEMO Services' discussion guide on the proposed criteria for the allocation of the first tender of LTESAs and the NSW Government's consultation paper on LTESAs). Projects which are successful in obtaining an LTESA (but not an access right) will not be able to seek an access right in later tender rounds and vice versa, bar some good faith exemptions in the best interest of NSW electricity consumers. Irrespective of whether proponents seek an LTESA or an access right, they will be required to enter into an agreement which sets and monitors tender bid undertakings, including project development milestones, reporting requirements and bonding, community and employment commitments (Project Delivery Agreement).
• The allocation of access rights to proponents will be granted in three stages by the Energy Corporation of NSW (EnergyCo NSW). The first phase will include an allocation up to an efficient level above the REZ's intended network capacity. If after the first allocation of access rights, the forecasted transmission curtailment level is lower than anticipated (such that the target transmission curtailment level has not been exceeded and additional capacity can be made available), the second phase of allocation will allow for more access rights to be granted. The third allocation of access rights will depend on whether augmentation to the REZ Scheme Network permits the creation of additional access rights without harming existing access right holders.
• To participate in the REZ Scheme, generators will be required to pay access fees. The Minister for Environment and Energy (the Minister) will set a minimum access fee. Above the regulatory minimum, AEMO Services may determine higher fees to be paid in order to discharge its statutory duty. The mechanism being proposed to recover access fees is an up-front capital payment, ongoing annuity payments, or a combination of both.
• The NSW Government has not put forward any specific incentives for connecting a load to the REZ. However, loads are encouraged to directly connect to the CWO REZ infrastructure to maximise the utilisation of the REZ Scheme Network and reduce curtailment risks.
• The REZ connection process will be delivered through a REZ Access Standard, which includes REZ-specific Generator Performance Standards (GPS) and inverter-based resource standards, centralised system strength to improve connection timeframes, batching of power system studies and connection via designed network assets, in a bid to increase certainty and reduce costs for proponents as compared to the current open access connection process in the NEM.
• The congestion management model (CMM) proposed by the ESB is targeted for implementation in 2025. If the CMM is implemented, the Department will evaluate impacts on access right holders in the CWO REZ and determine whether it is appropriate to derogate in any aspect to the CMM to protect and maintain the substance of the access scheme.
• The access scheme declaration will be the primary statutory instrument that implements and operationalises the access rights scheme. The access scheme declaration is planned to be declared and the access rights allocated through competitive tender by AEMO Services in the fourth quarter of 2022.

What you need to do

• Interested parties are invited to make a submission to the Department by 14 February 2022. Feedback forms can be found here.
  
  

 
Challenges of the NEM open access regime

The current open access arrangements in the NEM give generators the right to negotiate connection to transmission or distribution networks. However, this has created the following challenges:

• new renewable generation projects have had their connection delayed or output significantly curtailed due to system security issues, which are exacerbated by a lack of shared network capacity;
• revenue uncertainty for generation projects has increased because of higher congestion and marginal loss factor risk on the shared network in areas where more generation projects have connected than the network has capacity to support; and
• generation proponents have no incentive to fund shared network improvements because other ‘free rider’ competitors may benefit from the investments, while also increasing network congestion.

What benefits does an access right give a proponent?

Successful proponents who are awarded an access right will receive the following entitlements for the access scheme term (i.e. 15 years from the commissioning of the first substation on the REZ Scheme Network):

• non-firm access to connect to the REZ Scheme Network subject to curtailment;
• the ability to export generation to the network up to a project-specific limit for four periods of the day (dawn, day, dusk and night); and
• the ability to engage in a streamlined connection process instead of the NEM open access regime.

 
What is the overarching aim of the access rights regime and how will it be achieved?

The overarching objective of the access rights regime is to maximise the efficient usage of the transmission asset (i.e. the REZ Scheme Network), whilst providing sufficient certainty to proponents regarding their curtailment risk.

