ENERGY SECURITY BOARD INTERIM RELIABILITY RESERVE - Response to submissions on Consultation Draft Interim Reliability Measure Rule July 2020 ...
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ENERGY SECURITY BOARD
INTERIM RELIABILITY RESERVE
Response to submissions on
Consultation Draft Interim Reliability
Measure Rule
July 2020
1Contents
1. Introduction........................................................................................................ 3
2. Summary of issues raised in submissions and ESB’s response ................... 4
2.1 Process undertaken by the ESB in recommending Interim Measures ......... 4
2.2 Impact on affordability/prices from the Interim Reliability Reserve .............. 5
2.3 Changes to the reliability standard .............................................................. 6
2.4 Modelling of costs and benefits of the Interim Reliability Reserve ............... 6
2.5 The role for out of market resources ........................................................... 8
2.6 The role for multi-year contracting ............................................................ 10
2.7 Interim Reliability Reserve interaction with other reforms .......................... 12
2.8 Operation of the Interim Reserve .............................................................. 14
2.9 Transparency of the Interim Reserve Costs .............................................. 15
2.10 Interaction between RRO and Interim Reserve ......................................... 16
2.11 Other interim reliability reserve issues ...................................................... 17
C Abbreviations and Technical Terms .................................................................. 18
21. Introduction
The Energy Security Board (ESB) has developed a set of changes to the National
Electricity Rules (Rules) to implement the temporary out-of-market capacity reserve
agreed to by Ministers at the March 2020 COAG Energy Council Meeting. On the 12th
May 2020 the ESB published draft Interim Reliability Measure Rules for consultation. 1
The ESB received non-confidential submissions from sixteen organisations, including
from regulators, industry groups, generators and customer groups:
• Generators/retailers: AGL, CS Energy, EnergyAustralia, Engie, Ergon Energy
QLD, ERM, Hydro Tasmania, Infigen, Origin Energy, Snowy Hydro, Stanwell
• Industry bodies: Australian Energy Council
• Consumer groups: Australian Aluminium Council, Major Energy Users, Energy
Users Association of Australia, QLD Electricity Users Network.
• Regulators: ACCC
The submissions are published on the ESB’s website. 2
They are summarised, together with the ESB’s response, in Chapter 2. The ESB, AEMC,
AER and AEMO have subsequently worked together to consider issues raised in
submissions and develop a set of recommended Rules to be submitted to Energy
Ministers.
1 Energy Security Board, Consultation on the Draft National Electricity Amendment (Interim Reliability Measure)
Rule 2020, May 2020. Available at: http://www.coagenergycouncil.gov.au/publications/consultation-draft-
national-electricity-amendment-interim-reliability-measure-rule-2020.
2 See above.
32. Summary of issues raised in submissions and ESB’s response
2.1 Process undertaken by the ESB in recommending Interim Measures
Respondents Comments ESB response
AGL, CS Energy, EUAA, Consultation on the Interim Reliability Reserve was not best In undertaking the review between November 2019 and March 2020, the ESB
MEU, Origin Energy practice, lacked public consultation prior to the decision to proceed drew on the feedback from other recent reviews conducted by the AEMC and
Stanwell, QEUN with the Reserve and Interim Reliability Measure, and the ability to AER. The ESB also undertook informal consultation with a range of key
critique the ESB’s modelling and conclusions. stakeholders including the following organisations, the Australian Energy
Council, the Clean Energy Council, the Energy Users Association of Australia,
The implementation of the Interim Reliability Reserve undermines Grattan Institute, the Public Interest Advocacy Centre.
a number of recent processes focused on energy reliability and
security in which consultation was broad and transparent. The proposed rule changes are intended to be an interim solution that targets
resources that are not generally incentivised to participate in the market (ie
The QLD Electricity Users Network requests a list of stakeholder respond to five-minute prices). This interim solution is proposed to be in place
engagement that was undertaken in preparing the response to while the ESB and Market Bodies continue to work on longer term
COAG Energy Council. arrangements to improve reliability and security in a more enduring way. This
will be developed and implemented as a part of the Post 25 Work Program (eg
Two Sided Markets; resource adequacy mechanisms)
The Interim Reliability Reserve is intended to address the recent increased
use of the Reliability and Emergency Reserve Trader mechanism in some
regions. The Interim Reliability Reserve should allow AEMO to increase the
pool of resources available for out of market reserves and put downward
pressure on the cost of procuring these reserves when needed.
