A new framework for transmission network connections

In brief

Connecting to the network is a fundamental part of getting any new renewable energy development off the ground. The rules governing arrangements for connection to the transmission network changed on 1 July 2018, and are designed to increase transparency and contestability in the connection process and decrease the costs of connection. Partner Kate Axup, Senior Associate Angela Lu and Law Graduate Katy Milne consider some of the key ways in which the new rules will affect developers of new renewable energy facilities.

Background

The process of connecting new generation facilities to the transmission network has long been regarded by developers as challenging. While the process is regulated by the National Electricity Rules (NER), in its Transmission Frameworks Review,¹ the Australian Energy Market Commission (AEMC) found that transmission network service providers (TNSPs) were not providing connection services in a timely, consistent, cost-effective or transparent manner, and that generators did not have sufficient bargaining power to negotiate better terms and conditions of connection.

The following three issues consistently arise in the connection process.

1. Understanding what aspects of the connection process are contestable, and therefore can be procured pursuant to a competitive process. Part of the problem arises from the relevant provisions of the NER being open to multiple interpretations and, as a result, it was not uncommon for different TNSPs to take different approaches to the same issue.
2. Disagreement about the specifications for connection infrastructure. The previous rules did not make clear 'which assets could reasonably be specified by a TNSP' and consequently which assets a generator was paying for.² The generators' perception was that they were being asked to pay for infrastructure suitable for the needs of future network users rather than just their own needs.
3. The treatment of third-party access to connection infrastructure funded by the first connecting generator. Given generators pay for the full cost of connecting to the shared transmission network, utilisation of this connection infrastructure by third parties that subsequently connect was cause for concern, particularly where the subsequent connection caused disadvantage to the existing generator. Equally, new generators entering the market were uncertain as to their rights to use existing connection infrastructure (assuming this infrastructure had sufficient spare capacity).³

All three issues described above go directly to value, and therefore affect the economics of a new renewables project. With connection costs accounting for approximately 10 per cent of the cost of a new facility,⁴ resolving these issues has been of real concern in the industry.

Contestability

The amended NER now goes a long way to addressing previous uncertainty about whether or not a particular connection service is contestable. This is a positive step in terms of regulation, and will assist developers to navigate an efficient path to connection.
Under the new rules, there are two categories of asset in the network, each with a different regulatory status: 1) identified user shared assets, and 2) dedicated connection assets. This diagram shows how the new system works.

The shared transmission network

In all NEM states except Victoria, the operation and maintenance of the shared transmission network (including the high-voltage wires, transformers, switching equipment, and monitoring and communications equipment needed to move energy within and between states)⁵ will remain the responsibility of the incumbent TNSP. In Victoria, AEMO will remain responsible for these functions. Operation and maintenance of shared assets has remained non-contestable because the AEMC regards the safety, reliability and security of the network as better secured if one party is accountable for these assets.

Identified user shared assets (IUSAs)

IUSAs are components specifically required to facilitate the connection of a generator to the transmission network, and which ultimately form part of the shared transmission network.⁶ Examples of equipment that would likely fall into this category are the isolators and circuit breakers up to the connection point in a substation that connects to the shared network.⁷
The new rules establish a regime pursuant to which certain services provided in relation to new IUSAs are non-contestable, whereas others can be contestable if certain pre-conditions are met.

The detailed design, construction and/or ownership of assets (such as parts of a substation) that will ultimately form part of the shared transmission network are now contestable services under the NER if the capital cost of all the components that make up the IUSA is anticipated to be greater than $10 million, and:

• the components being constructed are new or a complete replacement of existing components; and
• the detailed design and construction of the relevant component of the IUSA is separable in that the new asset will be distinct from the existing transmission network.⁸

Where these pre-conditions are not met, the design, construction and/or ownership of the IUSA will remain the responsibility of the incumbent TNSP – and is not contestable.

There is no requirement for a person (who is not the primary TNSP) who owns a IUSA as permitted under the new rules (a third party IUSA owner) to be registered or hold a licence. However, the third party IUSA owner must enter into an network operating agreement with the primary (incumbent) TNSP.

We note that a third party IUSA owner must not own, operate or control a generating system that is connected to that party's IUSA or be a related entity of a person owning, operating or controlling a generating system that is connected to that third party's IUSA. This means that a generator may not own an IUSA pursuant to which it connects to the network.
The services of setting the functional specification, providing cut-in works and the operation and maintenance of IUSAs are non-contestable, and must be provided by the TNSP as negotiated transmission services.

Dedicated connection assets (DCAs)

DCAs are the components required to facilitate the connection of a generator to the transmission network, and which will ultimately be electrically isolated from the shared transmission network.⁹ Examples of this kind of equipment include the power lines and transformers that connect a generator's plant to the substation.¹⁰

The services of construction, ownership, operation and maintenance of DCAs used to connect a generator to the shared network are contestable. This was already the case in Victoria, and the new transmission connection arrangements will not affect the arrangements in Victoria. The party providing such services is required to register with AEMO as a TNSP or be exempted by the Australian Energy Regulator (AER). The primary TNSP remains responsible for specifying the minimum technical requirements of the DCA.

Specifications

Another helpful aspect of the new rules is the ability for a connecting generator or the relevant TNSP to involve an independent engineer to provide advice on technical issues relating to the proposed connection (eg the specifications of a connection asset). The role of the independent engineer could also be to advise on whether a particular asset or component should be regarded as an IUSA or a DCA, and comment on the contestability (or otherwise) of services provided in relation to IUSAs (see above). However, the advice provided by the independent engineer is not binding on the parties, and any remaining dispute regarding specifications would still need separate resolution.¹¹

The new rules acknowledge that either party (ie the TNSP or the connecting generator) may seek to 'over-size' an IUSA. If over-sizing is proposed by the TNSP, the TNSP must separately identify the additional requirements and, if the proposal is accepted by the generator, fund the additional works.

Third-party access

The new rules go some way to clarifying the position relating to third party access to IUSAs and DCAs.
In relation to third party access to IUSAs, the rules include a cost-sharing principle that requires a subsequently connecting party to contribute to the costs of negotiated transmission services paid by the parties that are already connected – but this framework does not extend to services that were provided as non-regulated transmission services (ie the construction of contestable components of an IUSA). This means a connecting generator would need to address this issue in its agreement with the third party IUSA owner.
Third party access on reasonable terms is addressed for large DCAs but not small DCAs. A large DCA is one where the total route length (geographic distance) of power lines is greater than 30km.¹² Primary TNSPs are responsible for classification of existing dedicated connection assets as small or large.¹³

Access to large DCAs is negotiated according to an access policy required to be prepared by the asset's TNSP and available on its website.¹⁴ Access policies must be lodged with and approved by the AER. There is an automatic presumption that a policy will be approved if the AER is reasonably satisfied that the policy complies with the rules. AER must also be informed of all access requests received and access agreements entered into by the asset's service provider.

What's next

The new rules are now in force, meaning that all new connection applications must proceed under this new framework. While there are many benefits afforded by the new rules, including better clarity around what services are contestable and how third-party access should be dealt with, there is a degree of angst among developers in not wanting to be the guinea pig in terms of being one of the first to proceed under the new framework.

The new rules include a transitional process pursuant to which applicants who have already commenced the connection process prior to 1 July 2018 can elect to continue under the old rules or can withdraw an enquiry made under old rules and can make a new enquiry to which the new rules will apply. There are no applicable time restrictions in relation to such withdrawal.