Consultation: Post 2025 Market Design Options Paper
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9/06/2021
Dr Kerry Schott AO
Independent Chair
Energy Security Board
Via email (info@esb.org.au)
Dear Dr Schott
Consultation: Post 2025 Market Design Options Paper
AusNet welcomes the opportunity to make this submission in response to the Energy Security Board’s
(ESB's) Post 2025 Market Design Options Paper (the P2025 Options Paper).
AusNet is Victoria’s largest diversified energy network business, owning and operating nearly $13 billion
of assets, which includes three core networks: electricity distribution, gas distribution and the state-wide
electricity transmission network. We service over 1.5 million customers and also have a commercial
energy services business called Mondo, focusing on contracted infrastructure and energy services.
The Post 2025 Market Design Review commenced with the purpose of taking a holistic look at the
market design of the National Electricity Market (NEM) and advising Energy Ministers on a long term,
fit for purpose market framework to enable the provision of the full range of services to customers
necessary to deliver a secure, reliable, and lower emission electricity system at least-cost.
During this time, the ESB has released several papers and conducted multiple consultation processes
on a broad range of issues and reform initiatives. As the penultimate paper in the review, we had at one
stage anticipated the P2025 Options Paper would have provided interested parties with more explicit
direction of the future market design, including options for each reform initiative with sufficient detail to
choose a preferred approach and then overall direction for the workstream pathway.
Instead, the P2025 Options Paper includes a suite of reform initiatives at different stages of policy
development. Some of the reform initiatives presented, seeded through earlier stages of the review, are
now well progressed through other formal reviews and Rule Change proposals, but also directly by the
ESB. Other reform initiatives are still at a conceptual level and require further testing that considers
real-world implementation challenges, which may be subject to different technological constraints and
innovation.
There are undoubtedly multiple factors that have contributed to this – including the breadth and
complexity of the questions explored, speed of the energy transformation and emergence of major
jurisdictional reform programs. However, the outcome is that the P2025 review recommendations are
less likely to constitute the definitive decision point on all areas of reform, and instead will contribute to
reform considerations that are ongoing.
In this context, where reforms covered in the P2025 Options Paper are subject to current or pending
Rule Change proposals, we have reserved our detailed feedback for those processes. The attached
submission provides some higher-level comments on the workstreams and proposals from the P2025
Options Paper with most direct impact to our business and our customers. This includes:
When and how best to procure essential system strength services to support a timely, efficient,
and enduring solution. The need to further explore and assess longer-term options for integrating Distributed Energy
Resources (DER) and accessing demand side response by drawing on a combination of trial
projects (such as Project EDGE and Flexible Exports) and incremental steps.
Identifying opportunities to improve the overall confidence in the framework for developing new
transmission investment, including the Integrated System Plan (ISP) and Actionable ISP
framework.
We also note AusNet is a member of Energy Networks Australia and supports that submission.
If you have any questions regarding our submission, please contact Katie Yates, Manager Energy
Policy by email at katie.yates@ausnetservices.com.au.
Sincerely,
Adrian Hill
Acting EGM, Regulation and External Affairs
AusNet Services
2AusNet’s submission in response to the ESB's P2025 Market Design Options
Paper
Essential system services, scheduling and ahead mechanisms
The essential system services (ESS) workstream of the P2025 Options Paper is fundamental to
maintain system security and stability as the penetration of renewable generation increases. Given their
technical nature, we support these services (i.e. inertia, system strength and ramping/operating
reserves) being considered through Australian Energy Market Commission (AEMC) rule changes.
Close attention should be paid to which services are best procured when (e.g. during investment
timeframes, operational timeframes, or both) and what mechanisms will deliver the greatest certainty
that the system is secure at the lowest cost to consumers. AusNet’s comments on this workstream
largely relate to the delivery of system strength services.
1. Efforts should be focussed on enhancing the provision of system strength during
investment timeframes.
