'Hybrid model' gives cause for optimism 12 min read
After a few false starts, updated reforms to address increasing congestion in the Australian electricity transmission system seem set to garner support from both policymakers and industry participants.
In late 2022 the Energy Security Board (ESB) released for consultation the Transmission Access Reform Directions Paper (the TAR Directions Paper), and has since received 32 stakeholder submissions in response.
This consultation phase represents the latest instalment in the ESB's work in transmission access reform, one of the four critical areas identified in the ESB's July 2021 advice to Energy Ministers regarding the post-2025 redesign of the National Electricity Market (NEM).
The TAR Directions Paper sets out a proposed new 'hybrid model', which includes three shortlisted solutions for transmission access reform. These reforms represent a major change to long-held underpinnings of the NEM.
In this Insight, we provide a snapshot of the 'hybrid model' and explore how the ESB will work with Energy Ministers and stakeholders to finally agree upon, and implement, the reforms needed for this complex and critical piece of the energy transition puzzle.
Source: ENERGY SECURITY BOARD - Transmission access reform Directions paper
Key takeaways
- The ESB has released its latest Directions Paper on Transmission Access Reform, proposing a 'hybrid model' which the ESB considers 'mixes and matches the best elements of the previous shortlisted models'.
- Still remaining are the challenges for transmission access reform which have defeated previous proposals (such as Coordination of Generation and Transmission Investment (COGATI) and CMM(REZ)), however there is plenty of cause for optimism, not least because state Energy Ministers and industry stakeholders are now highly incentivised to reach agreement given that the success of their renewable energy zones (REZs) and other state-based schemes hinges on the firmness of grid access and dispatch.
Transmission access: an increasingly urgent area for reform
Transmission access has been a hot topic on the energy reform agenda at both the state and federal level for a long time. The ESB has been in the policy driving seat since it was tasked by the Energy National Cabinet (comprising state and federal Energy Ministers) with developing the suite of post-2025 market reforms.
Transmission access reform is becoming increasingly urgent in light of the earlier-than-anticipated closure of coal-fired power stations and the responses of state Energy Ministers in setting up jurisdictional regimes to fast-track critical generation and transmission infrastructure projects (such as REZs, 'virtual transmission', batteries and interconnectors).
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"...State governments have sought to promote more coordinated system development by establishing renewable energy zones (REZ) within their regions. The work of the Energy Security Board (ESB) aims to support and dovetail with these initiatives. The current NEM design puts REZ schemes at risk because there is no way to protect REZ generators from being curtailed due to developments outside the REZ." ESB Transmission Access Reform, TAR Directions Paper, p 8. |
The TAR Directions Paper provides the most detailed indication to date of the ESB's vision for transmission access reform.
However, many design details are flagged as requiring further consideration and consultation before the reform package is presented to Energy Ministers for approval. A draft of the detailed design is due to be published in March 2023.Previous experience in transmission reform projects, such as COGATI and CMM (REZ) (refer to our earlier Insights), would suggest the devil is very much in this (design) detail.
How did we get here?
The challenge
The challenge of transmission access in the NEM—that is, the right of generators to connect to the network and export their energy output—is not new.
Historically a 'long and stringy' network serving a centralised fleet of thermal generators, the NEM has always operated an 'open access' regime, whereby new generators who meet the relevant technical standards can connect to the network wherever they wish, regardless of the transmission capacity or constraints in their chosen location.
In some cases this can lead to new generators 'cannibalising' nearby existing generation in that they gain 'free access' at the expense of existing plant.
This challenge has become increasingly acute with the rapid uptake of variable renewable energy, with new generators currently incentivised to locate where they can maximise their output and connect to the existing grid, rather than where new generation is actually needed.
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"The problem we can see emerging is that the transmission network does not have infinite capacity. So when all the renewable assets we need seek to connect, they often locate in the sunniest or windiest location near to the existing grid. When this happens, they can crowd each other off, which means renewable energy goes to waste." Anna Collyer, AEMC & ESB Chair |
Solving this challenge is complex as it requires a step-change in fundamental aspects of market participation and operation, such as price signalling, bidding behaviour and dispatch rules, in a way that provides both security of supply and value for money for consumers.
