2022 Reliability Standards and Settings Review
Fast Facts.
The Reliability Panel has commenced its 2022 review of the reliability standard and settings (the RSS review) with the release of an Issues Paper on 27 January 2022 [1].
Under the National Electricity Rules (the Rules), the Reliability Panel (the Panel) is required to undertake a review of the reliability standard and settings every four years. The Panel is required to consider whether the form and level of the standard and settings are appropriate for expected and evolving market conditions between 1 July 2024 and 30 June 2028.
The reliability standard is an ex-ante standard used by AEMO to forecast and indicate to the market the level of supply required to meet regional demand. The reliability settings form a ‘price envelope’ for wholesale spot prices and consist of the market price cap, market price floor, cumulative price threshold, and administered price cap.
The RSS review must be conducted in accordance with the Rules and the Reliability Standard and Settings Guidelines. The Panel published updated RSS Guidelines in July 2021, which set out the principles, assessment approach and assumptions that the Panel must comply with through its current review.
Of relevance, on 23 December 2021 the AEMC made a draft determination on a rule change request by Dr Kerry Schott (former chair of the Energy Security Board) to extend the timeframe for the review (to give the Panel more time to consider the ESB’s final market design advice), and to reduce the scope of the 2022 RSS Review to only consider the reliability standard (given the ESB’s capacity mechanism design would be expected to take account of optimal market settings).
The AEMC’s more preferable draft determination on Dr Schott’s rule change request retains the Panel’s role in reviewing the settings but requires the Panel to provide its final report and recommendations by 30 August 2022 and excludes the 2024-25 financial year from the review period and requires the Panel to provide its final report and recommendations by 30 August 2022. The final determination for this rule change is scheduled for 3 March 2022.
Submissions to the RSS Review Issues Paper are due by 3 March 2022.
Background
What is the current framework for reliability in the NEM?
Put simply, reliability refers to the adequate supply of electricity (generation and demand response) to meet customer demand for electricity. This requires sufficient investment in generation and network capacity to ensure that supply and demand can be maintained at any point in time.
The reliability framework in the National Electricity Market (NEM) includes a number of market mechanisms intended to provide market signals and incentivise efficient investment in generation and transmission when required. The reliability framework under the Rules currently consists of:
Market incentives – through the wholesale spot market and contracts market;
Market settings – the reliability standard and settings (refer below);
Market information – AEMO market forecasts, which provide investment and price signals to market participants, including the Integrated System Plan, Electricity Statement of Opportunities, and the Medium-Term and Short -Term Assessments of System Adequacy (MT PASA and ST PASA);
Intervention mechanisms – ‘last resort’ powers for AEMO to maintain system reliability and security, including the Reliability Emergency Reserve Trader (RERT) to contract for reserve capacity, directions to generators to increase or decrease output, or involuntary load shedding of customer load;
Retailer reliability obligation (RRO) – an obligation on liable entities, including retailers, to enter into contracts to ensure sufficient capacity to meet a reliability gap identified by AEMO within a three-year period [2]; and
What are the reliability standard and market settings?
The reliability standard is an ex-ante standard used by AEMO to forecast and indicate to the market an efficient level of reliability required to meet regional demand. Applied to generation and inter-regional transmission, the standard measures the maximum expected unserved energy (USE) as a % of total energy demanded in a region for a financial year, currently set at 0.002%.
The reliability settings form a ‘price envelope’ for wholesale spot prices which are intended to provide a sufficient level of revenue to meet the reliability standard while limiting high, low and cumulative price impacts. The settings consist of:
Market price cap (MPC) – an upper limit on wholesale market prices that can be reached in any trading interval, currently set at $15,100 / MWh
Market floor price (MFP) – a lower limit on wholesale market prices that can be reached in any trading interval, currently set at –$1,000 / MWh
Cumulative price threshold – the maximum total energy price and total frequency control ancillary services (FCAS) price that can be reached over a period of seven days, before an APP commences, currently set at $1,359,100 (roughly equivalent to 7.5 hours at the MPC); and
Administered price cap (APP) – maximum settlement price that applies during an administered price period (APP) after a set of sustained high dispatch prices exceed the CPT, currently $300 / MWh.
An interim reliability measure has also been put in place by Energy Ministers to improve reliability in the short-term, based on a maximum expected unserved energy (USE) of 0.0006% of the total energy demanded in a region for a financial year. This is currently used for the purpose of the RRO and RERT but is separate to the reliability standard and settings [3].
Is there a reliability problem in the NEM?
Historically, reliability events – that is, instances of involuntary load shedding due to supply shortfalls – have been rare. – tThe standard has been breached only a few times in South Australia and Victoria due to extreme weather conditions.
Looking forward, AEMO’s ESOO report forecasts that existing and committed capacity is sufficient to satisfy no breaches of the reliability standard until 2028-29, with if new capacity or demand reduction needed by that time to ensure the standard continues to be metis not in place by that time.
