Energy Security Board releases final consultation paper on Post 2025 Market Design

On 30 April 2021, the Energy Security Board (ESB) released the Post 2025 Market Design Options Paper (Options Paper) which forms the basis of the final round of consultation before final recommendations are made to the Energy National Cabinet Reform Committee in mid-2021.

The Options Paper acts as a shortlist of potential reform options for the National Electricity Market (NEM) and seeks comment from stakeholders on the potential pathways identified. The options follow on from the four key areas of need set out in the last directions paper issued in January 2021 (Directions Paper) which was discussed in our previous article.

The reform options aim to address the rapid increase in renewables in the NEM and the retirement of thermal generation which the ESB says is ‘pushing the existing energy system to its technical limits’.

The advice that the ESB provides after this final round of consultation aims to give Energy Ministers the information necessary to enable the ‘critical decisions needed for an affordable, reliable and secure electricity system that can ultimately operate at net zero emissions’.

Options Paper reform pathways

The Directions Paper in January identified the four key areas of reforms needed as being:

1. resource adequacy mechanisms and aging thermal retirement;
   
   
2. essential system services and scheduling ahead mechanisms;
   
   
3. integration of distributed energy resources (DER) and flexible demand; and
   
   
4. transmission and access.

The recent Options Paper takes the next step following the Directions Paper by narrowing down specific reform pathways for each of the established four key areas, and splits reforms into three categories:

1. immediate reforms to be done now;
   
   
2. initial reforms to be developed and implemented in the near term; and
   
   
3. next reforms which are longer term and depend on developments in the industry including technical changes.

These categories reflect the urgency of the situation, and aim to deliver the reforms progressively over time.

1. Resource adequacy mechanisms and aging thermal retirement

The ESB says that in order for Australia to replace most of its generation over the next two decades, modifications to investment signals in the market may be necessary to facilitate efficient retirement of aging thermal generation and a timely replacement by new resources to maintain reliability.

Potential immediate reforms identified include a NEM-wide approach to underwriting and investment schemes for new investment, changes to notice of closure requirements and enhanced exit mechanisms for retiring thermal generators.

The key initial reforms identified relate to modifying the retailer reliability obligation and provide two potential options which are to either: remove the current trigger (which only applies where a shortfall in reliability is forecast) which may promote a higher level of enduring contracting by retailers, or to create a ‘physical certificate scheme’. The physical certificate scheme has drawn some criticism that it may act as a subsidy for coal and gas generators, as it effectively underwrites existing thermal generators whilst they are still needed for grid reliability.

The next reforms will involve continued monitoring of the ability of the arrangements to deliver reliable investment and low overall costs to consumers, particularly with the entry of new storage and fuel types like pumped hydro and hydrogen.

2. Essential system services and scheduling ahead mechanisms

The Options Paper highlights that the growing role of renewable generation and battery storage in the NEM will increase the need for services to maintain security of the system. This means that essential system services will need to be efficiently procured through non-traditional and new sources to replace retiring thermal generation.

Immediate reforms proposed include refining frequency control arrangements, particularly around enhanced arrangements for primary frequency control and a potential new market for fast frequency response.

Some initial reforms suggested include the development of a unit commitment for security and a system security mechanism as a short-term option which may provide an adaptable operational tool to assist with system strength and to provide system configuration needed to maintain security.

The next reforms involve exploring the need for a new operating reserve or ramping services by assessing these options on a long term cost/benefit analysis.

3. Integration of DER and flexible demand

The Options Paper highlights that the largest generator in the NEM is now rooftop solar with 2.6 million solar PV systems installed across the NEM, and further that 21% of homes now have rooftop solar (the highest uptake worldwide). Such a large amount of DER in the NEM has the potential to provide significant demand flexibility if adequately integrated, and at the same time should provide benefits for consumers.

The proposed immediate reforms include expanding the responsibilities of distributors to hosting distributed generation and storage, and introducing technical standards for DER to assist in ensuring the security of the power system.

Initial reforms put forward by the ESB focus on rewarding customers for flexible demand and increasing value to the system from flexible resources provided. The reforms will need to make it easier for new and innovative retailers and service providers to enter the market, which will provide customers with greater choice and competition.

The next reforms will be to develop a ‘maturity process plan’ to be released every six months which will progressively develop opportunities for customers to get value for energy and services they provide to the grid, and work towards lowering overall system costs.

4. Transmission and access

It is clear that substantial transmission investment is needed to accommodate the ESB’s forecast of up to 50 GW of new large-scale renewable generation by 2040, so supply-side investment needs to be delivered in a properly coordinated manner to avoid overwhelming the capacity of the market.

Immediate reforms involve updates to the Australian Energy Market Operator’s Integrated System Plan with a least cost pathway for the development of the power system and the easing of congestion on the grid. Further development is suggested regarding the framework for establishing renewable energy zones (REZ) that would allow jurisdictions to remove barriers in the way of new renewables which the ESB argues will ‘encourage the cheapest, greenest combination of energy into the market’.

The ESB identifies initial reforms also being directed at REZs, with suggestions including  streamlining the investment process, reducing the likelihood of customer access to REZ generators being degraded by external generators connected to the grid, and implementing processes for real time congestion management.

The next reforms will be to shift the current access framework to locational marginal pricing and financial transmission rights which the ESB argues is a system that has proven to work in overseas markets and will provide the most comprehensive solution to the issues at hand.

Next steps

The ESB has stressed that that the scale and pace of change in Australia’s electricity sector cannot be overstated, and that correspondingly extensive and prompt reforms are required to keep up.

The consultation on the Options Paper is therefore a crucial step which will inform the final recommendations of the Post 2025 Market Design.

Consultation on the pathways identified in the Options Paper closes on 9 June 2021.