The challenge is amplified by the complex technical nature of transmission access and the myriad stakeholder views on the various policy proposals to date.
Finally, all of this is made more challenging by the inevitable juggling of individual jurisdictional priorities in relation to the design and administration of the multi-jurisdictional NEM.
These factors go some way to explaining why the transmission access journey to date has been long and winding, and previous proposals have not survived stakeholder scrutiny or the ministerial process.
Previous proposals: COGATI and the Congestion Management Model
As noted above, transmission access has been on energy reform agendas for a long time. Two key proposals on which we previously reported are 'COGATI' and 'CMM(REZ)' (refer to our earlier Insights).
The AEMC's COGATI review in 2020 attempted to solve the transmission access challenge through dynamic regional pricing and financial transmission rights. The COGATI reforms were well progressed by the AEMC—despite significant stakeholder resistance, the Commission got as far as developing a final report to be issued to the COAG Energy Council in March 2020. However, in addition to industry resistance, the COGATI package was also competing for the time and attention of state Energy Ministers, many of whom were beginning to focus on their own frameworks for accelerating transmission infrastructure (such as the Electricity Infrastructure Roadmap and rollout of REZs in NSW).
For COGATI, it appears the challenge was too much, and the ESB set aside the COGATI reforms in 2021, pivoting to further progress transmission access reform by supporting the development of state-based regimes.1
Following further detailed consultation with the market, the ESB then proposed the Congestion Management Model (CMM), which was designed to improve market signals to new generators and storage providers, ensure better use of existing network capacity and reduce investment uncertainty. This model was specifically adapted for REZs such that payments under the CMM were differentiated based on whether the generator was within or outside of a REZ. Notwithstanding the ESB's efforts to tailor the proposal to meet the needs of the merging state-based regimes, again stakeholders were not sufficiently supportive.
However, in voicing their concerns, stakeholders helpfully proposed a range of alternative models to address the transmission access challenge. In light of this constructive feedback, in May 2022 the ESB released the Transmission Access Reform Consultation Paper (the TAR Consultation Paper) which shortlisted four of these alternative models and sought further stakeholder feedback on each of them.
In developing the hybrid model under the TAR Directions Paper, the ESB has retained the CMM model as an alternative to the newly proposed Congestion Relief Market (CRM) discussed below.
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"Under the current access regime, even an investment that causes heavy congestion may still be profitable for an investor, because the costs of congestion may be borne in part by pre-existing generators… The ESB's hybrid model seeks to change this aspect of the access regime so that a generator whose investment decision causes inefficient congestion faces the associated costs, and a generator who locates where capacity is available, such as a REZ, is protected from subsequent connection risk'." ESB Transmission Access Reform, TAR Directions Paper, pp 15-16. |
Supporting and strengthening REZ schemes
The ESB is clearly working hard to convey to stakeholders the benefits that the proposed hybrid model would bring in jurisdictions implementing REZ schemes and other energy transition initiatives.
The TAR Directions Paper points out that, given the 'meshed' nature of the grid and the way electricity flows across it, whole-of-system transmission access solutions are in the best interests of REZ stakeholders, because constraints outside REZs will be felt in each REZ, and vice versa.
The TAR Directions Paper goes on to explain specifically how transmission access reform can support and strengthen state REZ schemes (and reduce the reliance on state-level subsidies to underpin investments for REZ projects), including by:
- strengthening incentives for new entrants to locate and participate in REZ investments;
- giving REZ participants confidence that their investment case will not be undermined by subsequent inefficient investments that locate outside the REZ in the broader shared network;
- allowing market participants to connect outside of REZs, without disrupting the coordinating efforts of the REZ;
- removing opportunities for subsequent connecting generators to 'free-ride' on REZ transmission investments without contributing to them; and
- promoting the efficient use of REZ transmission infrastructure by creating a market design that rewards storage providers for alleviating transmission congestion and providing firming services for renewable generators.