There are a number of emerging and evolving conditions, however, pointing to the need to reconsider the reliability standard and settings (and resource adequacy more broadly) in the NEM, including for example:
The increasing number of AEMO interventions in recent years, mainly due to varying weather events, which may indicate a tightening of short-term regional supply and demand;
The changing generation mix, including a rapid increase in variable renewable energy (VRE) and entry of utility- scale storage in the system, putting increasing pressure on incumbent thermal generation;
Declining minimum operational demand driven predominately by the rapid uptake of solar PV, along with changing consumption patterns; and
Changing market dynamics and increased price volatility due to the amount of variable renewable energy (VRE) in the system, including an increase in MPC and MFP events.
Based on the current pace of change, AEMO’s view, under its draft 2022 Integrated System Plan (ISP), is that Step Change is the most likely scenario, indicating a more rapid exit of coal- fired power from the system than previously anticipated. This is also evident by in recent announcements from Origin to bring forward the closure of its Eraring power station from 2032 to 2025, and AGL to bring forward planned closures of its Loy Yang A and Bayswater plant.
In response to these rapidly evolving conditions, the Energy Security Board (ESB) is progressing mechanisms for resource adequacy through its Post-2025 market reform program, including detailed design of a capacity mechanism (see separate RP’s Insights on this topic) and arrangements for the orderly exit of ageing thermal generators.
I suggest we shift this to be a paragraph at the bottom of the next section, beneath the dot points. Then it just needs a quick explanation of why it was put in place (if the Ministers explained themselves adequately).
Reliability Panel’s Assessment Approach and Key Issues
The Panel is required to undertake its review of the RSS in accordance with the RSS Guidelines updated in 2021, and guided by the National Electricity Objective [4] and the assessment principles and criteria.
The assessment principles are:
Allowing efficient price signals while managing price risk;
Delivering a level of reliability consistent with the value placed on that reliability by customers; and
Providing a predictable and flexible regulatory framework.
The assessment criteria are:
Complying with the reliability standard and settings guidelines;
Having regard to any terms of reference provided by the AEMC;
Having regard to the potential impact of any proposed change to a reliability setting on spot prices, investment in the NEM, the reliability of the power system, and market participants;
Having regard to any value of customer reliability determined by the AER which the Panel considers relevant, and
Any other matters specified in the guidelines or which the Panel considers relevant, including outcomes of modelling and stakeholder submissions.
The Panel’s Issues Paper sets out the matters that it must consider, along with other relevant issues, in assessing the reliability standard and each of the market settings. The Panel will only recommend a change to the form or level of the individual market price settings where there is a material benefit in doing so.
Assessing reliability standard
In assessing the level of the standard, the Panel must have regard to the value of customer reliability (VCR) determined by the AER. The Panel has indicated that in doing so, it will have regard to trade-offs between the value that customers place on reliability with the costs required to deliver this level of reliability; changes in the way that consumers use electricity, including the use of new technologies (solar PV, battery storage etc.), which may suggest a higher or lower value on reliable supply from the NEM; and whether a different level of reliability standard would deliver better outcomes for the NEM.
The Panel will also consider whether the existing form of the standard – maximum expected USE as a % of total energy demanded in a region – remains appropriate. As the resource mix changes, the Panel will consider whether the measure sufficiently captures reliability risks and provides an adequate signal to market. In doing so, it will consider:
Different forms of reliability standards, including those used in international jurisdictions such as the US and UK;
Whether supplementary metrics would provide additional insights to the market;
The costs of marginal, dispatchable generation, including the costs of new entrant technologies such as battery storage;
The forecast exit of thermal generation capacity from the system; and
The increase in DER on the system, and the way in which consumers are interacting with the NEM.
Assessing the Market Price Cap
The MPC is intended to manage participant exposure to price risk and provide efficient, long-term investment signals, and the Panel is required to consider the trade-off between these factors. In addition, the Panel must only set a MPC that allows the reliability standard to be met without use of AEMO’s intervention powers, and does not threaten the overall integrity of the market. The Panel can consider price volatility impacts on market participants, but the Issues Paper noted that the MPC is not intended as a tool for managing consumer costs.
Other relevant issues include the increase in new technologies and uptake of DER, the shift to five-minute settlement in the NEM, and impacts of potential new markets and jurisdictional investment schemes.
Assessing the Market Floor Price
The MFP is intended to incentivise a reduction in generation during times of excess supply compared to demand. Negative bids reflect the amount a generator is willing to pay to remain dispatched (or to avoid curtailment), particularly by less flexible generators with high start-up costs.
Notably, in updating the RSS Guidelines the Panel removed the previous limitation on assessing the form and level of the MFP, although the Guidelines state that the form of the MFP will remain unless there are material benefits that result from changing it.
In setting the MFP, the Panel will consider the trade-off between enabling the market to clear in most circumstances, and not creating risks that threaten the overall stability and integrity of the market; along with the frequency of trading intervals where the market price been at or close to the MFP, and whether there have been any significant changes in the generation fleet.
The Panel has indicated that it will also consider the increased level of demand side participation and storage; the impact of sustained negative prices; the potential for technology- specific floor prices; and whether the MFP should be indexed by inflation.