Jurisdictional oversight will continue to play an important role in ensuring that
the risk of unnecessary amounts of emergency reserves being procured is
minimised.
42.2 Impact on affordability/prices from the Interim Reliability Reserve
ACCC, MEU, ERM Concerned that these reliability measures will impose additional The Interim Reliability Reserve is intended to address concerns about the
costs on consumers, particularly small consumers. increased reliability risk following the retirement of a number of baseload
generators (including the Hazelwood, Northern, Munmorah, Wallerawang and
Any marginal change in unserved energy from improved reliability Anglesea power stations) and the subsequent increased use of the Reliability
in the wholesale market will make little difference to how and Emergency Reserve Trader mechanism in some regions of the NEM.
consumers see reliability, yet the proposed change will
significantly increase the costs they see. Analysis undertaken by ACIL Allen for the ESB indicates that a jurisdiction that
just meets the current 0.002% standard could expect load shedding one in
The costs to consumers for the dispatching of RERT during every three years on average – absent an intervention mechanism such as the
summer of 2019/20 were higher than the market price cap and so RERT.
if the new reliability levels had applied for summer 2019/20 then
the process would have led to consumers paying more than was The volume of reserves activated over recent years reflects the operational
necessary. requirements and actual lack of reserve conditions at the time.
The Interim Reliability Measure Rule is not one reform but three, The Interim Reliability Measure will not necessarily result in an increase in the
all attempting to solve the same issue. ERM Power questions the amount of reserves activated and could reduce the total cost to consumers of
need to adopt all of these arrangements at once, potentially the reserves that are activated relative to what would have been procured
increasing costs for consumers at a time when many households through short and medium notice RERT.
and businesses are facing serious financial and social pressures
as a result of the COVID-19 pandemic. The Interim Reliability Reserve should allow AEMO to increase the pool of
resources available for out of market reserves, putting downward pressure on
the cost of procuring these reserves when needed.
AEMO will need to consider the relative total costs to consumers and will be
subject to comprehensive reporting requirements. Jurisdictional oversight will
continue to play an important role in ensuring that the risk of unnecessary
amounts (and costs) of emergency reserves being procured is minimised.
The ESB will shortly issue a consultation paper on the changes required to be
made to the Retailer Reliability Obligation (RRO), in which it will discuss the
concerns about the interactions between the Interim Reliability Reserve and the
RRO.
52.3 Changes to the reliability standard
Respondents Comments ESB response
AEC, CS Energy, EUAA, Several stakeholders questioned the 1 in 10-year standard and its ACIL Allen undertook analysis that underpinned the ESB’s recommendations
MEU, Origin Energy, alignment with community expectations. to COAG Energy Council. Their analysis found that the current reliability
Stanwell standard may not represent the most economically efficient trade-off between
The decision to increase the standard is also inconsistent with the the cost incurred during load shedding and the cost of resources that would
findings of other recent reviews in this area. prevent load shedding (where Reliability and Reserve Emergency Trader
(RERT) offers were used as the best available indicator of the cost of
demand response and certain assumptions about the Value of Customer
Reliability). The analysis provides support for an interim tighter standard
under certain scenarios, including when there is sufficient demand response
at a cost that is lower than the cost of load shedding. An interim out of market
solution was chosen by the ESB as this approach would allow for greater
visibility and understanding of the availability and cost of demand side
resources in the NEM.
2.4 Modelling of costs and benefits of the Interim Reliability Reserve
Respondents Comments ESB response
ACCC, ERM The modelling results for NSW show that the costs of meeting the In the case of the Residential Only scenario, the benefit-cost analysis
interim reliability standard in NSW are higher than the benefits. showed that the costs exceeded the benefits of targeting 0.0006% USE in
the NSW simulation. However, the supply of demand side was relatively
limited in this scenario (an arbitrary decision to use existing AEMO
contracted levels). In the Reference case (higher value for VCR) and in the
two scenarios where the availability of demand side was doubled
(Expanded RERT), the benefits of targeting a USE of 0.0006% exceeded
the costs. There is nothing to suggest that the existing volume of RERT
contracts contracted by AEMO exhausts the supply of demand side in the
NEM. The analysis shows that the with realistic volumes of demand side
(evidenced by AEMO’s ability to contract under the RERT), the benefits of a
USE target between 0.0005 and 0.001% of USE exceeds the costs.