AusNet recognises the challenges and costs associated with rapidly declining system strength are
material, and require a timely, efficient, and enduring solution. In Victoria, inadequate system strength
along with other factors (such as requirements to manage voltage, minimum demand, and summer
conditions) are increasing the difficulty and cost of obtaining planned outages to conduct routine
maintenance and replacement on the transmission network. To ensure a reasonable outage window is
available, AusNet can be required to enter into a network support agreement (NSA) to enable a planned
outage to proceed. While dependent on the outlook for wholesale prices, an NSA can cost several
million dollars for a single major replacement project to go ahead, which can be very expensive when
considering the number of planned outages required over a typical year or a regulatory period. In
addition to the challenges for network service providers, declining system strength is also causing
delays for (or preventing) connection of new generation to the shared network and forcing them to
procure expensive remediation solutions, such as synchronous condensers.
These urgent and material issues are being considered by AEMC through the proposed rule change on
the efficient management of system strength on the power system (ERC0300).
The draft rule evolves the current framework for system strength provision by making Transmission
Network Services Providers (TNSPs) responsible for delivering an efficient amount of system strength
at certain locations on their network in investment timeframes, rather than requiring generators to
address their individual adverse impacts on the power system. It introduces new obligations on TNSPs
with jurisdictional planning responsibilities in each region to achieve a new system strength planning
standard at defined system strength nodes.
AusNet supports the thrust of the rule change, but recommends enhancements are made to the system
strength standard proposed in the AEMC’s draft determination. Specifically, the system strength
standard should be amended to permit planning for business-as-usual maintenance and replacement
of assets, including planned outage conditions1 and their associated costs. This could be achieved by
developing a set of economic planning criteria which consider the most efficient cost of providing system
strength services for energy users over investment timeframes. Such an approach would enable
network service providers to remediate system strength well before operational timeframes and reduce
otherwise unavoidable NSA costs. It would also enable pricing to be determined in investment
timeframes, which would provide greater certainty to generators than if left to market-based
mechanisms (see point 2 below).
2. AusNet is concerned that market conditions within the NEM are not supportive of system
security scheduling and procurement mechanisms. Analysis should be undertaken to
demonstrate the market for security services is feasible (i.e. sufficiently large and dynamic)
before introducing these mechanisms.
1Under the draft rule, the system strength standard only requires TNSPs to meet system strength standard
specifications for declared system strength nodes under system normal or credible contingencies.
3The P2025 Options Paper introduces the Unit Commitment for Security (UCS) and System Security
Mechanism (SSM) as a means to provide greater confidence that the system will remain secure in
operational timeframes. More specifically, the ESB notes it is committed to an UCS (or some form of
scheduling mechanism) on the basis that there could be more contracts than are able to be scheduled
efficiently. It is also investigating an SSM on the basis that the planning framework cannot account for
all operational conditions (e.g. actual development exceeds the planning expectations, or specific
operational conditions occur that are beyond the planned standard).
Like spot markets, system security scheduling and procurement mechanisms are typically most
effective where the demand and supply of products and services continuously changes at short notice
and promoting efficient pricing requires greater choice.
AusNet is concerned that the market conditions within the NEM are not supportive of system security
scheduling and procurement mechanisms. For example, in Victoria the market for providing system
strength services will likely be small, as there are a limited number of generators who can provide such
services where they are needed. Further, designing and implementing market mechanisms involves
complex scheduling or optimisation processes and interactions across multiple parties. Consequently,
we would expect the practical implementation costs to be high and could outweigh benefits of efficient
pricing.
Given the above, AusNet has concerns around the feasibility of implementing a UCS or SSM in the
NEM. Before introducing these mechanisms, we would recommend market bodies complete analysis
that demonstrates the market for system security services is sufficiently large and dynamic to generate
confidence and cost savings in operational timeframes. Without this work, there is a risk that the supply
market for providing system strength services is too small to drive efficient outcomes and the proposed
mechanisms are not viable.
3. AusNet supports the new fast frequency response market ancillary services proposed in the
AEMC’s recent draft determination.
AusNet considers it appropriate to grow frequency control markets as the challenge of matching supply
and demand increases due to factors such as the increasing share of energy being provided by
Distributed Energy Resources.
Such services are likely to be an important revenue stream for market participants seeking business
models for battery energy storage systems, which have potential broader benefits for the electricity
system.
Integration of distributed energy resources and flexible demand
By the ESB’s own acknowledgement, the distributed energy resources (DER) and demand response
workstream is less developed than the others.
