The common thread linking big and small network reforms

By Senior Economist Strategy and Economic Analysis, Greg Williams

Technology is dramatically reducing the costs of do-it-yourself generation – known in the trade as distributed energy resources. Solar panels, battery storage, electric cars have arrived and are of increasing interest and importance to consumers and the sector – holding out the promise of increased energy efficiency and savings.

The wholesale market of the national electricity market (NEM) used to be limited to big players because generation was only cost effective at a large scale and the metering/IT support required was very expensive. Now innovating technology is firmly in the hands of growing numbers of consumers and fundamentally changing the way consumers engage with energy markets.

AEMC reforms to support this future are being driven by two paradigm-shifting reviews on coordination of generation and transmission investment (COGATI) and the electricity network economic regulatory framework (ENERF).

The common thread linking these two reforms is all about the need to overhaul pricing in large and small networks to deliver a national grid that is fit for the future.

New generation has to be connected to, and be able to use, the grid in ways that realise the most value to both generators and consumers.

COGATI is the AEMC’s proposal for managing the costs and risks of getting new generation into the market. Under the proposal, large-scale generators and storage would get paid locational marginal prices. A new risk management instrument would give generators and storage the means to manage locational price risks and provide more investment certainty. The shift to a higher number of smaller, dispersed generators across the network requires these changes to make sure the networks are used more efficiently.

At the lower voltage end of the network, the ENERF work recognises that the electricity network is fundamentally moving away from a one-way supply chain model to a platform for local energy production, consumption, storage and trading. Behind the meter, there has been a massive surge in solar PV and millions of homes and businesses are now energy producers as well as consumers. Unfortunately, networks still largely charge for energy consumed and do not necessarily value the services consumers now require.

Both COGATI and ENERF advocate greater use of prices for signalling the value of consuming or generating electricity according to conditions in the relevant part of the network. Doing this could reduce network congestion and delay the cost of upgrading network capacity, a saving all consumers would appreciate.

Our vision is for a market where consumers buy and sell energy and demand response services in a more dynamic way – in response to prices and their own preferences. Network businesses also need to be enabled and incentivised to provide the new services that are valued by users of the network. These changes will benefit everyone on the grid – not just those with solar panels or other distributed energy resources. By making the most of what we’ve got, the grid can operate more efficiently, which means lower prices for all consumers.

New energy technology is changing the economics of power supply

We are fast moving towards the need for a new pricing paradigm.

Over the past decade the number of customers with rooftop solar in the national electricity market and Western Australia’s south west wholesale electricity market with; has increased from 35,637 (0.4% of customers) to 2.29 million (20% of customers) – and growing.

When the NEM started trading, it was limited to large players because the generation was only cost effective at a large scale and technology and communications required to participate was too costly to impose on smaller players. It was decided that establishing a single price in each region would be more cost effective and increase competition. So, while the wholesale market remained concentrated on relatively few and very large sources of generation in central locations, the AEMC has periodically considered the case for expanding the number of locations where electricity prices are calculated.

The Australian Energy Market Operator (AEMO)'s draft Integrated System Plan (ISP), released on 12 December, shows that by 2040 distributed energy generation capacity is expected to double or even triple and over 30 GW of new grid-scale renewables is needed to more than make up for the likely retirement of 15 GW of coal-fired generation. Unlike the existing fleet, the new generation comes from a large number of relatively small and geographically dispersed generators. This generation is likely to be connected in sunny or windy areas at the edges of the grid, where the network is less strong.

It is now time to reveal the local value of electricity

These changes illustrate why, in its COGATI draft discussion paper, published on 14 October 2019, the Commission has decided it is now time to establish more locational prices that reveal where best to locate and operate new sources of generation. The Commission is proposing changes that are common in markets elsewhere, particularly in the United States and New Zealand.

The Commission is proposing to retain the existing regional boundaries so financial trading would remain largely unchanged, but would add tools to manage the variations in cashflows associated with locational price risks that are driven by transmission congestion. Overall, the proposed changes should result in more coordinated generation and transmission investment and operation, creating efficiencies over the longer term, ultimately lowering costs for consumers. The instruments for delivering these outcomes, locational marginal pricing and financial transmission rights, are recognised by the Energy Security Board (ESB) as key features of the market design for the NEM post 2025.

In keeping with this position on the need for network pricing to reflect how the network is now being used differently, the ENERF report also advocates for greater use of price signalling to improve the integration of distributed energy resources (DER). The report notes that distributed energy resources can be used to help electricity networks manage peaks in demand on the grid and technical challenges created by ‘reverse flows’. This adds up to lower costs for consumers and a secure and reliable power system.

Both COGATI and ENERF reforms are the Commission’s response to the increasing digitalisation brought about by technology change, as they both consider how to provide market participants and electricity customers with vital information about the value and cost of their actions and decisions. Both reforms acknowledge that without price signals, affected parties could miss the opportunity to realise the full value of their resources.

What are the CoGaTI and ENERF workstreams?

The COAG Energy Council has asked the AEMC to report every two years on drivers that could impact future transmission and generation investment.  The inaugural COGATI report was released in December 2018, making recommendations for comprehensive reform to the way investment in generation and transmission is coordinated. Work is now underway on the changes required to deliver these recommendations. A project update paper will be published on our website on 19 December 2019, ahead of a final report in March 2020.

The Grid of the future review is another major annual report to the COAG Energy Council which examines whether the economic regulatory framework is robust, flexible and continues to support the efficient operation of the energy market in the long-term interests of consumers. The 2019 Review focused on reforms and other actions needed to integrate distributed energy resources into the electricity system.