For a Few Dollars More: more markets proposed, not all survive

There are a mountain of rule changes currently before the Australian Energy Market Commission (AEMC), many of which will fundamentally change the manner in which the National Electricity Market (NEM) operates.

In this Chart of the Week we rate the impacts and probability of implementation of the rule changes being considered as part of the consolidated system services rules change consultation paper released by the AEMC on 2 July 2020.

The NEM energy-only market is no longer. The future of the NEM is a market with multiple capacity, reserve, frequency response, ramping and system strength markets. The Energy Security Board (ESB) is mandated to investigate and develop recommendations and rule changes for a post 2025 market design by early 2021. The current rule changes proposed by participants in this current group of rule changes appear to address a number of the issues the ESB is seeking to investigate.

The consultation paper clearly illustrates the AEMCs agreement with a number of the market participants proposing reserve/capacity markets stating that there is a need for reserves in the NEM. This requirement is only likely to grow in the future, and there is no explicit mechanism to procure reserves which the AEMC proposes have traditionally be provided for free or below cost. The concept of a reserve would fundamentally change the NEM dynamics by providing a new revenue stream for generators as well and potentially suppressing wholesale prices (as 100% of revenue no longer needs to be generated from the wholesale market). The AEMC clearly acknowledges the need for reserves, which would intimate that they see a path to implementation for this type of service and may be inclined to establish a reserve market of some kind. Accordingly, we believe that a reserve/capacity market will be approved in some shape or form. As a result we place a high probability on the development and approval of an operating reserve service. However the AEMC caveats their supportive remarks by suggesting that in order to be successful, any reserve market will need to be complementary to the services currently operational in the NEM.

In addition to the reserve market rule changes there are three rule change requests that deal with frequency, inertia and system strength. These issues have been some of the most contentious issues in the NEM. We think that the most likely of these new services is the transfer of responsibility for system strength to the TNSPs. Additionally it would also be likely that a combined or co-optimised fast frequency response and inertia market be developed as they are closely linked. AEMC also reiterated their preference to incentivise alternative or complementary provision of frequency control in relation to their recent decision to mandate primary frequency control.

We also feel that Tas Hydro’s proposal for synchronous services creates unnecessary complexity for minimal gains and may not be considered favourably. Accordingly we assessed it as unlikely to be implemented.

Join us to review these issues at our Quarterly update.