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"While access within each REZ can be managed through a jurisdictional REZ arrangement, the overall value of a REZ, both to prospective investors and to the NEM, is subject to the broader access to the national grid. Under the current open access regime, participants could choose to connect to the grid at any point outside the REZ. Subsequent connections could reduce the access available to parties in the REZ and degrade the value of connecting within the REZ. It is also possible that well-placed connection outside of the REZ could gain preferential access in dispatch. In the medium to long term, the NEM’s extreme version of open access is incompatible with REZs because it is an unstable foundation for coordinated system development." ESB Transmission Access Reform, TAR Directions Paper, pp 18-19. |
What is the proposed Hybrid Model?
The ESB considers that the 'hybrid model' satisfies the key objectives for transmission reform: improved locational signals for generators, better utilisation of the existing network through more efficient dispatch, incentives for storage providers, and boosting investor confidence that new plant won't be 'cannibalised' by future generation projects—all in the bests interests of, and at a lower cost to, consumers.
The 'hybrid model' purports to 'mix and match' the best elements of the four shortlisted models in the previous TAR Consultation Paper in seeking to solve the transmission access challenge across both investment and operational timeframes:
- investment timeframes: to provide better signals to encourage efficient investment in areas of the network which considers the overall impact of congestion, and provides the most benefit to customers; and
- operational timeframes: to implement solutions that attempt to remove incentives for non-cost reflective bidding in order to promote better use of the network.
At a high level, the hybrid model proposes the following:
- investment timeframes are to be addressed by:
- providing enhanced information to investors and potential new generators, and
- managing access via either priority access rights or congestion fees;
- operational timeframes are to be addressed by a CRM.
The following table provides a short explanation of each element of the hybrid model:
| Invesment Timeframe |
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Enhanced information Providing information early in the investment decision on the technical limits of transmission networks. This would include provision of information about where further development is possible, which parts of the network are getting close to capacity and where there is no capacity left. Proirity access Generators are assigned a place in a priority access queue dependent on when they connected to the transmission network. In the event that bids in the energy market are tied at the market floor, priority of dispatch will be given to those generators higher in the priority access queue, thereby incentivising early investment in under-connected areas. Generators will no doubt closely monitor the development of the design of this aspect of the hybrid model given each generator's position in the queue will be crucial to its future dispatch priority—in particular securing a coveted P0 position will be very valuable. |
| Operational timeframe |
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Congestion relief market The CRM is a separate 'opt in' market which will run in parallel to the energy market and incentivise providers of congestion relief, such as batteries or controllable loads, to locate in congested parts of the network and act in a manner to decrease total congestion. Participants would continue to bid into the energy market as they currently do, but would also have an opportunity to increase profits by bidding into the new (and separate) CRM. Participants would be priced at the 'Regional Reference Price' for outcomes in the energy market, and at the 'Locational Marginal Price' for outcomes in the CRM. For example, if a generator expects to be 25% constrained in the energy market, it could bid 25% into the CRM for supply to local congestion relief providers such as batteries. However, the generator would only receive the locational marginal price for the 25%, which is likely to be less than the NEM regional price. |
What is in store for transmission access reform in 2023?
The path to transmission access reform has been long and winding, thanks to the range of complex factors canvassed above, including the shift in focus to state-based regimes such as REZs.
While these factors are still at play, there is now plenty of cause for optimism: as noted above, the ESB's latest proposal is expressly designed to support and strengthen state-based regimes, including REZs. In addition, the TAR Directions Paper notes that the next phase of stakeholder consultation is to be conducted jointly between the ESB and state government senior officials, suggesting a collaborative approach between the market bodies and jurisdictions in settling the design of the hybrid model.
Perhaps the biggest cause for optimism however is the very fact that the state regimes such as REZs are now well underway. Both Energy Ministers and industry stakeholders risk undermining these new regimes if they cannot agree on a way forward for transmission access in the NEM.
In its TAR Directions Paper the ESB has strongly stated the case for the hybrid model: it would provide a 'whole of system' solution for the benefit of the entire grid, and would also guard against the specific risk of 'cannibalism' by new generators locating just outside a REZ and accessing the network at the expense of generators within the REZ.
What are the next steps?
- Draft recommendations for detailed design will be published in March 2023.
- The final draft rules are proposed to be submitted to the Energy Ministers in June 2023.
Footnotes
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ESB Post-2025 Design Directions Paper, January 2021, p 10.