The access scheme declaration will apply to the REZ Network Infrastructure and is designed to support the access rights regime. The access scheme is based on a physical connection model with access rights initially being awarded up to an initial aggregate maximum capacity cap. By providing for a limit on the capacity that connects to the REZ network infrastructure up to the targeted level of transmission curtailment, proponents will be given certainty that additional projects will not be connected in the second allocation of access rights if the target transmission curtailment level is forecast to be met or exceeded. This certainty allows proponents to be able to better forecast NEM locational price signals, such as marginal loss factor and curtailment.

The target transmission curtailment level is intended to provide flexibility to grant access rights above the initial allocation of access rights where the network is considered under-utilised, including when the intended network capacity of a REZ is increased by EnergyCo NSW. This flexibility ensures that the efficient usage of the REZ Scheme Network is maximised.

The graphs below depict the design elements which are key to understanding the access scheme and the proposed allocation approach of access rights. We provide a brief description of each of the key elements below.

What type of projects are eligible to apply for LTESAs and access rights?

Access rights will be tendered through a combined competitive process run by AEMO Services, whereby generators and storage providers will bid for an access right with an LTESA, if preferred, or they will just bid for an access right if they are not seeking an LTESA (or vice versa depending on the type of project).

At the end of the LTESA/access rights tender evaluation process, AEMO Services will recommend:

• successful projects to EnergyCo NSW for allocation of an access right; and/or
• successful projects to the Scheme Financial Vehicle for the award of an LTESA.

Proponents that require an access right and an LTESA for a project must obtain these in a single competitive tender round. To mitigate proponents gaining an unintended advantage in the competitive tender process, AEMO Services will prevent projects that bid for, and are successful in obtaining, an LTESA (but not an access right) from seeking an access right in a later tender round and vice versa. Some flexibility may be permissible in limited circumstances where proponents have acted in good faith and an exemption to apply separately for an access right and an LTESA is in the best interest of NSW electricity consumers.

While future competitive tenders for LTESAs and access rights will typically be combined into a single process, an exception has been made for the first tender due to the ongoing design and planning for the CWO REZ. The first tender will be run as a pilot in the second quarter of 2022 for eligible generation and long duration storage projects.

Irrespective of whether proponents seek an LTESA, an access right or a combination of both, they will be required to enter into Project Delivery Agreements which set and monitor tender bid undertakings, including project development milestones, reporting requirements, community and employment commitments and bonding arrangements.

In summary, successful proponents seeking:

• an LTESA only (e.g. projects outside a REZ ("outstanding merit" projects)), will enter into an LTESA and a Project Delivery Agreement and will not be able to seek an access right at a later point;
• an access right only, will be required to enter into a Project Delivery Agreement and will not be able to enter into an LTESA at a later point; or
• an LTESA and an access right together, will enter into an LTESA and a Project Delivery Agreement.

The below table sets out what types of projects are eligible to apply for LTESAs and/or access rights and which allocation of access rights they will be entitled to.

What is the proposed approach to the allocation of access rights?

The allocation of access rights will be staged into three phases. By choosing to provide for three phases of allocations, the Department is seeking to optimise consumer outcomes whilst meeting the policy objectives of providing certainty to proponent generators, ensuring efficient utilisation of the REZ Scheme Network and supporting the ability for proponents to fund augmentation of the REZ Scheme Network. The three phases of allocations are as follows:

