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Two roller coaster rides for the price of one? Preliminary vs final MLFs

In recent years, movements in marginal loss factors (MLFs) have received significant attention in the National Electricity Market (NEM). Many renewable projects in remote areas have experienced material MLF reductions as more supply connects nearby. For example, the MLF for Broken Hill Solar Farm saw a whopping 50 ppt drop in two years (from 1.2456 in 17/18 to 0.7566 in 19/20). Revenue swings of this magnitude could turn a profitable project into a loss.

Many participants were also concerned that the year-on-year movements in MLFs are unpredictable and called for more regular updates by the system operator. In response, AEMO recently started publishing indicative MLFs for the coming financial year through the Preliminary MLF Report in December. This is intended to provide more transparency (or forewarnings) regarding potential major changes in the Final MLF Report in April.

This ‘Chart of the week’ compares the Final 21/22 MLF (y-axis) changes with that indicated in the Preliminary version (x-axis). The dots to the left of the 45-degree line are projects whose final MLFs are higher (those to the right are lower) than predicted in the Preliminary Report.

The chart shows that preliminary MLFs are quite accurate for traditional thermal and hydro plants (most of them hugging the 45-degree line tightly). The initial report also correctly predicted the direction of the change for most projects (top-right and bottom-left quadrants), meaning they provide valuable guidance for participants. However, there are material differences between preliminary and final figures for wind and solar, which are also most susceptible to wild MLF swings.

The most notable ones are solar projects in Southeast NSW and Northwest Victoria. The Preliminary figures predicted they would experience further reductions in their MLFs, but they ended up receiving some welcome improvement in the Final. The differences range between 5 to 7 ppt for these projects. According to AEMO, the discrepancies are due to a voltage collapse limit constraint in Southwest NSW and methodological changes that altered Murraylink flows in the Final. In effect, these projects were taken on a roller coaster ride twice, but the good news is that they came out happy (for this year). More broadly, this raises questions on the value of more frequent (e.g., quarterly) MLF updates, given in the end, only one set of MLFs will apply for the entire financial year.

As more renewable generators enter the market, grid challenges such as MLF and curtailment risks will continue to be part of NEM for the foreseeable future. Cornwall Insight will host an upcoming webinar on REZ: grid constraints and insights on 23 July. You can register for free or get in touch at enquiries@cornwall-insight.com.au.