6AEC, ERM, MEU ACIL Allen’s modelling fails to consider the classes of customer most ACIL Allen ran two types of customer analysis – all excluding agriculture
likely to be subject to involuntary load shedding. and only residential customers (having the lowest USE over the 1-3 hour
outage period considered). They analysed the outages using the granular
The Value of Customer Reliability indicates on average what VCR values that underpin the AER’s headline ‘anytime’ values, which are
customers would be prepared to pay for lower levels of all supply very averaged. The ACIL Allen analysis using VCR for residential only
interruptions, which tends to be heavily influenced by recent events in customers (lowest average VCR value) supports a USE target of between
their respective distribution system, forty-one percent of respondents 0.0005% and 0.001%, especially where higher demand side participation is
to the AER’s process indicated a willingness to pay of zero. available.
ACIL Allen recognises that using average VCR values for consumers has
limitations. Ideally, the market price cap would be raised to the point where
individual customers responded based on their own circumstances.
However, in the current environment, it is a reasonable approach
considering that the market operates over a shared network.
Willingness to pay surveys have inherent limitations as they require
respondents to provide a response and these responses can be swayed by
a variety of influences, including recent experience. It might be argued that
customers with recent experience are more likely to provide an accurate
assessment of their willingness to pay. Similarly, it is not unusual that
customers with little or no disruption experience, should report a willingness
to pay of zero (why pay for something that in their mind they already have).
ERM The closer the unserved energy forecasts are to meeting the interim The statement that the closer unserved energy forecasts are to meeting the
reliability standard, the less expensive it will be for reserve contracts interim reliability standard, the less expensive it will be for reserve contracts
to bring reliability back to within the interim standard, therefore the to bring reliability back to within the interim standard, is true in the following
ACIL Allen modelling approach is unstable. sense:
• The lower the demand, the less supply needed to meet that demand
• Supply meeting the lower demand would be the lowest cost (assuming
a competitive market)
• The resulting market clearing price will be lower
• Supply meeting demand will be less expensive where there is less
demand to meet
It is also true that the greater the volume of demand side available, the less
expensive it will be to meet the interim standard. ACIL Allen developed four
7scenarios to provide a range of outcomes. The results were consistent and
there is no indication of instability.
ERM The 2019 ESOO forecast does not include the supply provided by the The existence or otherwise of the reserve generators in South Australia has
South Australian emergency diesel generators which have been no effect on the broader analysis. The analysis used the AEMO ESOO data
transferred to market participants and will be bid in using the normal to construct realistic USE data sets as an input to the analysis.
market process in the future. Incorporating additional supply and removing USE from the data sets would
have been counter to the purpose of undertaking modelling with significant
volumes of USE.
ERM, CS Energy The modelling does not provide an adequate assessment of costs Undertaking modelling on the costs and benefits to support the COAG
and benefits, in large due to the use of ESOO 2023-24 projections Energy Council decision was generic and time independent. It was not
designed to find the cost of meeting a particular standard in a particular
region in 2023-24 (the data set used in the modelling). The purpose of using
the 2023-24 data set was to easily extract realistic half hourly outage
sequences for the analysis. 2023-24 was the year modelled in the 2019
ESOO that had the highest USE numbers. ACIL Allen used this year as it
provided the richest data set to develop a series of simulations based on
the three states that provided significant levels of USE.
2.5 The role for out of market resources
Respondents Comments ESB response
Infigen Given that the Market Price Cap is less than the average value of The Interim Reliability Reserve is an interim measure designed to be a last
customer reliability, procuring demand response through the RERT resort mechanism, intended to avoid distortions to the market and
minimise the cost of procuring out of market resources. The framework
therefore may allow for (arguably) more orderly load shedding, without
builds on the current Victorian jurisdictional derogation for RERT
needing to increase the Market Price Cap for all participants. Contracting.
Hydro Tasmania The framework will allow AEMO to procure reserves if the ESOO (or any
In response to the previous Enhancement to the RERT rule change in update) forecasts that the Interim Reliability Measure will be exceeded.
2018, Hydro Tasmania presented a set of guiding principles: AEMO will be allowed to enter multi year reserve contracts for up to three
years if the Interim Reliability Measure is exceeded for at least two years
1. a last-resort response to maintain reliability; including the first financial year.
2. designed to ensure efficient market responses, and avoid The proposed rule changes are intended to target resources that are not
crowding out investment; generally incentivised to participate in the market (ie respond to five-
83. activated rarely; minute prices) and ultimately lower the cost of procuring out of market
resources.