• allocation of access rights up to the initial Aggregate Maximum Capacity Cap (Allocation 1): the first allocation of access rights sets a cap on access rights at an efficient level above the REZ’s intended network capacity at the Aggregate Maximum Capacity Cap. As the Aggregate Maximum Capacity Cap will exceed the REZ’s intended network capacity, access rights will not provide firm access to the REZ Scheme Network. To assist proponents in modelling their curtailment risks, it is proposed that proponents will be provided with an indicative generation mix and associated Aggregate Expected Capacity Profile that is used in setting the Allocation 1 Aggregate Maximum Capacity Cap;
• allocation of additional access rights up to any revised Aggregate Maximum Capacity Cap (Allocation 2): the second allocation of access rights is for headroom in capacity created where actual REZ utilisation after Allocation 1 is significantly below expectations and there is room for further generators to connect into the REZ. This may arise if, among other reasons, projects are operating significantly below forecast levels or significant load has joined the REZ. Projects will be allocated during Allocation 2 up to the point where the forecast of transmission curtailment meets the Target Transmission Curtailment Level. Headroom for Allocation 2 will be calculated as per the Aggregate Maximum Capacity Profile, showing a different level of headroom for each of the four time periods;
• allocation of access rights for market-led network augmentation (Allocation 3): the third allocation is intended to provide a mechanism for the market to propose augmentation to the REZ Scheme Network to allow the creation of additional access rights without harming Allocation 1 and 2 access right holders. Allocation 3 will be granted by EnergyCo NSW on an ad-hoc basis, but will only become available after Allocation 1 has been fully exhausted and is expected to take place only after any initial second allocation has occurred.

What access fees will proponents pay?

Payment model

Applying the NEM fee model to the REZ would result in consumers paying for the shared REZ network and generation projects paying the cost of their connections to that REZ network. AEMO Services is currently contemplating whether to deviate from this model and whether access fees should recoup network related costs in part or full.

Quantum and structure of the fees

Generators who are successfully allocated LTESA/access rights will be required to pay access fees. The quantum will vary based on different categories of access, including access rights or subordinate access rights or any other access permitted to REZ Network Infrastructure beyond the intended network capacity of the REZ.

No conclusions have been made on the quantum of the access fee as yet, however, it is anticipated that there will be a minimum access fee, which will be comprised of community benefit fees and regional economic benefit fees (see below). The access fee will also factor in the administrative costs of administering the access scheme.

Above the regulatory minimum, AEMO Services may determine higher fees to be paid in order to discharge its statutory duty to act in the long-term financial interests of NSW electricity customers. In addition, AEMO Services will aim to ensure that the access fee will avoid creating unacceptable barriers for entry into, or utilisation of the, REZ infrastructure and not materially impact LTESA fixed prices, option exercise behaviour and contract market liquidity.

The access fee will likely be set on an equal per unit basis irrespective of generation type in order to maintain technology neutrality. The mechanism being proposed to recover access fees could be an up-front capital payment, ongoing annuity payments or a combination of both.

Purpose of the fees

Aside from the construction and maintenance of the CWO REZ infrastructure itself, the access fees will be used for two alternative purposes. A portion of the access fees will be directed to benefit the REZ communities, named the "community purpose". Another portion of the access fees will be directed to promoting regional economic development, including supporting employment, skills and training of employees inside a REZ who are affected by changes in electricity generation in NSW.

Treatment of load

Loads are encouraged to directly connect to the CWO REZ infrastructure to maximise the utilisation of the REZ Scheme Network and reduce curtailment risks. At this point, a load will not be required to hold an access right or pay an access fee and will be permitted to connect to the REZ open access arrangements under current NEL and NER arrangements during any of the three REZ allocations.

No specific incentives are proposed for connecting a load to the REZ. Loads will only be charged network use-of-system costs associated with the existing shared transmission network up to the boundary points of the REZ, and will not be charged network fees associated with recovering the cost of the REZ network infrastructure. This provides a financial incentive for loads to connect, without increasing costs for generators.

Proponents will benefit from a streamlined connection process

The current NEM connection process has been recognised as a source of uncertainty and risk by many generation and storage developers seeking to connect to the grid. This is because the connection process has the potential to be long, expensive, lack transparency and subject to resource constraints from AEMO and transmission network service providers. The issues with the current open access regime have arisen, in part, because the connection process was not established to accommodate the unprecedented volume of connection applications that are currently being received.

The Department has sought to address some of the issues associated with the current connection process by proposing a more streamlined connection process. The objectives of the streamlined connection process are to minimise re-work of complex power system modelling, improve certainty of timeframes for proponents, reduce time to market and greater certainty of technical requirements at an earlier stage.

