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Australia – Optional Firm Access To Electricity Transmission Networks.

10 April, 2014

 

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

 

The National Electricity Market (NEM) currently does not provide an effective means for generators to gain ‘firm’ access rights to the transmission network. A generator is always at risk of other generators subsequently connecting to the transmission network, resulting in a transmission network ‘constraint’ (i.e. a situation where the generation capacity that would otherwise be dispatched by the NEM scheduling and dispatch processes is limited by the available transmission network capacity).

 

This risk of subsequent generator connection is most acute in the renewables sector, where there are several examples of wind farms located in close proximity to capture high quality wind resources. In some situations (e.g. in South Australia), this has resulted in multiple wind generators connecting to the same radial line, presenting issues about how those generators should be dispatched in constraint conditions and connection arrangements that prescribe limits on generation capacity below the rated capacity of the relevant wind farms. 

 

The Australian Energy Market Commission (AEMC) has now developed a proposed Optional Firm Access (OFA) model which has the potential to change that position, with wide-reaching implications for all NEM participants.

 

Current Constraints

 

In congested areas of the NEM, generators have had no choice but to accept that constraints in the transmission network may mean that they will not be able to dispatch their full generation capacity despite offering their plant at values below the system marginal price. Even where a generator is willing to fund shared network augmentation to address constraints, there is no effective ability for that generator to secure firm access rights in respect of that additional capacity. While a potential mechanism for obtaining access rights exists in rule 5.4A of the National Electricity Rules (NER), that rule is vague and has apparently never been used.

 

For generators, the lack of a right of firm access to the transmission network can potentially have material implications. If new generation capacity connects in the surrounding area, and creates or increases network constraints, that may have a direct impact on the existing generator’s revenue without creating any right of compensation.

 

Development Of The Optional Firm Access Model

 

In the NEM the primary role of network service providers (NSPs) is to provide a service to electricity consumers, not to generators. This approach is reflected in the way NSPs are regulated (through load-focused reliability and performance standards), the charges they are permitted to recover (predominantly as ‘prescribed’ charges that recover the cost of the shared network from consumers, not generators) and the tests applied to network investment decisions (the regulatory investment test for transmission (RiT-T)).

 

In 2010, the Ministerial Council of Energy (now the Standing Council on Energy and Resources (SCER)) asked the AEMC to undertake a wide ranging review of the NEM’s transmission frameworks. In April 2013, the AEMC released its final report in response. One of the results of this lengthy and complex review process was a recommendation that an OFA model be developed for implementation in the NEM.

 

The Proposed OFA Model

 

The proposed OFA model would give generators the option to pay for firm access rights to the transmission network.

 

These access rights would essentially be financial rights, giving the holder (the ‘firm’ generator) the right to receive financial compensation where it is not dispatched due to a transmission constraint. The financial compensation will be collected from the ‘non-firm’ generators who access the scarce network capacity. The access rights will not affect the current dispatch model (ie. they will not guarantee a generator is dispatched), but they will potentially protect a firm generator from the financial effects of being constrained off.

 

The amount of compensation paid to the firm generator will be the difference between the regional energy price and a notional ‘local price’.

 

The compensation payments will be settled through the Australian Energy Market Operator (AEMO) with the non-firm generator ‘paying’ the compensation amount out of the funds it would otherwise have received from AEMO for its generation into the market. The OFA arrangements will therefore need to be accommodated within the current NEM settlements and prudential support processes.

 

Transmission NSP Obligations

 

A generator will contract firm capacity rights with the relevant transmission network service provider (TNSP). The OFA model will require TNSPs to develop a Firm Access Standard in addition to their existing load-focused reliability standards. The Firm Access Standard will include mechanisms for TNSPs to compensate firm generators where constraints are caused by the TNSP failing to meet required availability and operating standards.

 

The Firm Access Standard will require TNSPs to plan and invest in their network in an way that ensures a defined level of access is available to firm generators collectively under ‘normal operating conditions’. The cost of firm access rights will likely reflect the cost of ensuring the required firm capacity. 

 

Although details are yet to be released, it appears that the Firm Access Standard will involve the development of physical works by TNSPs to ensure the contracted level of firm access for a generator.

 

Next Steps

 

On 9 March 2014 the SCER instructed the AEMC (together with AEMO) to further develop, test and assess the Optional Firm Access model set out in its April 2013 report and to consider the optimal approach to its implementation.

 

The AEMC is due to report back to the SCER with detailed recommendations by July 2015. In the interim, the AEMC will be considering specific aspects of the OFA proposal and undertaking extensive stakeholder consultation. The AEMC intends to release a project plan which will include details of the proposed consultation arrangements.

 

The level of analysis required to finalise the OFA model, and the changes required to implement it, are complex and have the potential to significantly change the NEM. All stakeholders will need to consider the potential implications of the OFA model on their businesses.

 

herbert smith Freehills

 

For further information, please contact:

 

Peter Davis, Herbert Smith Freehills

[email protected]

 

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