4. offered by truly additional capacity only (must be ‘out of
This interim solution is proposed to be in place while the ESB and Market
market’ reserves); Bodies continue to work on longer term arrangements to improve reliability
and security in a more enduring way. This will be developed and
5. transparent in nature (with a clearly understood process implemented as a part of the Post 25 Work Program (eg Two Sided
for procurement, enactment and timely publication of Markets; resource adequacy mechanisms)
RERT outcomes); and
AEMO will also need to consider the relative costs to consumers, including
6. administered at the lowest-possible cost. whether a single year contract is more cost effective than a multi-year
contract (see below), and will be subject to comprehensive reporting
Hydro Tasmania consider that the above guiding principles will most requirements that will support an AEMC review that is required to be
likely be met under the proposed rule change. undertaken by July 2023.
AEMO will also need to request single year as well as multi-year contracts.
Snowy Hydro The Reliability and Emergency Reserve Trader (RERT), the current Based on a suggestion by stakeholders (eg AGL), this will minimise
distortions to the wholesale market as it will encourage demand response
out of market reserve, is a function conferred on AEMO to maintain
providers to consider becoming participants in the wholesale market where
power system reliability and system security using reserve contracts. possible, including through the new in-market demand response
RERT in the Short-Notice or Medium-Notice RERT are currently mechanism.
appropriate tools which allows AEMO to purchase reserves 7 days and
Jurisdictional oversight will continue to play an important role in ensuring
10 weeks respectively from the anticipated shortfall, providing an
that the risk of unnecessary amounts of emergency reserves being
appropriate trade-off for maintaining sufficient levels of unserved procured is minimised.
energy in the NEM. There is a recognition that there is a trade-off with
cost per unit of the Short-Notice RERT and Medium-Notice RERT
being more expensive than a multi-year out of market capacity
reserve.
The out of market capacity reserve mechanism is instead non market
based and suffers a complete lack of transparency in both the
tendering phase and also the cost of using the service, which is
ultimately borne by customers. The existing market design can be
relied upon to support reliability in the long-term with the NEM.
AGL Considers that there may be some benefits of multi-year contracting
such as creating a greater pool of potential suppliers with more diverse
system capabilities, along with potentially lower cost solutions when
the contract is required for multiple years.
However, these benefits need to be considered in the context of the
impacts multi-year RERT contracting may also pose to the market, and
ultimately to customers through possible impacts on other market
participants and wholesale markets. These risks must be carefully
managed, particularly measures to prevent over procurement of
9emergency reserves, avoiding indirect costs such as market
inefficiencies, and preserving the RRO framework.
There should be an expectation that out-of-market resources be made
in-market resources where feasible. This will reduce the distortions of
Stanwell out-of-market procurement on the energy market.
Out-of-market procurement has the potential to cause distortions in the
energy market, including the withdrawal of generation capacity from
the market, dampen investment signals in capacity to participate in the
market, inefficient risk allocation, and unpredictable reliability reserve
costs
EUAA The EUAA has also consistently argued in favour of in-market
measures to achieve the reliability standard as an over reliance on out-
of-market measures can lead to unnecessary costs for consumers
from unnecessary or inefficient procurement of RERT.
ERM A tighter reliability standard with an unchanged MPC and the potential
for out-of-market contracts of three years will possibly drive any new
supply to the RERT rather than moving into the market. This is likely to
distort the market as new entrants may try to strike a RERT contract
with AEMO rather than participate in the market and unscheduled
reserves (like demand response) could prefer to wait to strike a
contract with AEMO than to commit to participating in the market.
The proposed approach contains no change to the reliability settings. It
is therefore unclear how any new capacity would be expected to make
a return in the market and instead, potential new suppliers may be
incentivised to stay out of the market in the hope of striking a multi-
year contract with AEMO. As this capacity remains “off-market”, this
would also increase wholesale market prices above that which would
have otherwise occurred, further increasing costs to consumers.
2.6 The role for multi-year contracting
Respondents Comments ESB response
Infigen While RERT is a valuable tool, we consider that in-market ACIL Allen undertook analysis that underpinned the ESB’s recommendations
mechanisms should be pursued where possible, such as Infigen’s to COAG Energy Council. Their analysis found that the current reliability
proposed Operating Reserves framework. Infigen is concerned that standard may not represent the most economically efficient trade-off between
procuring RERT resources for multiple years risks drawing valuable the cost incurred during load shedding and the cost of resources that would
10demand response resources out of the market. This prevents their prevent load shedding (where Reliability and Reserve Emergency Trader
use in delivering lower-cost retail contracts. (RERT) offers were used as the best available indicator of the cost of demand
response and certain assumptions about the Value of Customer Reliability).
