The AEMC today handed down a final determination backing a consumer-focussed approach to the way electricity losses are calculated in the national electricity market. The Commission did not make the rule sought by Adani Renewables to change the way losses are calculated by averaging them out. The request was rejected because the change would see consumers wear the financial cost.

The physics of the electricity network mean that when you transport electricity across poles and wires, some of it is lost as heat. Marginal Loss Factors (MLFs) are a method of calculating and putting a price on these losses. They are calculated annually by the Australian Energy market Operator (AEMO).

Marginal loss factors are a form of market price signal that can financially affect generators depending on where they are located in the grid. They reflect the effect that a generator’s output has on the total electricity losses in the system, given where they are located. Higher losses are associated with being located in a weak part of the network.

The Commission found that averaging these losses out by using the ‘average loss factor’ (ALF) calculation method would shift the costs of losses onto both consumers and generators who are located where losses are lower.

“Consumers shouldn’t have the cost of individual business decisions simply transferred to them,” AEMC Chairman John Pierce said today.

“The submissions we received from the Australian Competition and Consumer Commission, Energy Consumers Australia and others support this view,” he said.

The Commission has made a more preferable rule that gives AEMO more flexibility around the way it calculates MLFs. We are working to give investors more information about the market. In October we changed the rules to increase transparency of new generation projects.

“We recognise loss factors are a challenging issue for the industry. More accurate information, higher quality data and expediting progress on necessary transmission upgrades should all support a better solution for both industry and consumers,” AEMO CEO and Managing Director, Audrey Zibelman said.

Background

During the submissions process, we heard from renewable generators and investors who told us that volatility and uncertainty were affecting the investment environment and had increased their cost of capital. They said loss factor values were declining and less predictable than in the past, which was making it difficult for them to do business. There are also well-documented issues with grid congestion.

In our determination, the Commission agreed that volatility and uncertainty are affecting the investment environment, but we disagree on the cause. Volatility is a symptom of a broader issue – the rapid transition of the NEM. This doesn’t make MLFs inherently wrong – it means the NEM is rapidly changing and volatility is a symptom of the change.

“The rapid pace of renewable investment has meant that generation has got ahead of transmission,” Mr Pierce said.

“We agree this has to be fixed but diluting market price signals and shifting costs onto others is not the way. Changing to ALFs could increase total losses, which means more electricity needs to be generated to meet consumer demand. It could also increase wholesale energy prices and overall make the operation of the NEM less efficient.

In our determination, the Commission considered external modelling supplied by the Clean Energy Council that indicated ALFs would mean lower prices for consumers.

We conducted extra analysis and modelling to investigate this. We found that the external modelling supplied looked only at spot price changes and did not take into account the impact on transmission use of system charges that are paid by consumers or intra-regional settlement residues. The Commission’s modelling has also identified that the impact of a change to ALFs to the revenue of individual generators could be significant.

“MLFs are more of an issue in particular areas of the network, so they affect some generators more than others and not everyone has the same experience,” Mr Pierce said.

“This is reflected in the submissions we received – not all renewable generators are opposed to the current framework.”

The rule request submitted by Adani Renewables also sought to change the way intra-regional settlement residues (IRSRs) are allocated. Our final determination maintains the existing framework for allocating the IRSR.

Media: Kellie Bisset, Media and Content Manager, 0438 490 041 or (02) 8296 7813