The streamlined network connection process (as depicted in the diagram below) will be integrated with the combined access rights and LTESA tender process and shall include the following four key design elements:

• REZ Access Standards;
• system strength solutions;
• batching of power system studies; and
• common connection assets.

REZ Access Standards

Under the CWO REZ, it is intended that EnergyCo NSW will facilitate AEMO and Transgrid in developing REZ GPS and REZ inverter-based resource standards (together, the REZ Access Standards).

It is expected that any reasonable quality generator will be able to meet the REZ GPS, but reflecting that technical requirements may be adjusted according to a project's generation and storage technologies. In addition, for some technical requirements, these standards may be less onerous than the technical requirements under the NER.

The REZ inverter-based resource standards will identify the required technical limits that plant must meet, including a minimum short circuit ratio, voltage phase shift withstand capability and rate of change of frequency requirements. By requiring inverter-based plant to meet this standard, projects will reduce system strength risks in the REZ Scheme Network. We note that the inverter-based resource standards are informed by the recent AEMC rule change.

As a condition of the access rights tender, proponents will be required to agree to meet the REZ Access Standards. Proponents will also need to include the relevant standard that will apply in their application to the REZ Scheme Network and which will ultimately be included as an agreed performance standard in a proponent's Connection Agreement.

Once successful proponents are allocated an access right, it is intended that they will be automatically entitled to submit an application to connect to Transgrid and the REZ Network Operator in accordance with the approval requirements under section 5.3.4A or 5.3.4B of the NER. This is designed to be an automatic process because Transgrid and AEMO must accept the REZ Access Standards as the agreed standards without negotiation, thereby significantly decreasing the anticipated timing of the connection process. Transgrid will notify the proponent that its GPS have been agreed. The proponent will then be required to provide final plant models to Transgrid.

Batching of power system studies

Following approval of the application to connect, successful proponents will then follow a ‘batched’ connection process, whereby Transgrid will conduct REZ power system studies for all projects that have submitted applications to connect to the REZ Scheme Network within a specified time period. By batching connections, it is anticipated that efficiencies will be realised because the connection, limit and stability studies for all projects can be addressed in the one process.

Following the power system studies, Transgrid will make offers to connect to the proponents and Connection Agreements will be entered into between the REZ Network Operator, Transgrid and proponents. Registration and commissioning shall occur in accordance with the current NEM process.

System strength solutions

The Department has proposed a centrally coordinated approach to providing system strength services for the REZ Scheme Network. By centrally coordinating the delivery of system strength, the modelling of system strength impacts of individual projects can be avoided, thereby supporting efficient investment in system strength solutions.

Instead of proponents providing their own system strength solutions, under the Project Deed between the REZ Network Operator and EnergyCo NSW, the REZ Network Operator will deliver specified system strength requirements for the new transmission infrastructure that will support REZ development to ensure stable network operation up to the Allocation 1 Aggregate Maximum Capacity Cap of a given REZ, at the time of design. The REZ Network Operator's costs of meeting initial system strength solutions will be recovered from projects based on a fixed allocation methodology reflecting predetermined contributions on a pro-rata basis per megawatt of generation capacity.

Any additional system strength requirements for the REZ Scheme Network will be provided by Transgrid. Transgrid's costs of meeting these requirements will be recovered from projects connected to the REZ Scheme Network via a system strength transmission charge under the NER, based on that project's forecast contribution to the need for system strength.

Connection via designated network assets

Common connection assets are expected to be delivered through the recently-adopted Designated Network Asset framework under the NER. Designated network assets are treated as part of the shared transmission network, rather than as connection assets, and are subject to third-party access rights, rather than the open access regime. The designated network asset regime incentivises third-party investment in transmission infrastructure by providing special access rights to designated network asset owners (i.e. parties that invest and fund the assets).