We recommend that AEMO should only procure RERT to the extent The analysis provides support for an interim tighter standard under certain
level needed to meet the agreed standard in the upcoming year, scenarios, including when there is sufficient demand response at a cost that
with those contracts extended for multiple years only if AEMO has a is lower than the cost of load shedding. An interim out of market solution was
high degree of confidence it will be required and AEMO can chosen by the ESB as this approach would allow for greater visibility and
demonstrate that expected costs will be lower to consumers relative understanding of the availability and cost of demand side resources in the
to sequential contracts. NEM.The Interim Reliability Reserve is an interim measure designed to be a
last resort mechanism, intended to avoid distortions to the market and
Aluminium Council The Council has concerns that Contract terms of up to three years, minimise the cost of procuring out of market resources. The framework builds
proposed in the Paper, are still only short term in the context of the on the current Victorian jurisdictional derogation for RERT Contracting.
investment cycle for aluminium smelters, so do not fundamentally
offer a change to a smelters long term strategy. Also, three years The proposed solution has been put in place to take care of immediate
does not provide a sufficient time horizon for investment which reliability concerns. This interim arrangement will cease in March 2025. The
would allow smelters to enhance their capability to provide proposed solution builds on interim arrangements in place for Victoria but can
additional services to the market. now apply to other regions. This interim arrangement, along with the RRO,will
be reviewed by the AEMC in 2023. At the same time, the ESB and Market
Hydro Tasmania It is integral that longer-term contracting for RERT is only Bodies are currently working on longer term arrangements to improve
undertaken if clear and enduring reliability gaps are identified. The reliability and security in a more enduring way. This will be developed and
paper suggests longer-term contracting should occur where there is implemented as a part of the Post 25 Work Program (eg Two Sided Markets;
capacity shortfall two years out of the three years. We consider this resource adequacy mechanisms).
appropriate. The maximum period AEMO will be allowed to enter a multi-year reserve
contract for the Interim Reliability Reserve is three years, and this will only be
Snowy Hydro A multi-year out of market capacity reserve is fundamentally permitted when there is forecast Interim Reliability Exceedance in at least
contrary to the design of the NEM. Any out of market capacity two of the three years including in the first year. As noted above, where
reserve should be intended as a last resort mechanism, to deal with AEMO is considering entering into a multi-year reserve contract, AEMO must
instances of genuine market failure, and should be rarely used. have regard to whether it is a more cost-effective option, compared to
Snowy Hydro therefore strongly oppose the contract terms of up to procuring single year contracts over the same period. To enable this
3 years. There is only one market in the NEM and all regulatory comparison, AEMO must request from providers in its tender process single
settings should be calibrated to incentivise participation in the year and multi-year bids.
market.
For multi-year contracts, the maximum volume that can be procured by
ERM By tightening the reliability standard, the volume of any RERT AEMO in any financial year in any region to meet the Interim Reliability
procured is also likely to be higher than it would have been under Measure shall be:
the existing reliability standard. This means that any potential
efficiencies from multi-year contracts may be lost by the higher
volumes of reserves needed in order to meet the interim reliability
standard.
11Origin agrees AEMO should only be permitted to enter into multi- - on an annual basis, no more than is reasonably necessary to
Origin Energy
year contracts of up to three years in length where: the forecast address the largest Interim Reliability Exceedance identified during
level of unserved energy exceeds 0.0006 per cent for two out of the the period for which the contract would apply, and
three years; and the multi-year contract is more cost effective than
entering into shorter duration contracts covering the same period. - with respect to the total amount of reserve procured over the
contract term, no more than reasonably necessary to secure
AGL Considers that there may be some benefits of multi-year contracting
such as creating a greater pool of potential suppliers with more reliability of supply in the relevant region.
diverse system capabilities, along with potentially lower cost
solutions when the contract is required for multiple years.
However, these benefits need to be considered in the context of the
impacts multi-year RERT contracting may also pose to the market,
and ultimately to customers through possible impacts on other
market participants and wholesale markets.
