31 March, 2014

What You Need To Know

• The Australian Energy Market Commission and Australian Energy Market Operator have been requested by the Standing Council on Energy and Resources to investigate and make recommendations on an alternative transmission arrangement, “Optional Firm Access”.

What You Need To Do

• Interested parties should watch this space, as a project plan highlighting the timetable for public consultation is expected to be released shortly. 
• The Australian Energy Market Commission and Australian Energy Market Operator will make final recommendations on the Optional Firm Access model to the Standing Council on Energy and Resources by 1 July 2015. 

In February 2014, the Australian Energy Market Commission (AEMC) and Australian Energy Market Operator (AEMO) were requested by the Standing Council on Energy and Resources (SCER) to investigate and make recommendations on the Optional Firm Access (OFA) transmission package. The full terms of reference for the review can be found here.
The OFA was initially proposed as part of the AEMC’s Transmission Frameworks Review completed in April 2013. In that review, the AEMC recommended further development of the OFA model. We previously reported on the framework for connecting generators and large loads to the transmission network recommended in the Transmission Frameworks Review here.
Background
The OFA model is an alternative transmission model for the National Electricity Market (NEM), which is an integrated package of market arrangements creating the ability for generators to “insure” against the risk of congestion.
OFA changes the way generators access the market during times of congestion, giving generators the option of buying firm access rights taking the form of compensation payments funded by generators without such rights. This would be underpinned by the provision of transmission capacity.
In choosing to obtain firm access rights, generators fund and guide the development of new transmission to underpin those rights. Thereby driving transmission investment decisions to some extent.
Current Situation – Change Needed
In the Transmission Frameworks Review, the AEMC noted that the NEM is experiencing a period of significant change and, in the transmission sector, the pattern of network flows is changing with future needs uncertain. Further, climate change policies and technological developments are affecting the use of the transmission system.
In the Transmission Frameworks Review, the AEMC concluded that the current transmission arrangements provide for inefficient processes for generation and transmission investment which may result in development of the NEM which does not reflect the minimum cost to consumers.
In addition, the NEM does not compensate “constrained-off” generation when transmission capacity is scarce, such as when there are constraints on the network leading to congestion. Without any “constrained-off compensation”, generators have an incentive to adjust offers into the market to maximise the amount of output they are dispatched for. This is known as disorderly bidding, which can result in volatile spot market outcomes and affect the efficiency of dispatch.
Features Of The OFA model
Under the OFA model, generators would be able to obtain firm access (for all or part of their output) to their regional reference price. Generators obtaining such access would be paid even when not dispatched due to congestion.
In the Transmission Frameworks Review, the AEMC provided a high level outline of the OFA model. Key features of the model are:

• Access products and settlement: Generators that do not procure firm access receive non-firm access and would be required to compensate firm generators that they have constrained-off for loss of dispatch (through access settlement). Such access settlement would occur automatically through the market settling process and would provide greater financial certainty by ensuring firm generators were in the financial position they would have been had they not been constrained-off.

• Planning: Transmission Network Service Providers (TNSP) would be required to plan and operate their networks to provide the level of capacity necessary to meet agreed amounts of firm access. Whilst TNSPs would not be required to plan their networks for non-firm access, they would still be required to meet their jurisdictional reliability standards for load.

• Access pricing and procurement: Generators would pay TNSPs to obtain firm access but no charge would be required for non-firm access. If additional firm access was required, new costs would be imposed on the TNSP to provide this capacity and the firm generator would pay an amount to the TNSP to cover such incremental costs. Access pricing estimates such costs. In addition, short-term firm access can be obtained through an auction or transfer between power stations (secondary trading process).

• Inter-regional access: Generators and retailers would be able to procure firm interregional access rights entitling them to the price difference between two regions on their access amount. This would help guide and fund the expansion of interconnectors.

• TNSP regulation and incentives: As monopoly providers of firm access (which would be treated as a prescribed service), TNSPs would be subject to regulation in access issuance, access pricing, revenue and access quality.

Such a model introduces more commercial drivers on transmission businesses and more commercial financing of transmission infrastructure. Generators being able to trade-off between the cost of generation and the cost of transmission may help to deliver more efficient development to the NEM.
However, as the OFA model is “internally consistent and highly interlinked” (see the Transmission Frameworks Review), the AEMC does not recommend implementation of parts of the model in a piecemeal manner.
Terms Of Reference
SCER has provided the AEMC and AEMO with a joint proposal for further work on the design and testing of an OFA model. Whilst the AEMC and AEMO each have separate areas of focus, the matters are closely related and therefore the two institutions will collaborate and deliver a final coordinated package of work to SCER.
SCER is requesting that the AEMC and AEMO:

• confirm or modify the design of the OFA model as a result of testing and evaluation;
• consider how the OFA model will contribute to the achievement of the National Electricity Objective, including assessment of potential areas of impact;
• engage with industry participants and governments to build understanding of the OFA model and the potential impacts of its implementation and operation (from both an individual and marketwide perspective); and
• recommend whether to implement the OFA model, and if so, how it could be implemented (specified to a sufficient degree to allow implementation as the next step).

Ultimately, SCER is seeking to be informed on whether there is a long term benefit in implementing the OFA framework and if such a benefit is identified, for the AEMC and AEMO to develop the optimal approach and implementation of the framework.
Next Steps
Interested parties should watch this space as the AEMC and AEMO are expected to release a project plan highlighting the timetable for public consultation shortly.
The AEMC and AEMO will make final recommendations on OFA to SCER by 1 July 2015.

For further information, please contact:

Paul Newman, Partner, Ashurst
[email protected]

Peter Limbers, Partner, Ashurst
[email protected]

Liza Carver, Partner, Ashurst
[email protected]

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