Where the designated network asset regime is used to provide common connection assets, projects connecting to designated network assets which connect to the REZ Scheme Network will be required to hold access rights under the REZ access scheme before connecting to that designated network asset.

EnergyCo NSW will maintain a coordination role with respect to connection assets and is proposed to maintain a right to intervene to achieve improved costs and social licence for the projects and the REZ where connection can be achieved through a shared connection asset.

How does the access scheme treat projects seeking to connect to existing infrastructure inside and outside a REZ?

The connection of projects to declared REZ infrastructure which do not contribute to the intended network capacity of the REZ may impact the overall REZ network performance and access right holders. As such, an access scheme control mechanism will apply to projects seeking to connect to existing infrastructure identified in the REZ declaration over a voltage threshold of 66 kV (see categories C and D in the below flowchart and map), while projects below this threshold may apply under existing connection arrangements.

Projects connecting to the REZ Scheme Network will be categorised as Category A projects, which for the CWO REZ, will be those projects that are connecting to New REZ Infrastructure. Category A projects will therefore need to participate in the access rights/LTESA auction and be granted an access right to connect.

Projects that seek to connect to New REZ Infrastructure outside of the geographical boundary of the REZ will be categorised as Category B projects and will not be allowed to connect to this part of the network infrastructure.

The two proposed access control mechanism options include:

• controlled access through a competitive tender allocation process with the same eligibility criteria as projects seeking LTESAs (e.g. community benefits and regional economic development requirements); or
• controlled access through a ‘do no harm’ test (i.e. a test that assesses whether the project is expected to have an adverse impact on a fully subscribed REZ as determined at the end of the first and second allocation of access rights).

It is proposed that certain projects will be grandfathered as part of the scheme, such that they can avoid being subject to the access scheme control mechanism. Namely, the access scheme control mechanism will not apply to projects that have either of the following within 6 months of the date of publication of the access scheme declaration:

• a development consent; or
• a submitted application to connect.

Interaction with the ESB's congestion management model

Subject to formal adoption by the Energy National Cabinet Reform Committee, the CMM proposed by the ESB is targeted for implementation in 2025. Within the ESB's proposed model, it has outlined that where a bespoke REZ-specific access scheme is implemented prior to 2025, it may be integrated into, or applied in conjunction with, the CMM.

Under the CMM, generators will receive a congestion rebate for locating themselves within the REZ or less congested parts of the network. This is intended to provide generators with greater revenue and certainty regarding congestion risks.

The ESB has indicated it will release a detailed consultation paper in March 2022 on the proposed rule changes to incorporate the CMM. We will provide updates on any developments as they arise.

If the CMM is implemented, the Department has indicated that it will evaluate impacts on access right holders and determine whether it is appropriate to derogate in any aspect to the CMM to protect and maintain the substance of the REZ access scheme.

When and how will the access scheme be declared?

The access scheme will be delivered through a combination of an access scheme declaration, regulation and contract (i.e. the Project Delivery Agreement, Connection Agreement, Project Deed and Transmission Lease).

The access scheme declaration (to be made by the Minister) will be the primary statutory instrument that implements the access scheme and will (among other things):

• identify the infrastructure forming the REZ Scheme Network to which access rights may be allocated;
• set the method for determining the volume of access rights that can be allocated and conferred, including the Allocation 1 Aggregate Maximum Capacity Cap;
• provide a mechanism to increase the volume of access rights that can be allocated where new infrastructure or augmentations increase the capacity of the REZ Scheme Network;
• govern the process to grant access rights in Allocations 2 and 3;
• establish a mechanism to control access to existing infrastructure specified in a declaration that is not part of the intended network capacity of the REZ (i.e. the access control mechanism);
• facilitate the development of the REZ Access Standards; and
• establish and maintain a public register of access rights.

The access scheme is anticipated to be declared in the fourth quarter of 2022. A draft access scheme declaration for the CWO REZ will be published by the Department as part of its consultation soon. A schedule of other draft access scheme declarations is due to be published in mid-2022.