2.7 Interim Reliability Reserve interaction with other reforms
Respondents Comments ESB response
Infigen Facilitating an active two-sided market, where both supply and The proposed rule changes are intended to be an interim solution that targets
demand participate in price setting, will allow for more efficient resources that are not generally incentivised to participate in the market (ie
outcomes and contribute towards the National Energy Objectives. respond to five-minute prices). This interim solution Is proposed to be in
place while the ESB and Market Bodies continue to work on longer term
The ESB should fast track the Two-Sided Market workstream, which arrangements to improve reliability and security in a more enduring way. This
should reduce the need for RERT interventions and may also avoid will be developed and implemented as a part of the Post 25 Work Program
the need for the proposed Demand Response Mechanism (avoiding (eg Two Sided Markets; resource adequacy mechanisms)
the need for centrally determined baselines, and providing options
for residential consumers currently excluded under that scheme).
Aluminium Council The proposed mechanism will only be triggered if the Electricity
Statement of Opportunities (ESOO), indicates a requirement for at
least two of the following three years including the summer of 2020-
2021. At this stage, forecasts indicate that it does not appear likely
to be triggered, reducing the bankability of this mechanism.
Smelters seeking to recontract are facing difficult decisions,
especially under current economic conditions. The Council believes
the ESB should consider how it can expedite these Interim
Reliability Reserve Rules to increase certainty in the bankability of
this mechanism.
12Ergon Energy We note that the proposed interim reliability reserve does not
appear to impose extra risks on the wholesale market or retailers,
except where contracted plant is dispatched in competition with the
energy only market requiring intervention pricing. Ergon Energy
Retail expects that investors in peaking plant or demand response
that is currently out-of-market will seek reserve contracts from
AEMO rather than compete in the wholesale market where the MPC
is too low to provide a sufficient return for higher-cost peaking plant.
This could entrench the need for the ‘interim’ reliability reserve and
lock the NEM into two markets - an energy only market and a
reserve capacity contract market. Should this occur, Ergon Energy
Retail is concerned how this scenario will be resolved in the ESB’s
post 2025 market design.
Hydro Tasmania The RERT interacts with the market broadly and impacts on
incentives/signals for investment in future capacity/storage and
resources. The ESB should continue to be clear on the intent of the
RERT and ensure it does not distort other market processes or
negatively impact on future market design choices being considered
in the post 2025 work.
Snowy Hydro The ESB should consider the recommendations from their
consulting report if there are any changes to the reliability standard
through the post 2025 market design. The ACIL Allen Consulting
report notes that if there is a need for a tighter reliability standard
through the current NEM market arrangements then this can be
achieved through changes to the market settings. This approach as
the paper notes is the “most economically efficient approach as it
allows the market to naturally clear based on price”
Origin Energy The operation of the mechanism and AEMO’s reserve procurement
activities should be reviewed by 1 July 2023 as proposed, with a
view to sunsetting the mechanism at that time. This would be
consistent with the view that the Interim Reliability Measure is
intended to be temporary, noting further consideration is being given
to the need for other more enduring reforms to the NEM framework
under the ESB’s Post-2025 work program.
CS Energy There is a risk that this mechanism will crowd out any potential
demand response participation in the Wholesale Demand Response
13Mechanism, a mechanism that has a material cost associated with
its implementation next year.
It is unclear how this mandate of increased community appetite will
align with the ESB’s longer-term market reform program and
whether it will allow potential new frameworks to be considered
appropriately. For example, there is an apparent conflict with the
two-sided markets design initiative which seeks to explore a desire
for consumers to opt for lower reliability.
2.8 Operation of the Interim Reserve
Respondents Comments ESB response
AEC Supports obligation on AEMO to have regard to whether total The maximum period AEMO will be allowed to enter a multi-year reserve
payments are likely to be lower than a number of shorter-term contract for the Interim Reliability Reserve is three years, and this will only be
reserve contracts.
permitted when there is forecast Interim Reliability Exceedance in at least
Latitude for reserve contracts to address an interim reliability two of the three years including in the first year. As noted above, where
exceedance across multiple regions. AEMO is considering entering into a multi-year reserve contract, AEMO must
Suggested Drafting Changes - Proposes to limit the volume have regard to whether it is a more cost-effective option, compared to
procured by AEMO to no more than necessary for each year. procuring single year contracts over the same period.