The P2025 Options Paper provides a reasonable survey of relevant issues and market design options
for integrating DER and better accessing demand side response. This includes the ‘immediate reform’
areas where Rule changes (such as the Access, Pricing, and Incentive Arrangements for DER Rule
change) and other activity (such as development of technical standards) are already underway.
Minimum demand is rightly identified as an urgent issue where further reform may be necessary, and
work is needed to address this advancing challenge in a way that is efficient and customer friendly,
while ensuring system security is maintained.
However, many of the options canvased in the P2025 Options Paper’s discussion of ‘initial reforms’,
would be better treated as ‘next reforms’ under the timelines applied throughout the other workstreams.
These include the establishment of a Trader Services model, and the introduction of flexible trading
arrangements.
It is notable that we are still at a point in time where the predominant form of DER is solar PV, and there
is very little flexibility of the electricity generated by the existing PV fleet (even in terms of inverter
response), or of residential demand generally. While there are a lot of exciting technology-based tools
4being developed to help integrate DER and enable DER to access wider markets, we may still be years
away from wide-spread deployment. Hence there is something of a split between the reforms needed
in the short term to work with mostly passive-DER; measures to encourage flexibility in demand; and,
the market design options being contemplated for a time when technology, incentives, market design
and supportive customer behaviour are in place.
4. Management of minimum demand associated with solar exports is a key issue to be
addressed in the short term.
Change in minimum demand has been rapid, with the reverse flows from distributed solar exports
starting to drive system level instabilities in more and more parts of the NEM. The emergency backstop
solution imposed in South Australia has been necessary, but ideally this type of approach is reserved
truly as an emergency tool.
A related but separate consequence of the solar export peak is that local network limitations (e.g.
voltage and capacity limits) are being increasingly reached or breached.
Ideally the path forward for DER management in Victoria would align to solve both distribution and
system level issues. AusNet would like to see an aligned approach and for AEMO to actively consult
on any plans it has for mandating some form of solar control for the managing events that could threaten
system security.
AusNet is working with South Australia Power Networks (SAPN) on rapidly progressing one tool that
could assist to manage minimum demand issues under the ARENA-SAPN Flexible Exports for Solar
PV Trial. This project seeks to offer customers an alternative to the fixed export constraints that are
currently imposed when local network issues are in place, by instead creating a dynamic export
constraint that only limits customers exports where there are binding local constraints. This framework
has potential to be expanded to manage for system-level constraints from AEMO. Customer
consultation and communication is an important part of this approach, to ensure customers understand
what they are signing up to, including how and why individual solar systems are being managed for the
benefit of the overall system.
Nevertheless, it could be years until this approach can be rolled out NEM-wide. Hence collective efforts
are needed to monitor and manage minimum demand issues, with a particular emphasis on maintaining
customer trust. Requirements may differ by jurisdiction, and regular assessment of the regional risk and
timeframes associated with minimum demand are needed because factors such as electrification of
transport and other industries could reduce or reverse minimum demand concerns in the medium term.
Jurisdictional differences in network design and metering will also need to be considered in solution-
design as, for example, the South Australian emergency backstop is not an automatically available
option in all jurisdictions.
5. Broad approaches should be taken to encourage flexibility in demand.
DER is already providing a significant share of electricity generation in the NEM. Increasing the flexibility
of that generation and of residential demand is fundamental to delivering greater benefits to energy
customers from DER, improving the overall efficiency of electricity supply, and to maintaining a secure
system.
AusNet supports a strong focus on developing incentives or rewards to encourage customers to take-
up products, services or behaviours that offer more than simple passive solar exports to the energy
market. From a customer perspective, this could include installation of a household battery, purchase
of an electric vehicle, enrolment in a demand response program, or signing up with an aggregator or
energy service provider who manages their DER or some of their electricity connected devices.
While network tariffs have received a lot of the focus in relation to providing better incentives, they
should not be the only tool we rely on. Experience tells us that these tariffs are difficult and slow to
change. The signals they provide can also seem minor compared to other drivers of customer
behaviour, whether they be upfront solar and battery rebates, feed-in-tariffs, or environmental and other
non-financial concerns.
