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Energy Spectrum Australia

Energy Spectrum Australia | Issue 7

Welcome to the seventh edition of Energy Spectrum Australia.

The below extract has been taken from our seventh edition, and if you have enjoyed reading this article and want to read more about the latest developments in the Australian energy market, please contact Ben Cerini, b.cerini@cornwall-insight.com.au for more information.

AEMC releases more details on CoGaTi

On 26 March 2020, the Australian Energy Market Commission (AEMC) published three updates as it continues to progress its energy grid access reforms under the Coordination of Generation and Transmission Investment (COGATI) review. These updates include a transmission access reform update paper, a technical blueprint for the access model, as well as a benchmarking study on access reforms overseas.

The update paper on transmission access reform presents a two-part solution to improving transmission frameworks and supporting the continuing evolution to a reduced emissions electricity sector. This report is expected to form a fundamental part of any future market design to be further developed and modified over the coming year by the AEMC, through the Energy Security Board’s (ESB’s) existing processes for market design.

The first part of the solution – which falls under the ESB’s mandate – involves improving the frameworks around transmission planning and investment decision-making processes via actioning of the Integrated System Plan (ISP). In addition to changes around actioning of the ISP, the Council of Australian Governments (COAG) has also charged the ESB with providing interim advice on options for the implementation of Renewable Energy Zones (REZs) along with their other market design work.

The second part of the proposed solution – which the AEMC will continue to develop as a part of the ESB market design work – will focus on transmission access arrangements reform. According to the paper, access arrangements around transmission require reform for the transmission infrastructure built from the ESB work to be efficiently and effectively utilised.

The technical blueprint for the access model outlines methodical specifications of the proposed access model for transmission in the NEM. Given the COGATI review commenced in early 2017, and concluded with a final report in December 2018, this technical report now presents blueprints for locational marginal pricing (LMP) and Financial Transmission Rights (FTRs); core components of the new model.

A key change in this updated design from the October update is the tenure aspect of FTR designs. Making FTRs available for up to 10 years into the future has been espoused by the AEMC in consideration of stakeholder feedback. Specifically, stakeholders sought FTR tenures that are more in line with Power Purchase Agreement (PPA) lengths as well as the economic life of generating assets. Whilst this longer term FTR could be of value to investors, concerns have also been raised about hoarding. In addition, the risk of ascertaining how much future capacity in transmission will be needed exactly to back these FTRs has also been raised. Whist the AEMC considered these valid concerns, they also believe these are risks that can be managed through a detailed design process as the design evolves.

To promote the liquidity of FTRs, the AEMC proposes different avenues through which they can be acquired. These include grandfathering of incumbent participants, auction for eligible participants, as well as on a secondary market by any party. It is left to be seen what the impact of the grandfathering arrangements will have to the ability of new participants to acquire FTRs of fair value terms. In the blueprint design, the AEMC themselves acknowledge that the new design should start with most of the network covered by grandfathered FTRs. Whist this transitional grandfathering is proposed as a way to reduce the risk of sudden changes in electricity prices, it could also impede the ability for new generators to reach market depending on the structure and terms of the grandfathering arrangements.

The risk of limited access to new generators is implicitly tied to the issue of market power. Exactly how this risk is managed could determine the success level of this reform in incentivising new generation where it is needed the most. The AEMC is currently undertaking impact analysis to determine the significance of market power considerations under this reform. The consideration of market power in the designed details is to be informed by this impact analysis.