Disagrees with Clause 3.20.6(d)(4) not being applicable and For multi-year contracts, the maximum volume that can be procured by
believes it should remain or be incorporated in 11.xxx5(d)
AEMO in any financial year in any region to meet the Interim Reliability
Stanwell Further consideration should be given to whether interim reliability Measure shall be:
reserve costs could be reduced by procuring multi-region reserve
contracts that simultaneously address interim reliability - on an annual basis, no more than is reasonably necessary to
exceedances across multiple regions, with costs shared address the largest Interim Reliability Exceedance identified during
appropriately across regions on a user-pays basis. the period for which the contract would apply, and
Origin Energy Origin considers Clause 11.xxx.4(i) should be strengthened by
specifying that procurement volumes associated with a given - with respect to the total amount of reserve procured over the
contract (single or multi-year) should be capped at the level contract term, no more than reasonably necessary to secure
reasonably required to address an interim reliability exceedance, reliability of supply in the relevant region.
having regard to any other reserve contracts entered into over the
same period. AEMO will need to consider the relative total costs to consumers and will be
subject to comprehensive reporting requirements. The final rule requires
AGL In addition to the requirement that a multi-year contract can only be
entered if that would be more cost effective than entering AEMO to request single year reserve contract bids (where it also requests
successive single year contracts, we suggest that AEMO should
only enter into a multi-year contract with a provider when there is a
14material saving in costs compared to a shorter contract with that multi-year bids) that should support AEMO’s ability to assess and
provider. demonstrate the benefits of entering multi-year contracts.
ERM Re Clause 11.xxx.4 (i) (2) – ERM’s interpretation is that clauses 2 (i)
and (ii) are in conflict. Clause 2(i) suggests that any contract should Clause 11.xxx.4(g) - The rule changes do not prevent the use of reserves
have a volume limit no larger than the largest exceedance over the located in one region helping a different region. If AEMO can lower the costs
course of the contract’s duration. While clause 2(ii) seems to of procuring reserves by sharing these across multiple regions, then it is able.
impose a volume limit for each year. The consultation paper This would be subject to jurisdictional agreement.
describes the intent of this clause is that for multi-year contracts
“with respect to the contract term, no more than reasonably Clause 3.20.6(d)(4) is not applicable because it refers to a low reserve
necessary to secure reliability of supply in the relevant region.” condition trigger which is not relevant to an interim reliability reserve.
Clause 11.xxx.4 (i) (2) (ii) now includes the words “in total” to remove some
concerns about apparent confusion. Clause 11.xxx.4 (i) continues to provide
the flexibility needed by AEMO with limitations – this flexibility is mitigated by
the transparency and reporting elements that are incorporated into the
Interim Reliability Reserve rule changes.
2.9 Transparency of the Interim Reserve Costs
Respondents Comments ESB response
Hydro Tasmania Hydro Tasmania supports all reasonable opportunities to enhance The final rule now includes Rule 11.xxx.4(j) which requires AEMO to request
transparency around the operation of the RERT (without bids for single year reserve contracts (in the event it seeks multi-year bids),
compromising commercially sensitive information). which will support AEMO’s ability to assess and demonstrate the benefits of
entering multi-year contracts.
Costs for retailers should be as predictable as possible. While we
acknowledge that it is only ex-post that RERT costs will be known, During consultation stakeholders requested that the costs of multi-year
AEMO should aim to provide as much guidance as is reasonably contracts and the Interim Reliability Measure should be more transparent. It is
practicable to retailers so that they can forecast likely RERT costs important to note that AEMO already have an obligation to report on costs
and pass-throughs. under 3.20.6(d)(i) which will apply to the Interim Reliability Reserve. However,
the final rule now includes additional requirements on AEMO to provide final
Snowy Hydro Any new RERT measures and triggers must include greater bid data annually to the AEMC that will assist the AEMC in conducting its
transparency, to improve the ability of retailers to explain the costs review by July 2023.
and benefits of emergency reserves to consumers and the industry
As the arrangements are an interim measure and the requirement on the
more broadly.
AEMC to conduct a review by July 2023, the implementation of a
Transparency Review and Report by the AER is not necessary.
Stanwell requests transparent reporting on the procurement costs
Stanwell associated with the interim reliability measures. This will ensure the
15costs incurred to meet a reliability standard tighter than that
recommended by the Reliability Panel are visible to all stakeholders.
EUAA We think that a useful addition to the rules change would be a
requirement for the AER to undertake a Transparency Review and
Report in relation to the level of detail and transparency contained in
quarterly and annual AEMO’s RERT Reports. This is the same
concept as the Transparency Report proposed by the ESB to
enhance oversight and increase transparency in the ISP rule
changes.
