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Australia – Connecting Large Loads To Transmission Networks.

10 November, 2012

 

Legal News & Analysis – Asia Pacific – Australia – Energy & Project Finance

 

In brief
 
  • Large loads connecting to transmission networks will benefit greatly if the Australian Energy Market Commission’s (“AEMC”) recommendations on the arrangements for connecting are implemented.
  • Significantly, the AEMC’s proposals will provide certainty as to the regulatory framework applying to extensions which should lead to a reduction in overcall costs and more efficient and timely outcomes for connecting loads.
 
The resources boom has led to significant increases in the demand for power. Increasingly,  resource projects are seeking connections directly to transmission networks in order to meet their large load requirements.
 
The Australian Energy Market Commission (“AEMC”) is currently undertaking a market review, known as the Transmission Frameworks Review, which in part considers the arrangements for connecting to a transmission network. The intention of this part of the review is to enhance transparency in the connection process and to clarify and simplify the rules relating to connections.
 
Under the current connection provisions, there is considerable uncertainty as to the services that transmission entities must provide, the scope of the services
and the classification of the services for regulatory purposes. Significantly, these factors affect important matters such as how charges are determined; whether the market settlement, metering, technical and performance standards of the National Electricity Rules (“Rules”) will apply to all of the assets to be constructed to provide power; and whether a user will have recourse to arbitration if agreement on the
terms and conditions of access cannot be reached with the transmission entity.
 
Clarifying the regulatory treatment of extensions to existing transmission networks
 
These issues are particularly relevant to any extension that is likely to be required to an existing transmission network in order to connect power supply for a project. The cost of such an extension, which will be entirely funded by the user, is usually considerable and can have a material impact on project funding. Transmission entities generally view the provision of extensions to existing transmission networks as being outside the scope of the Rules. However, even though such extensions fall outside the Rules, in practice users have no choice but to negotiate with monopoly service providers for power supply. In submissions by users to the AEMC, users were uniform in their view that there is a significant imbalance in bargaining power between transmission entities and users, with inadequate safeguards against the monopoly powers of transmission entities.
 
A lot of the uncertainty regarding the classification of the service for regulatory purposes arises from the question as to whether the service is contestable or not. The AEMC’s position is that contestability is not a criterion for determining the classification of the services. However, most transmission entities treat contestability as the key  factor in determining whether the services fall outside the scope of the Rules. It is generally accepted that the construction of the underlying assets for an extension to an existing transmission network may be contestable (and transmission entities commonly subcontract this work). However, the supply of power using those assets is generally not considered contestable by users as, in practice, there is no alternative transmission service provider and there are
significant barriers to entry.
 
In the AEMC’s Second Interim Report for the Transmission Frameworks Review, the AEMC proposes that all transmission assets including extensions owned by transmission entities should be covered by the Rules. Additionally, the AEMC proposes that transmission entities be required to provide a connecting party with an extension to an existing transmission service if requested and that the
extension fall within the scope of the Rules. Interestingly, the Report provides that the AEMC does not consider that it was the intention of the Rules that extensions to an existing transmission network would fall outside the scope of the Rules.
 
From a practical perspective this is a logical approach. If extensions to an existing transmission network fall outside the scope of the Rules, there is considerable uncertainty as to the technical and performance standards that apply to the extension, together with the market settlement and metering requirements. This is unlikely to be an issue if the extension is only a short distance. However, if the extension is a significant distance, it is not clear what the relevant legal framework is (regulatory or contractual) that will apply when generators or other third party loads seek to connect to the extension. This has significant consequences for retail arrangements (for load) and the ability to participate in the spot market (for generators).
 
Other measures
 
In addition to clarifying the regulatory treatment of extensions to existing transmission networks by transmission entities, the AEMC is also proposing 
measures to:
 
  • enhance transparency in the connection process, including requirements to publish a standard contract, design standards for connection assets and to provide detailed cost information to connection applicants; and
  • allow users a greater role in the tender process for the construction of connection assets. 
 
Next steps
 
The final product of the AEMC’s review is a report with recommendations to the Standing Council on Energy and Resources, which will consider and make policy decisions on the recommendations. The best outcome for users will be if the Rules are amended to remove the ambiguity in the connection process and strike a fairer balance in the bargaining power between monopoly service providers and users.
 

 

For further information, please contact:

 

Paul Newman, Partner, Ashurst

paul.newman@ashurst.com

 

Teresa Scott, Ashurst

teresa.scott@ashurst.com

 

Ashurst Energy & Project Finance Practice Profile in Australia

 

Homegrown Energy & Project Finance Law Firms in Australia

 

 

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