Key takeaways from COAG's review of future security of the NEM:
On 9th June COAG published its long awaited Independent Review into the Future Security of the National Electricity Market (NEM) undertaken by a Panel chaired by Australia’s Chief Scientist, Dr Alan Finkel (the Finkel Review). The review was in response to the emerging issues impacting power system security in the National Electricity Market (NEM). Specifically these include the increasing penetration of wind and solar generation, shrinkage of the fossil fuel fired sector, the need to continue reducing emissions from the generation sector if Australia is to meet its international commitments and the fragility that this has introduced in a market designed over twenty years ago when none of these factors were prevalent.
The report itself runs to over 200 pages and makes 50 separate recommendations, many of which are for further reviews. A large proportion of the report is focused on the near term system reliability issues that could emerge as demand increases next summer, but the report also speaks to longer term energy policy through its recommendations for a Clean Energy Target. This briefing summarises those recommendations that are of most relevance to industrial, commercial and government organisations, the report in full can be accessed here.
The CET proposal has attracted the most attention and will be most difficult politically for the federal government to implement. It recommends a new scheme that would reward generators producing power at a carbon intensity below a threshold level set by the government. The mechanism would be similar to that for the existing Renewable Energy Target, with generators creating certificates based on how clean their generation is and the retailers being required to back a proportion of their load with certificates or pay a penalty for any shortfall. The burning question here is what the threshold level will be?
The coal lobby would prefer a higher threshold so that the younger and cleaner coal fired plants (or any new ones) can participate in the scheme, or alternatively, have no scheme at all. The environmental lobby wants a lower threshold to cut emissions more steeply. The CET will likely run in parallel to the current Renewable Energy Target (RET) scheme. Modelling for how the CET would impact the future electricity price shows that overall the CET would reduce the cost of electricity in the long run, because it will encourage investment in new plant that is currently lacking precisely because there is no energy policy beyond the RET scheme, and it isn’t sufficient to make up for the number of ageing coal plants that are likely to close in the future. It looks as if the CET would increase delivered energy prices marginally in the shorter term, but decrease them marginally in the longer term.
The report contains a number of recommendations to improve system reliability and to help prevent any recurrence of the South Australia and NSW experiences of the past 12 months, with particular regard to the forthcoming summer. Two recommendations in particular stand out. One, the requirement for new generators including wind and some large scale solar installations to be able to provide fast frequency response services. The second is the requirement for transmission businesses to provide a sufficient level of inertia for each region (which basically means making sure that there is enough plant running to provide the required frequency response). When South Australia suffered its state wide black-out, the available generation in SA was falling away rapidly as weather brought down transmission lines and disconnected generators. There weren't sufficient plants available to pick up the lost generation quickly enough (fast frequency response) and the result was the black-out. Taken together these recommendations should help prevent a similar situation occurring.
Two plant closure announcements (Alinta’s Northern power station in South Australia and Engie’s Hazelwood power station in Victoria) took the market by surprise mainly because they were made less than six months before the final closure date, and caught the market off guard. The report proposes requiring three years notice of closure. That would give the market operator ample time to assess the impact of the closure and take whatever actions are necessary to manage the effect on system security. It would also allow the retailers to more easily plan their contract purchases. However, three years is a long time and we will have to wait and see whether the proposal is implemented as-is or reduced in duration.
A second recommendation is for gas fired generators to provide the market operator with details of their gas purchase contracts. In the past the market operator has requested that gas fired units be brought online at short notice but this has been defeated by gas availability under short time frames. Knowledge of the gas supply arrangements would help in planning for high demand/low generation periods and could prevent customer disconnections. Both of these recommendations are positive in terms of planning for the longer term security of electricity supply.
The report recognises that responsibility for delivering a secure electricity system in the longer term is divided between COAG, the Australian Energy Regulator, the rule change body (AEMC) and the market operator (AEMO). Only co-ordinated action on behalf of each of these bodies will result in better outcomes. To support implementation the review of the NEM recommends creation of the Energy Security Board. This will have an independent Chair and members will include the CEO of the AEMO and Chairs of the AEMC and AEMO. Creation of this body should promote effective action, which involves more than one of the market bodies.
The review of future security of the NEM makes many sensible recommendations for the prevention of the kind of events that South Australia has experienced over the last twelve months. However, this may not mean that customers will not be curtailed at some point over the next summer with customers in South Australia and Victoria most at risk. If implemented, the recommendations should help to minimise the number of curtailment events, their magnitude and duration.
In addition, the report provides a more meaningful energy policy regarding increased low or zero emissions generators. One of the principal shortcomings of current energy policy is that it has effectively created a moratorium on new coal fired plant and accelerated the closure of existing ageing plants. At the same time it has provided insufficient incentives for new gas or renewables plant to fully replace the closing fossil plants. System security has also been compromised by failure to recognise the technical characteristics of the new, renewable generators. The result has been electricity and environmental certificate prices hitting near record highs as the supply/demand balance has narrowed, insufficient investment in new plants in spite of the price signal, and increased system fragility due to the technical parameters of those new renewable generators that have been commissioned. The Review seeks to address these inconsistencies.