Finkel Review - System security: its impact on energy investment

In brief

While much of the commentary on the Finkel Review has been around a clean energy target, a number of very important, but very technical, issues relating to system security were also canvassed. The Review recognised that system security characteristics should be valued, and regulated, in addition to the amount of energy actually produced. Changes in this area are likely to have the most impact on network operators and solar and wind farm generators seeking to connect to the network in locations where there is limited synchronous generation and low system strength. As a result, investors in these projects will need to ensure that their due diligence includes an assessment of how their projects will be impacted by these changing system security requirements. In the last of our series analysing the Finkel Review, Partner John Greig , Lawyer Mark Leersnyder and Law Graduate Patrick Broe report. 

Background

In energy industry parlance, 'system security' means the ability of the energy system to operate within the technical parameters that allow electricity to be delivered in a safe, useful and efficient way to homes and businesses. That is, the electricity system must be able to withstand sudden and unexpected changes in demand or generation and the occurrence of natural or other disruption.

The consequences of an insecure system – blackouts, economic disruption, property damage and loss of life – should and do worry governments, regulators and the electricity industry. However, the changing mix of generation technologies means that the system security characteristics inherently provided by 20th century generators are becoming both scarcer and, at the same time, more necessary.

For this reason, regulatory intervention aimed at improving system security is inevitable, although working out how best to facilitate efficient investment, and who should bear the costs, are likely to be areas of contention.

Finkel adopts the work of the AEMC and AEMO

The Finkel Review essentially summarises and gives blessing to the work that the AEMC and AEMO have already put in motion through their system security reviews and assessments of the National Electricity Rule changes. Since the Finkel Review, the AEMC has delivered its final report as part of the System Security Market Frameworks Review on 27 June 2017 (System Security Review), which includes a more detailed blueprint for how the energy markets should evolve to better address system security issues. This System Security Review coincided with two draft rule changes that the AEMC is seeking to make final by September 2017.

The issues

The grid's system security regulatory framework must be adapted to account for the differences and challenges posed by increased non-synchronous generator participation in the grid. Finkel endorses AEMC's move to stricter technical standards governing connection to the grid and the procurement of system security services by AEMO. The three main issues are summarised below.

• Improving system strength: System strength is the ability of a localised area of the grid to withstand an abnormal flow of electrical current (such as a short circuit). A system with higher non-synchronous participation, or a localised area with a particularly high proportion of non-synchronous generation, has weaker system strength (all else being equal) as, at present, only synchronous generators provide 'fault current' that supports system strength.
• Resisting frequency change: The level of inertia within the system dictates the system's ability to resist initial frequency changes, with a minimum level being essential for system security. Inertia has historically been in abundance in the system, as it is naturally provided by synchronous generators. The shift towards a higher proportion of non-synchronous generation indicates the need for positive action to ensure that sufficient inertia levels are maintained within the system. 
• Controlling frequency response: Over the past 18 months there has been a decline in frequency control within the target band around 50Hz. With the simultaneous decrease in inertia levels within the system (which slow down frequency change), there are concerns that the current Frequency Control Ancillary Services framework (FCAS) does not rebalance supply and demand quickly enough to reliably prevent, or promptly recover from, frequency band deviations.

The recommendations and their implications

The System Security Review has recommended a number of changes that will impact on the commercial viability of generation projects. The key recommendations from the System Security Review and Finkel Review, and our view on their implications for industry, are set out below.

Broad trends and next steps for the energy industry

The AEMC has provided a blueprint for change with the System Security Review and draft rule change determinations. Government and regulators are reacting to the need for change and the path to solutions seems relatively settled. In addition to the specific implications above, investors in the energy market should take note of the following broad trends:

• Investors in renewable energy projects need to consider more than just mega-watt output. In a world where system security services have value, it will be important to consider, among other things:
  • the location of the generator and the relative system strength and inertia levels in the nearby transmission network; and
  • the technology proposed for the generation and its ability to contribute to (or detract from) system strength, resisting change in frequency or responding to change in frequency.

  Robust and forward looking due diligence – technical, legal and commercial – will be needed to prevent investment surprises.

• Network providers will play an increased role. With the AEMC appearing to recognise that markets for system security services are unlikely to be efficient or effective (with the possible exception of inertia provision above the minimum inertia required for a secure system), network providers will find themselves with greater regulatory responsibility and opportunities for revenue generation.
• The National Energy Market is not so 'national' for system security. Because system security characteristics such as inertia and system strength vary across the national electricity market, the location of new generation or the provision of system security services will need to be taken into account when investing in generation or system security services.
• The time for input into regulations is now. The AEMC has released its blueprint for system security and signposted many of the likely changes. Energy market participants should be working to understand the implications of these proposed changes and participating in the consultation processes to ensure that any decisions are well made. The key dates for submissions on the AEMC rule changes are can be found on the AEMC website – there are a number of deadlines in the next two months.