Australia’s clean energy industry has had a lot to say about the Australian Energy Market Commission’s recently published COGATI Proposed Access Model and Renewable Energy Zones Discussion Paper (14 October 2019) and Transmission Loss Factors Draft Determination (14 November 2019).

David Green, Founding Partner, Lyon Group 

A healthy debate can be very helpful to getting issues on the table and Lyon embraces to opportunity to participate.

But it would be wrong to assume that all renewables developers have the same perspectives.

Perhaps this is a sign of the maturation and mainstreaming of renewable energy? Just like other market participants, we each take positions reflecting our experience and our views on what kind of policy and regulatory settings will align with the strategies our businesses are pursuing.

Lyon’s strategy and project design philosophy are based on assumptions of good policy that will drive the most economically efficient outcomes, in line with the principles of microeconomic reform that gave rise to Australia’s National Electricity Market (NEM).

Lyon’s positions on COGATI and Transmission Loss Factors, and on the Energy Security Board’s Post 2025 Market Design Issues Paper (2 September 2019), differ markedly from where most of the clean energy industry lines up.

Post 2025 Market Design

Lyon’s submission on the ESB’s Post 2025 Market Design Issues Paper supported the essential propositions that:

  • there is a need to evaluate whether the overall market and regulatory design is fit for the future; and
  • the right starting point is identification of the full range of services required to deliver a secure, reliable and lower emissions electricity system at least-cost to customers.

But Lyon took issue with the framing adopted by the ESB in the very first sentence of the Issues Paper.

The ESB framed the challenge of responding to the opportunities and risks of “future diverse [supply and demand side] sources” as changing the market framework to the meet the needs of those sources.

What is required is that the market framework is changed to ensure that the evolution of those sources meets the needs of consumers, at least cost.

The framing in the Issues Paper reflects a false paradigm, which is that solar and wind generation necessarily:

  • is intermittent or weather-driven and therefore only ever unstable and non-firm; and
  • requires massive co-investment in network stabilisation, transmission augmentation and “firming” of that unstable and non-firm energy.

The false paradigm damages the interests of economic efficiency and consumers.

COGATI

Lyon’s submission on the AEMC’s COGATI Proposed Access Model and Renewable Energy Zones Discussion Paper endorsed the proposition that economically efficient outcomes for consumers will become more difficult and Australia’s international competitiveness will suffer without better optimisation of generation and transmission investment, so there is a need for reform.

We also agreed that substantial and timely transmission infrastructure will be required as the NEM transitions to renewable based generation.

However, we expressed our concern that the AEMC’s proposals may not lead to the most economically efficient outcomes and may result in a misallocation of capital, because those proposals are wrongly targeted:

  • at assisting developers of solar and wind projects to manage their risk so they can continue to attract capital, based on an incorrect assumption that they do not have other ways to insulate themselves from or manage their exposure to congestion risk and changes in loss factors; and
  • at maintaining downward pressure on wholesale electricity prices, when the wholesale electricity price is one component that influences the price to consumers of electricity and it should not be artificially lowered via cross subsidies from other sectors of the industry as is currently the case.

This assumption that the new clean generation coming into the market cannot manage the risks of congestion and adverse loss factor changes is not correct. To manage or not manage this risk is a choice made by the developers or owners of new clean generation. They can make their projects stable and flexible, and thus able to address much of the risk associated with congestion and adverse loss factor changes, by integrating battery energy storage systems into the design, construction and operation of their clean generation. Generation plant of this nature can manage its dispatch to avoid congestion and the correlation penalty component of adverse marginal loss factor (MLF) changes, be configured to act as a load, and deliver stable power such that the plant does not need to be forced offline to avoid voltage disturbances.

In circumstances where technology is available, as is the case here, reform should first look to unlock value by incentivising projects to deliver services that the power system needs, one of those things being locating where the network will benefit.

Renewable generators should be incentivised to manage their risk exposure to the full extent they are able within markets for bundled and unbundled services within the NEM. It could become necessary to introduce an insurance product like the COGATI proposal, depending on assessment of the remnant risk. However, introducing an insurance product before incentivising available advanced technology and innovative project design to be used to deliver valuable services removes the incentive to deliver the services and to ensure that your project incorporates advanced technology and innovative project design.

To dull the innovation imperative is to impose a barrier to those seeking a return on innovation.

The escalating cost of congestion and adverse MLF changes is an effective and valuable market signal. Capital markets will support projects that demonstrate they can effectively manage their risk or that the risk is appropriately priced. Capital markets place considerable discipline on owners of generation to manage risk if they want to access finance. The AEMC should seek to take full advantage of the role capital markets can play in driving investment decisions that deliver efficient outcomes.

Transmission Loss Factors

Lyon supports the AEMC’s draft determination, which rejected a proposed change to the loss factor methodology. We agree with the AEMC that the shift to average loss factors proposed by Adani Renewables (and supported by a significant cohort of utility solar and wind companies because it would make their revenues more predictable) “would have driven a wedge between the physics of the power system and generators’ financial incentives”.

Conclusion

The key theme underpinning Lyon’s positions on these important issues is that important reforms to the NEM policy and regulatory framework should be designed to be as economically efficient as possible consistent with the NEM objectives. Reform should not be designed to meet the needs and accommodate the limitations of particular forms of technology (e.g. generation with variable output).

It’s unfortunate that some solar and wind projects are generating lower than modelled revenues. But, if we want to drive past 50% renewables and make solar and wind primary energy sources (not to mention enable the continued growth in rooftop solar that people clearly expect), we have to address the physical, economic and political ceilings on the penetration of utility solar and wind. This means unleashing the capabilities of available advanced technology and innovative project design with market incentives.

There’s an array of well informed and passionate views on these issues. We’re interested in hearing yours.

© 2019 Lyon Group

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