The Australian Energy Market Commission today released a draft rule to boost the power system’s strategic reserve mechanism so it has the flexibility to effectively protect the reliability of the national electricity market at the lowest cost possible to consumers.

The reliability and emergency reserve trader (RERT) is a safety net which enables the system operator, AEMO, to pay a premium for ‘out of market’ generation or demand response to be on standby when it forecasts supply shortages ahead.

We are calling for public submissions on our recommendations to tighten the rules so they set clear requirements for industry to step up and offer least-cost supplies to the market so the RERT can be an effective tool in keeping the lights on during extreme weather events and emergencies.

AEMC Chairman John Pierce AO said more needs to be done by governments and the power sector as a whole to improve reliability. Procuring emergency reserves is only one part of a comprehensive framework that is designed to provide enough capacity to meet the reliability standard, he said.

“Emergency reserves are just that – for emergencies. Price signals through the spot and contract markets, along with forecasts and notices from AEMO, give the market incentives and information to supply longer-term generation and demand response when and where it is needed.”

“Emergency reserves are more expensive, which is why we need to keep them to a minimum. That’s why we also need a well-functioning market with clear price signals and information, backed up by policy certainty from governments, with tools like the retailer reliability obligation which is being developed by the Energy Security Board right now.

If approved by the COAG Energy Council as planned, the retailer reliability obligation could be in place mid year.

The Energy Security Board is conducting public consultation on the obligation in the weeks ahead – it is a long-term solution that will be designed to encourage investment in dispatchable generation which the system has to have to meet its reliability standard.

Mr Pierce said the draft rule released today would help address risks to power system reliability that are being caused by the changing characteristics of the power system as lower emission and non-synchronous, weather-driven generation like wind and solar connects to the grid while synchronous generators are closing. 

“The national electricity market today is a far more complex interconnected system of renewable and non-renewable energy generation sources that need to interact effectively to provide essential power supply to households and businesses,” Mr Pierce said.

“Different arrangements are needed by AEMO to stabilise the system and manage emergency reserves as the transformation of the power system accelerates.

“Today’s draft rule is designed to minimise the cost of emergency reserves. It also directly links the level of strategic reserves to the reliability standard, which is set by an independent panel of experts including large energy users, consumer groups and industry,” said Mr Pierce. 

The electricity market is designed to supply enough power to meet consumer needs 99.998% of the time - the reliability standard. Price signals from electricity spot and contract markets, along with information from AEMO’s forecasts of demand, tell generators and demand response providers when, where and how much power supply or demand response is needed. 

But there are times when the power system’s capacity falls short – typically when extreme weather events are forecast. To fill the gap, AEMO uses a range of emergency mechanisms including the RERT to buy emergency reserves to be on standby.

Today’s draft rule makes a range of enhancements to the RERT process to lower procurement costs and improve transparency. Key changes include:

• improving incentives for customers to reduce demand to minimise the need for emergency reserves: we want incentives for demand response – for example, retailers encouraging their customers to reduce energy use during heatwaves. So costs of emergency reserves will be recovered, where possible, from customers who caused the need for the RERT.
• increasing transparency and awareness of options for emergency reserves supply: AEMO would provide regular updates on how the RERT is procured and how much emergency reserves cost. 
• clarifying the trigger:  the RERT can be triggered if AEMO forecasts a breach of the reliability standard which requires enough generation to service 99.998% of consumer demand. This clarity helps the market plan operations and budgets. 
• increasing the lead time to buy reserves from nine to twelve months:  with a longer lead time, AEMO can get better deals from a larger pool of providers, including demand response providers. This would ultimately lead to lower costs for consumers.
• providing a price guide for emergency reserves:  the price should typically be less than the cost of load shedding. AEMO will use the AER’s assessment of the value customers place on reliability as an input.
• encouraging a lower-cost competitive market response: by only letting providers enter into contracts for emergency reserves if they have not been in the market for the past 12 months. This avoids a more expensive ‘RERT-only market’ developing. 