We should be looking for broader options to reward demand flexibility. The proposed Scheduled Lite
scheme is an example of this. It is sensible that this is being developed on an opt-in basis, rather than
introducing mandatory and punitive measures. The focus on reward should also allow an eye to be kept
5on minimising the costs of the reform that is introduced so as not to eat into the reward that can be
offered.
6. Further exploration and assessment needed for longer term reforms such as establishing a
Trader Services model and Flexible Trading Arrangements.
Trader Services and Flexible Trading Arrangements are discussed in the P2025 Options Paper as
potential ‘initial reforms’ which would imply near-term implementation. However, more information is
needed before committing to these particular reforms. Neither option is explored to a level of detail that
would allow policy makers to take actions with confidence. Especially as both options are likely to be
complex and costly to implement.
Trader services
AusNet supports the proposition that existing market participant categories need updating to enable
greater participation of DER. We have supported the proposed expansion of AEMO’s Market Ancillary
Services Specification to enable greater participation of DER in ancillary services markets.
However, the elimination of participant categories and move to service-based regulation as set out for
the Trader Services model is no simple task. More details are needed on how the National Electricity
Rules would need to be amended, including setting out how services would be regulated once the single
‘trader’ participant category is introduced, to assess whether it would actually be effective overall.
Flexible trading relationships
The promise of flexible trading arrangements is to deliver increased innovation and competition in
energy services. This is a worthy goal.
However, caution should be exercised here as both models set out in the P2025 Options Paper (second
connection point and sub-meter connection point) add complexity and substantial system costs. There
is also a substantial history of energy reforms that have failed to deliver the innovation benefits
promised.
A complex set of factors have contributed to the lack of retail innovation and customer appetite for such
innovation seen to date. At this point in time, it may be more fruitful to focus on introducing rewards for
flexibility in demand so that DER owners can see the value of participating in energy markets.
Building evidence for reforms that will work
While potential benefits have been identified, there is not a high degree of confidence on the size of
benefits that can be achieved, and the degree to which the benefits are contingent on these major
reforms (i.e. is there a simpler, less costly option?).
Instead, further work and evidence gathering is needed. A combination of trial projects and incremental
steps is a sensible way to progress these reforms. This would establish the workability of theoretical
models in the real world, customer appetite and attitudes, as well as a better view of the relative costs
and benefits. Actions can be accelerated once the case is built that the reform will deliver net benefits.
AusNet is involved in a number of such innovation projects:
Project EDGE – Conducted by AusNet, Mondo and AEMO, this project will test distribution
market design options that will assist in determining preferred reforms for the longer term. This
project, to be run in the Hume region of Victoria, will test market framework models as well as
trialling the use of Dynamic Operating Envelopes, and a version of Scheduled Lite.
Flexible Exports – AusNet is a key partner in the SAPN-led ARENA-supported project, which is
described above (point 4). The role out of dynamic export limits as being trialled is likely to be
a key incremental step by distribution networks for any of the market design options being
developed.
Community energy resources – AusNet is delivering a number of projects in edge of grid
communities that will help improve the resilience and reliability of those communities, utilising
batteries and other DER. Energy delivery models are emerging that incorporate community
batteries and microgrids and enable customers or communities to maintain a level of energy
supply through periods where connection to the broader grid has been interrupted.
6Lessons from these projects and others should be used to inform decision making on future reforms
relating to the integration of DER.
Transmission and access
The transmission and access workstream has considered key issues in relation to the efficient planning
and delivery of new transmission investment, and the coordination of transmission and generation.
Specific issues relate to establishing a framework for Renewable Energy Zone (REZ) delivery; the
transmission access framework for generators, both within REZs and more broadly; investment
decision making for transmission, including the role of the Integrated System Plan (ISP) and Regulatory
Investment Test for Transmission (RIT-T); and, procurement and regulation approaches to deliver
transmission efficiently.
