On 6 February 2018 the AEMC made a final determination not to introduce a market mechanism for power system inertia at this time. Instead, we will continue to assess the potential for an inertia market mechanism through our Frequency control frameworks review which will publish a final report and recommendations in mid-2018. 

This will allow time for the Australian Energy Market Operator (AEMO) to gather information about the minimum levels of inertia needed as the generation mix in the electricity system changes. AEMO’s data will help show if there are economic benefits from having additional inertia by allowing for greater power transfers on the network. For example, additional inertia could allow for higher interconnector flows between regions, which could reduce overall costs to consumers.

The final determination also notes that the current application of constraints by AEMO to manage low system strength issues in South Australia limits the market benefits that could be obtained through the provision of additional inertia. Through the Frequency control frameworks review, we will consider how inertia can be accurately valued with the application of constraints to manage other system security requirements, such as system strength and system stability, and with the provision of alternative frequency control services, such as fast frequency response.    

The proposal to provide a market mechanism for additional economic benefits should be distinguished from the need to provide minimum levels of inertia to maintain system security. This need was addressed in September 2017 when the AEMC made a final rule requiring networks to provide minimum levels of inertia. The new rule provides confidence that system security can be maintained in all regions of the national electricity market, while minimising the costs to consumers.

Background
This rule change request, submitted by AGL, concerns the introduction of an Inertia Ancillary Services Market as a response to the declining supply of inertia in the national electricity market.

On 27 June 2017 the AEMC published its final report on the System security market frameworks review. The report made a number of recommendations, both for immediate measures to address priority issues and a further program of work to develop robust market frameworks for the longer term.

Two of the recommendations contained in the final report relate to the provision of power system inertia:

1. Place an obligation on TNSPs to provide minimum required levels of inertia, or alternative equivalent services, to allow the power system to be maintained in a secure operating state.
2. Introduce a market-based mechanism to realise the market benefits that could be obtained through the provision of inertia above the minimum obligation on TNSPs.

On 19 September 2017 the AEMC made a final rule determination with respect to the rule change request received from the South Australian Government on Managing the rate of change of power system frequency. The final rule commences on 1 July 2018.

The final rule addresses the first recommendation by placing an obligation on TNSPs to make available the minimum level of inertia required to maintain secure operation of the power system by 1 July 2019.

The final rule does not provide a mechanism to realise the market benefits that could be obtained through the provision of additional inertia above the minimum required level.

However, the Commission considers that a market mechanism has the potential to complement and build on the certainty created through the TNSP obligation by providing the ability to continuously adjust the level of service provision in real time to maximise efficiency.

The Commission intends to continue its assessment of the appropriate design of an inertia market mechanism through the Frequency control frameworks review.