On very rare occasions – only a few days in the last decade, and most recently last month in Victoria – there is a shortage of supply even with emergency reserves. On these occasions, AEMO directs network businesses to interrupt supply to some customers to bring supply and demand into balance and help avoid a system-wide blackout.

“This controlled load shedding is regrettable and put in place as a last resort. Blackouts can be very distressing for customers, particularly on extremely hot days, and will impact some people and businesses more than others,” said Mr Pierce. 

The AEMC is underway with an extensive system reliability and security work program which was started before South Australia’s system black event in 2016.

Submissions on the draft determination are due by 21 March 2019.

Media: Prudence Anderson, Communication Director, 0404 821 935 or DL (02) 8296 7817.
7 February 2019

BACKGROUND

Who are the market bodies?

AEMC Australian Energy Market Commission is the rule maker, market developer and expert adviser to governments. It protects consumers and achieves the right trade-off between cost, reliability and security.

AEMO Australian Energy Market Operator is the electricity and gas systems and market operator. It works with industry to keep the lights on.

AER Australian Energy Regulator is the economic regulator in charge of rules compliance. It policies the system and monitors the market.

Who is the Energy Security Board?

The Energy Security Board was established by the COAG Energy Council to coordinate implementation of recommendations from the independent review into the future security of the national electricity market (the Finkel review).

What is the Reliability Standard?

The current standard sets an expectation there will be enough supply to meet demand 99.998% of the time each year. It is reviewed every four years by the Reliability Panel of experts from large energy users, consumer groups, generators, network businesses, retailers and AEMO. It is informed by the value customers place on a reliability supply of power, known as the value of customer reliability (VCR). The Australian Energy Regulator is currently consulting on the value of customer reliability and will provide an updated VCR at the end of 2019.

Setting the standard is about striking a balance between having enough generation available to meet consumer demand for the vast majority of scenarios, and keeping costs as low as possible for consumers. 

For example, it may be far too expensive to plan for a very rare, say one-in-ten year event, by building a new generator and more poles and wires to support it – particularly when it may never even be used. 

The alternative way to manage rare events is for AEMO to buy emergency reserves (using the RERT) and issue directions to generators to turn on, if the market hasn’t responded.

How does the market responds to meet consumer demand

Market participants respond to price signals and information published by AEMO to provide the level of reliability that is expected by the Reliability Standard.

Spot and contract markets for electricity provide price signals to the market about how much power is needed. For example, when the spot price is increasing, generators ramp up their output or more expensive generators turn on to sell extra power to the market. For example, a gas peaker or pumped hydro plant may jump in.

The market gets another prompt when AEMO publishes its regular short, medium and longer term forecasts of when reserves may be running low. 

If the market response isn’t enough, AEMO can intervene by contracting for reserves under the RERT. Under the draft rule, AEMO can procure reserves up to a 12 months in advance of a forecast shortfall (currently this is nine months). 

As forecasts are updated, AEMO may set up a panel of RERT providers in the medium term (between ten weeks’ and one week’s notice of a projected shortfall) and in the short term (between seven days’ and three hours’ notice of a projected shortfall).  AEMO will seek additional reserves from these medium and short-notice RERT panels if the forecast gap in the medium or short term is more than it had contracted for through the long-notice RERT.

If supply continues to tighten, AEMO issues notices to the market to encourage more generation or demand response.

If there is not enough response to these notices, AEMO can dispatch emergency (RERT) reserves. 

AEMO can also direct a generator to increase its output, or a large energy user, such as an industrial plant, to temporarily disconnect its load or reduce demand, provided this can be done safely. 

Controlled load shedding

As a last resort, if there is no more generation or demand response available, controlled load shedding is used. This is when AEMO directs network businesses to interrupt supply to some customers to bring supply and demand back into balance and help avoid a system-wide blackout. 

It works by interrupting supply to a group of customers for up to half an hour, then rolling on to a different group.

Importantly, controlled load shedding does not include sensitive groups such as hospitals and emergency services. Also, businesses or energy users that need continuous energy supply, such as data centres and customers on life support, have their own back-up plans, for example on-site diesel generators.

This has happened on a few days in the past decade, most recently in Victoria on 24 and 25 January 2019, all during extreme heatwaves.