Over the two-plus years that the Post-2025 Market Design Review has been underway, a period where
the ISP and Actionable ISP framework have been newly introduced, there have continued to be signs
that various stakeholders lack confidence in the existing framework with respect to whether
transmission projects can be delivered in an efficient and timely way to meet the needs of the energy
transition, and whether the risks will be appropriately shared across stakeholders. This has manifested
in a range of different issues and solutions being put forward from different parties. For example,
proposals to improve predictability of project costs, better manage social licence considerations and
expediate delivery of infrastructure.
In this context the focus for future reform must be on improving the overall confidence in the framework
to deliver the transmission and generation outcomes that electricity customers need.
7. The rise of jurisdictional REZ schemes needs to be acknowledged for the role it will play in
shaping transmission and generation investment.
One of the most significant recent developments has been the emergence of jurisdictional REZ
initiatives in Victoria, NSW and Queensland. In addition to underwriting or contributing to investment,
these jurisdictions are actively exploring alternative processes to procure, fund and own their proposed
portfolio of projects, as well as developing bespoke access regimes and mechanisms to coordinate the
timing of generation and transmission investment. Many of the projects being progressed as part of the
REZ initiatives were not contemplated as actionable ISP projects and could materially reshape the
NEM.
This increased role for jurisdictional governments raises questions for what is needed from the national
framework, and the ongoing role for the ISP. This includes a question on the remaining objectives for
access reform if the location of new generation is going to be strongly guided by State government
involvement.
8. Any reform to the regulatory investment test should first consider the ISP and its ongoing
role in upholding consumer confidence, particularly given the emergence of jurisdictional
REZ initiatives.
The P2025 Options Paper introduces questions regarding the Regulatory Investment Test for
Transmission and its application to ISP projects.
One question that has been raised is whether the investment test should be widened to include benefits
beyond the energy sector, such as local economic and job benefits. Without diminishing the importance
of such aspects of new transmission projects, particularly to local communities, it seems unlikely that
widening the RIT-T to consider such benefits would materially alter the conclusions regarding the
national view of project priorities. There may be other options for incorporating consideration of broader
benefits and engaging the local communities that will be most affected by new transmission and
generation investment in planning and decision making. States may pursue different priorities to those
determined from a national perspective, and may be better placed to consider non-energy market
benefits than transmission networks and AEMO, who apply the RIT-T.
Further, jurisdictional REZ initiatives should not be dismissed as simply a competition over where future
energy jobs are located. It is clear that States hold concerns as to the ability of the existing framework
7to deliver timely transmission investment and have differing views to those embedded in the current
framework around the likelihood and consequence of not meeting affordability, reliability and
decarbonisation objectives. These are not all matters for the investment test.
The protracted process involved in initiating new transmission projects underlies another question
raised in the P2025 Options Paper as to whether the RIT-T is necessary once a project is identified as
on the optimal development path in the ISP.
While many stakeholders are frustrated by the lengthy process, we also acknowledge that having a
transparent and rigorous process for assessing investment decisions is critical to the confidence of the
electricity customers who ultimately pay for these major projects. They want assurance that they will
benefit for such projects.
To promote efficient and timely delivery, AusNet suggests further consideration be given to the size and
status of projects that would be subject to ISP oversight and the processes they should follow.
AusNet considers an approach that promotes greater scrutiny on larger ISP projects where consumers
bear greater risk, and less scrutiny on smaller ISP projects where consumers bear less risk would be
sensible. This includes seeking opportunities to streamline various elements of the RIT-T (as raised in
the P2025 Options Paper), but also review the sequencing and risk borne by parties across all elements
of the planning and investment process.
9. The AEMC’s upcoming review into the regulation and financing of large transmission
projects is an opportunity to consider critical issues not addressed by the Post 2025 Market
Design process.
We understand the ESB is considering the terms of reference for the AEMC review into the regulatory
and financing of large transmission projects, initially flagged in April 2021. This is an important review
in the context of building stakeholder confidence in the transmission investment framework.
AusNet would encourage the review to consider the following areas of priority:
Governance – What is the ongoing role of the ISP in the context of current state action (as
discussed in point 7)?
Investment framework – Should the investment test of the RIT-T be refined and how and when
should it be applied?
Regulation – Are the right mechanisms in place to balance cost control and providing adequate
returns to investment?
Competition – In which circumstances would contestability deliver benefits to electricity
consumers?
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