Marginal loss factors: are we going average or what?

Marginal loss factors (MLFs) have emerged as a hot‑button topic in the National Electricity Market (NEM) after being a relatively unexciting feature of the market.

Previously, in the period 2000-2015, MLFs were reasonably predictable and variations year-on-year were minor. This reflected the stability of the generation sector with much of the supply provided by large generators, connected to high voltage transmission lines, to the key demand centres.

Contrast this with today, new generators are connecting to very different parts of the network at an unprecedented rate. While some are connecting in suitable locations for their technology, they are located far from the end users and in some cases on weak parts of the transmission network, which can result in larger losses.

The current environment is making MLFs difficult to forecast accurately and to ultimately incorporate into investment decision-making for some market participants.

In response, there have been multiple rule change requests including one in February 2019 from Adani Renewables seeking to change the MLF calculation methodology to an average loss factor methodology. The proposed rule change received mixed responses from industry, with a general consensus for increased transparency of new projects and of the MLF framework.

What is needed is clarity. MLFs, among other uncertainties, are already having an impact on the appetite of investors looking for stable returns on investment; the first half of 2019 saw new committed investment in the NEM falling to its lowest levels in three years. The potential for project revenue to be impacted on both the price side (MLF change driven) and also on the supply side (congestion/ constraint driven) is making investors wary.The Australian Energy Market Commission (AEMC) has today deferred its draft determination on this rule change request to November 21. It is left to be seen if the COGATI transmission access review would address some of the future impacts of MLFs by better aligning generation investments with transmission network capacity in renewable energy zones.

In our analysis, the largest variability in MLFs is occurring in areas with a combination of high renewable penetration, lower grid strength and situated far from load centres (see Figure above). Front of mind is the impact on relatively new renewable projects like Broken Hill, Silverton and Kiata which have seen MLF reductions as large as 20 percentage points (pp) recently. Less mentioned is the impact on conventional plants like Uranquinty (-9pp) have also seen their MLFs fall over the same time period.

The key to the MLF variability is location (less so technology), therefore the solution should target how best to incentivise investment to address imbalances and who will ultimately bear the cost to unlock these zones.