The revival of the Retailer Reliability Obligation

In brief

In the wake of the last COAG Energy Council meeting, at which it was agreed the National Energy Guarantee's reliability component should be progressed, new draft legislation gives effect to a 'Retailer Reliability Obligation'. Partner Anna Collyer and Associate Luisa Colosimo report.

Background

On 8 November 2018, the Energy Security Board (ESB) released exposure draft legislation, and an accompanying consultation paper, to amend the National Electricity Law (NEL) to give effect to a 'Retailer Reliability Obligation'. This comes off the back of the last COAG Energy Council meeting on 26 October 2016, during which Ministers agreed that the ESB should progress the reliability component of the now-discarded National Energy Guarantee (the Guarantee) before the next meeting in December.

The draft National Electricity (South Australia) (Retailer Reliability Obligation) Amendment Bill 2018 (the Draft Bill), prepared by the ESB, is an amended version of the draft Guarantee legislation issued for public consultation by the COAG Energy Council in August 2018. The majority of the amendments are to do with removing all provisions relating to the emissions reduction requirement of the Guarantee from the draft legislation.

A quick refresher on the proposed Retailer Reliability Obligation

The purpose of the repackaged Retailer Reliability Obligation, formerly the reliability arm of the Guarantee, is to incentivise retailers, and other large users, to invest in dispatchable electricity generation in regions of the National Electricity Market where it is expected there will be a gap between generation and forecast peak demand.

The Federal Government views the Retailer Reliability Obligation as a long-term solution to ensuring reliable electricity supply. If a generation gap is forecast, 'liable entities' will be required to demonstrate they can meet their share of peak demand – eg by having firm on-demand contracts related to the purchase or sale of electricity from the wholesale exchange. It is intended that additional functions and powers will be given to the Australian Energy Market Commission (AEMC), the Australian Energy Market Operator (AEMO) and the Australian Energy Regulator (the AER), to support the implementation of the obligation.

Key design features of the Draft Bill

The changes to the NEL that the Draft Bill proposes include:

• (Liable entity) defining a 'liable entity' for a region for the purposes of the Retailer Reliability Obligation (ie 'Market Customers' as defined in the National Electricity Rules), and detailing the process for non-liable entities to 'opt-in' to the reliability obligations;
• (Forecasting function) giving AEMO the function of forecasting for the occurrence of reliability gaps in future years;
• (Reliability instruments) setting out circumstances in which reliability instruments can be requested by AEMO and made by the AER:
• if AEMO is satisfied that a material reliability gap is forecast, AEMO can request a reliability instrument three years before the forecast gap (T-3). In response, the AER has the responsibility of determining whether or not to make a T-3 reliability instrument for that region, which will act as a signal for liable entities to assess their likely share of the system peak demand and secure sufficient qualifying contracts to cover this demand;
• if AEMO is satisfied that a material reliability gap is forecast and a T-3 reliability instrument already applies (or there are exceptional circumstances), AEMO can request a reliability instrument one year before the forecast gap (T-1). In response, the AER has the responsibility of determining whether or not to make a T-1 reliability instrument for that region, which will require all liable entities to demonstrate that their net contract position is sufficient to meet their share of peak demand;
• (Procurer of last resort) giving AEMO 'procurer of last resort' powers to enter into qualifying contracts in circumstances where a T-1 reliability instrument is made and liable entities have not adequately responded to the forecast shortfall, and allowing AEMO to recover the costs of carrying out this function from non-compliant liable entities (up to a maximum of $100 million per entity);
• (Compliance regime) establishing a compliance regime under which the AER is required to establish guidelines for complying with the Retailer Reliability Obligation and carry out audits to assess liable entities' compliance with these guidelines;
• (Penalties) if a liable entity is in breach of one of the civil penalty provisions of the Draft Bill, providing for a maximum penalty of $1 million for a breach during a reliability gap period, and a maximum penalty of $10 million for a breach during a subsequent reliability gap period; and
• (Matters to be dealt with in Rules) allowing for certain matters relating to the Retailer Reliability Obligation to be provided for, or prescribed, in the National Electricity Rules – eg:
  • the manner in which AEMO must publish forecasting information;
  • the materiality threshold against which a forecast gap will be measured;
  • the timetable for reliability forecasts, requests and instruments;
  • the 'exceptional circumstances' in which a T-1 reliability instrument can be made in a region where a T-3 reliability instrument does not already apply; and
  • the imposition of a market liquidity obligation in relation to qualifying contracts, to ensure smaller retailers and liable entities are able to access qualifying contracts.

Have changes been made after public consultation on the draft Guarantee legislation?

In preparing the Draft Bill, it appears that the ESB has taken into account some of the relevant concerns stakeholders raised during the consultation process on the exposure draft Guarantee legislation, earlier this year. In particular, the ESB has provided scope for entities other than Market Customers to 'opt-in' to the Retailer Reliability Obligation (eg non-registered customers with an annual consumption above a certain threshold), in response to the market requesting more flexibility in this area. References to the AER establishing a trade repository have also been removed from the Draft Bill, with the ESB noting that it has consulted on this issue separately, and will report its findings and recommendations to the COAG Energy Council at the December meeting.

The consultation paper also acknowledges concerns stakeholders raised about some of the features of the legislation, which the ESB considered but ultimately dismissed in favour of retaining the existing drafting. Eg, notwithstanding stakeholder opposition, the Draft Bill retains proposed legislative amendments that:

• will allow AEMO to request to trigger the Retailer Reliability Obligation without first requesting a T-3 instrument;
• will require liable entities to maintain a net contract position from T-1 to the year of the forecast gap; and
• does not limit the AER to using contract information collected through the Retailer Reliability Obligation process solely for the purpose of administering the obligation.

Next steps

Interested stakeholders should consider providing submissions on the Draft Bill, with the consultation process open until close of business 22 November 2018. The ESB has advised that, following this, a final Draft Bill will be presented at the next COAG Energy Council meeting, in December 2018.

The current Federal Government has publicly committed to working with state and territory Ministers of the COAG Energy Council to implement the Retailer Reliability Obligation and, if agreed to, has indicated its intention that the Retailer Reliability Obligation be in place by 1 July 2019.