The Australian Energy Market Commission has set the direction for urgently needed reform of the way generators access transmission networks to deliver electricity to consumers.

AEMC Chairman John Pierce said the COGATI reforms are necessary to enable the connection of new wind and solar across the national electricity market (NEM) to deliver on the Integrated System Plan (ISP).

The proposed reforms address both the need for greater certainty for generators that they can get their energy to consumers, and reduce the financial and risk burden on consumers in funding new transmission investment.

“Current access and transmission pricing arrangements presume that transmission is built for consumers - hence consumers pay for it,” Mr Pierce said.  

“As the volume of generation connecting to the grid becomes increasingly dispersed, transmission networks are becoming more congested which means more infrastructure needs to be built for generators to get their output to market and so be paid for their energy.

“Instead of asking consumers to pay for the network that also benefits generators, we are proposing new ways to share both the cost burden and the risk of new transmission investments.”

The AEMC has today released detail on proposed new measures to give generators the option to pay for firm access rights to the transmission network. These measures include:

• Introducing dynamic regional pricing to better reflect the costs associated with electricity supply from different locations as new renewable generators are increasingly located away from existing coal-fired power stations.
• Creating a transmission hedge to enable generators to manage price risks and so secure access to the network to dispatch their energy, reducing investment uncertainty.
• Aligning transmission planning and operation to generation supply and consumer demand, so that transmission is built to link supply and demand with the costs no longer solely recovered from consumers.

“COGATI reforms will give new generators tools to manage financial risks so they can have more certainty around getting their product to market,” Mr Pierce said.

“They are a cost-efficient way of ensuring that these billion-dollar projects only happen where and when they are needed which is important so we all don’t pay more for this infrastructure that is necessary.  

“Without reform, we face a situation where investment in generation is being made without risk of the financial consequences of how that energy will reach consumers; and where transmission investment decisions are made by networks, and funded by consumers, without sufficient reference to supply.”

The Energy Security Board (ESB) is developing the framework to underpin an orderly energy system transition under a range of future scenarios via the ISP, with a particular focus on doing so at the least cost to consumers.

Today’s AEMC directions paper contains significant detail on the proposed approach to dynamic regional pricing in response to stakeholder requests. Further detail on transmission hedging, planning and operational aspects of the reforms are expected to be released by September 2019 after further consultation with industry and consumers. 

Subject to further consultation, the Commission proposes to provide recommendations to the COAG Energy Council in December 2019 to implement dynamic regional pricing and transmission hedging concurrently in July 2022. 

A public forum on the directions paper will be held in Melbourne CBD on 8 July 2019. Register here.

Submissions on the directions paper are due by 2 August 2019.

Media: Prudence Anderson, Communication Director, 0404 821 935; 02 8296 7817

Background

In the NEM today, generator investment decisions are made by private entities that are paid for the energy they generate once it is sold into the grid. If there is too much congestion on the transmission network, the generators can’t sell their energy and are therefore not paid. That risk is borne by those entities. In addition, consumers pay for congestion through higher wholesale prices by more costly generators being dispatched.

Similarly, if too much transmission is built then consumers will pay for assets that weren’t required. 

Consumers also face the risk of supply-side changes (for example, changes in marginal loss factors) rendering generating plants uncompetitive. These risks may manifest in the form of higher than necessary market prices as a result of reduced generation capacity. 

These risks occur because transmission and generation are built and operated through different processes. Transmission investment decisions are made by regulated networks (publicly or privately owned). These networks assess the appropriate investment in transmission, and the regulator determines the appropriate revenue that should be collected by the transmission company directly from consumers. The risk of poor transmission network investment decisions is therefore borne by consumers. In contrast, generator investment decisions are made by commercial investors.

A lack of coordination between these generation and transmission investment decisions can mean that consumers are paying more than necessary, as any inefficient costs are ultimately borne by consumers.

The AEMC reforms are designed to remove this disconnect, by exposing generators to the local marginal price, and giving generators the ability to purchase transmission hedges to manage price risks that may arise under congestion.  The purpose of transmission hedges would inform transmission planning decisions, and offset transmission use of system charges. This means that the TUOS component of a customer’s bill should decrease, potentially significantly. 

Who are the market bodies?

The 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. 

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

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

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).