The Australian Energy Market Commission (AEMC) is considering options to improve current market arrangements for the provision of security services to ensure the power system remains secure in response to rule change requests from Hydro Tasmania and Delta Electricity.  

Essential system services (ESS) are critical to maintaining overall power system security by meeting core power system requirements. 

Given the current transition to a new operating environment with exiting synchronous generation and increasing penetration of inverter-based resources such as wind, solar and batteries, the Australian Energy Market Operator (AEMO) is regularly intervening to direct generators to provide system security, to make sure the market is operated securely. 
The Operational security mechanism rule change process is considering options that would improve arrangements for maintaining security of the power system both today, and across the transition.  

Supporting the power system through the transition

The Commission released a draft determination for this project in late 2022 outlining a design for a new tool that would allow AEMO to procure, schedule and optimise system security services in operational timeframes. 

After carefully considering the proposed approach in the draft determination and stakeholder feedback to date, the Commission is of the view that there may be simpler and more immediate solutions available to address the problem compared with the model set out in the draft determination.  

The Commission considers that a focus on simplicity and flexibility, rather than complex mechanisms for operational procurement could result in greater benefits, and less costs, for consumers. There are two main reasons for this:

• There are benefits to waiting for a greater understanding of the engineering and technical capabilities of the system before introducing complex market changes. Our understanding is still developing about system security needs through the transition (including our ability to define services rather than relying on asset configurations), and how new technologies will contribute to security. The Commission considers significant progress is likely in coming years on these matters. 
• We already have security frameworks that are comprehensive and allow for procurement of services – system strength, inertia and NSCAS. A simple yet effective approach is to ensure these frameworks are set up to enable procurement of security services to support the transition, and that they can be scheduled in real time. Building on existing frameworks is likely to put in place arrangements quicker.

We propose that the OSM rule change will focus on the following:

• aligning the existing system strength and inertia frameworks, and if Network Service Providers (NSPs) choose to meet their obligations under these frameworks through contracts with third parties, how such contracts could be scheduled in operational timeframes
• improving transparency and efficiency of the directions process, and
• enhancing the Network Support and Control Ancillary Services (NSCAS) framework.

This approach ensures that the opportunities identified in the OSM rule change process continue to be progressed while also addressing several issues identified with the approach proposed in the draft. This includes: 

• how best to provide appropriate long-term investment signals to encourage investment and to encourage learning about the power system
• avoiding complex interactions with the energy spot market
• market power concerns.  

More details on the new direction for the rule change and the issues that led to the change in direction are outlined in the forward direction note.  

The timeframe for a final determination has been extended

Given the complex issues raised by this rule change, which have led to the change of direction, the Commission has extended the timeframe for a final determination to 21 December 2023. This will allow for greater engagement with stakeholders on the new direction to inform the proposed solutions. 

The draft rule released in September 2022 proposed an operational tool to value, procure and schedule security services  

The draft determination proposed to introduce an operational tool to value, procure and schedule security services. This tool was designed to procure security services not already procured through a market by receiving offers close to real-time through multi-part bids. The OSM as designed in the draft determination also proposed to enable planning timeframe contracts, such as system strength, to be operationalised by the OSM. More information on the design of the OSM previously proposed by the AEMC can be found in the draft determination below.

Overview of the rule change process

Hydro Tasmania’s rule change request, received 19 November 2019, proposed an approach where system services would be procured within the spot market and the need for system services would be determined by binding constraints. This would involve the creation of a “synchronous services market” which would be integrated with the existing energy and FCAS spot markets. 

Delta Electricity’s rule change request, received on 4 June 2020, proposed an approach where system services would be scheduled ahead of time outside of the spot market. System needs would be identified through the short term project assessment of system adequacy.  

The Hydro Tasmania and Delta Electricity rule change requests were consolidated on 2 February 2022, pursuant to section 93 of the NEL, under the name “Operational security mechanism” (ERC0290). The AEMC decided to consolidate its consideration of the rule change requests because both identify the need for new arrangements to schedule and procure essential system services as the proportion of variable renewable energy (VRE) increases. 

Key dates for this rule change 

• Rule change request received (ERC0290) – 19 November 2019
• Rule change request received (ERC0306) – 2 July 2020
• Consultation paper published – 17 July 2020
  • Submissions due 13 August 2020 – see below
• Directions paper published – 9 September 2021
  • Submissions due – 21 October 2021 – see below
• Rule change requests consolidated pursuant to s93 of the NEL – 2 February 2022
• Draft determination and rule due – 21 September 2022
  • s107 extension of time granted to publish draft determination and rule (due to complexity of issues) – 24 September 2020, 9 March 2021, 17 June 2021, 24 November 2021, 22 June 2022, 25 August 2022
  • s108A report published giving reasoning for a rule not being made within a year of initiation – 17 June 2021
• Final determination and rule expected completion – 21 December 2023 
  • s107 extension of time granted to publish final determination and rule (due to complexity and difficulty of issues raised by stakeholder submissions to draft determination) – 22 December 2022, 25 May 2023.