MEU The MEU considers that greater transparency through more
comprehensive and timely reporting by AEMO in relation to the
RERT (how much RERT was required, what was used, what its cost
was, how much RERT is contracted for more than 12 months, etc)
and by doing so will increase the transparency of the RERT
process.
Origin Energy Origin is supportive of the additional reporting requirements
proposed under 11.xxx.5(d). However, AEMO should also be
required to outline the payments made for each contract entered
into under the Interim Reliability Measure, noting that is a
requirement for contracts procured under the RERT framework.
2.10 Interaction between RRO and Interim Reserve
Respondents Comments ESB response
AGL As the Interim Reliability Measure may have contracts running until Clause 11.xxx.4 AEMO to have regard to the RERT principles, which aim to
2024/25, there are several years of overlap where a forecast breach minimise impacts on customer bills and market distortions, and the potential
may be driving both retailer contracting and AEMO reserve
impact on the interaction with the Retailer Reliability Obligation.
contracting. AGL proposes that in the event the RRO is triggered,
AEMO should be cautious about procuring reserves for that
reliability gap before the RRO contract position date, to give retailers
every opportunity to secure contracts and to minimise the risk of
unnecessary procurement. AEMO’s decision around reserve
procurement and volumes should then be based on the most up to
date information.
162.11 Other interim reliability reserve issues
Respondents Comments ESB response
Snowy Hydro Snowy Hydro believes it is sensible to replace the Victorian The Interim Reliability Reserve is intended to replace the need for the
Jurisdictional Derogation final rule for multi-year contracting of Victorian Jurisdictional Derogation final rule for multi-year contracting.
RERT by a NEM wide approach. Jurisdictional RERTs can lead to
significant uncertainty for market participants in Victoria and
complications for AEMO’s management of power system operations
across regions with different RERT arrangements. In an
interconnected NEM, it is inefficient that possible future challenges
facing the market need be managed at a jurisdictional level.
ERM ERM Power notes the proposed approach that the ESOO will be The ESB considered using the MTPASA and EAAP but decided to restrict it
used to determine if there is a breach of the Interim Reliability to the ESOO because this is the most rigorous forecast, covers all 3 years
Standard. We do see that the MTPASA and EAAP can be a
and is aligned with the trigger for the RRO. If there is a material change in
particularly important ‘sense check’ for the first two years given the
differences in approaches between the MTPASA and ESOO. We circumstances, then there is a rules requirement for AEMO to update the
are not arguing for an approach where a breach of the interim ESOO. AEMO is constantly checking the various reliability assessments to
reliability standard in the ESOO is invalidated if there is no breach in ensure consistency and understand any material differences in outcomes that
the MTPASA or EAAP. Rather, a material difference in forecasts may indicate an ESOO update is warranted.
between the two should be seen as a cause to reconsider the need
for a multi-year contract.
QLD Electricity Users Concerned that the 2020 ESOO will overforecast demand due to AEMO has engaged economic consultants to consider the impacts of
Network COVID-19. Should small business demand, and business demand COVID19 on key sectors of the economy, analysed meter data to monitor
in general, be overstated in the August 2020 ESOO it is possible the
changes in residential and business sector consumption, and collaborated
T-1 instrument could be triggered as early as 2020-21 for the
following year. with the Forecasting Reference Group and Energy Networks Australia to
consider the impacts on demand for the 2020 ESOO forecast.
AEC The enthusiasm to change the reliability standard must also be AEMO’s demand forecasts will incorporate an assessment of the impact of
assessed in light of the COVID-19 pandemic. The COAG Energy COVID19. More broadly, in light of the economic down turn, the final rule has
Council is concerned that the supply-demand balance has
strengthened the checks and balances in relation to minimising costs to
tightened, and there is a risk that outages will occur. In contrast,
economic commentators are predicting Australia will experience a consumers.
recession, which will reduce demand markedly. Furthermore, there
is no indication from market reports such as the Medium Term
Projected Assessment of System Adequacy that there will be any
shortfall within the next two years.
17C Abbreviations and Technical Terms
AEC Australian Energy Council
AEMC Australian Energy Market Commission
AEMO Australian Energy Market Operator
AER Australian Energy Regulator
COAG EC Council of Australian Governments Energy Council
ESB Energy Security Board
EUAA Energy Users Association of Australia
MEU Major Energy Users
NEL National Electricity Law
NEM National Electricity Market
NER National Electricity Rules
18Contact details:
Energy Security Board
E: info@esb.org.au
W: http://www.coagenergycouncil.gov.au/energy-security-board
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