Assessing the Cumulative Price Threshold
The CPT acts to reduce the incidence of high prices over a sustained period, and is set in tandem with the MPC. A lower CPT increases the likelihood of an APP event occurring, while a higher CPT reduces the chances of an APP.
Like the MPC, the Panel must only set a CPT that allows the reliability standard to be met without use of AEMO’s intervention powers, and does not threaten the overall integrity of the market. In assessing the level of the CPT, the Panel will consider protecting market participants from prolonged periods of high prices; the ability of the market to determine price signals for efficient operation and investment, and the level of the MPC.
Other relevant issues for the Panel’s consideration include the role of new technologies (such as battery storage) in high price periods, the role of risk management tools by market participants, and FCAS prices.
Assessing the Administered Price Cap
The APC is used in conjunction with the CPT to minimise financial risks for market participants arising from extended periods of high prices. In setting the APC, the Panel must consider trade-offs between incentivising generators to supply during APC events, and minimising financial collapse and compensation claims by participants. The Panel will therefore consider changes in short-run marginal costs of generators and compensation claims since the last review.
Other issues of relevance include the cost of different technologies during APP events; gas price volatility and other fuel prices; interaction with contracts (derivatives) market; whether the APC should be indexed, and the form and level of the APC to provide appropriate investment signals for new technologies.
Our Insights
The Reliability Panel’s review is at an early stage, and it will work through the matters within its scope in an orderly way in accordance with the Rules and the RSS Guidelines. The Issues Paper identifies the matters the Panel must consider, and appropriately highlights a range of relevant considerations consequent to the energy transition, including the role of new technologies, and increased levels of DER and demand side participation. The Panel’s removal of the limitation on assessing the level of the MFP in its recent RSS Guidelines update, suggests the MFP may be considered more fulsomely as part of this review as compared to previous reviews. This echoes the recent focus on the MFP in Western Australia’s Wholesale Electricity Market (WEM), which was recently made subject to an annual review process (but has been kept at -$1,000/MWh).
There are two key issues of note:
The first is how quickly the market is shifting. AEMO’s draft 2022 ISP indicates that Step Change is now the most likely scenario and forecasts that remaining coal- fired generation will exit the system by 2040. Already, the announcement from Origin Energy, bringing forward the retirement of Eraring, indicates that even Step Change may not be fast enough. The NSW REZ program will further accelerate the transition of the generation mix and challenge the profitability of incumbents. It will be essential for the Panel to stay close to industry developments, and their implications for the reliability standard and settings, through the review.
The second is how the RSS review and the ESB’s capacity mechanism design process will interact. In the AEMC’s draft determination on the timeframe and scope of the 2022 RSS review, the AEMC rejected the ESB’s proposal that it should review the market settings as part of its capacity mechanism design, but extended the timeframe for the Panel to undertake the review until August 2022. The Panel must develop its recommendations on the assumption that there is no capacity mechanism, given that there is no certainty that Energy Ministers will agree to implement it.
However, the Panel’s recommendations will necessarily affect the capacity mechanism design process.
The introduction of a capacity mechanism would presumably involve a transfer of some revenue from the energy market to the capacity mechanism, in order to avoid simply lumping customers with a new, additional cost. It is unclear at this stage whether this would be effected through a different approach to the reliability settings or an alternative measure
Capacity mechanism design typically involves various simplifications, based on underlying assumptions, to promote transparency and predictability of the mechanism. To the extent that the ESB design involves simplifications based on assumptions related to the reliability standard and settings, there may be late changes needed if the Panel recommends a significant departure from the status quo.
While the AEMC considers the delay to August will provide sufficient time for the Panel’s recommendations to be considered by the ESB, it remains to be seen how the ESB can accommodate this timing within the design and consultation processes that it will run prior to providing the final design due to Energy Ministers in December 2022.
Elephants in rooms are not invisible, but they do tend to be treated as such for longer than they should – the ESB’s Post 2025 reforms were named at a time when Central was the most likely scenario but perhaps Post 2023 would have been more fitting? Given the pace of the transition and emerging reforms, there’s a question as to whether the reliability standard and settings recommended by the Panel in 2022 will remain appropriate for the period 1 July 2025 to 30 June 2028. While the RSS are intended to provide a level of investment and operational certainty for market participants, it is also important that the reliability framework is reviewed and designed holistically, taking account of the rapidly evolving energy system.
End notes
[1] The Reliability Panel is a specialist industry and consumer body established by the AEMC under the National Electricity Law and Rules, responsible for monitoring, reviewing and reporting on reliability, security and safety of the national electricity system.
[2] The RRO obligation commenced on 1 July 2019. The operation of the RRO is set out in the AER’s Retailer Reliability Obligation Guidelines. The South Australian Minister also has the power to trigger the RRO in South Australia.
[3] The interim reliability standard is intended to act as an interim measure to support reliability in the NEM by allowing the RRO to be triggered by a forecast exceedance of this measure, and allow AEMO to procure emergency reserves in the event that this measure is expected to be exceeded, while an enduring market design is developed through the ESB’s Post-2025 work. The interim measure must be reviewed by the AEMC by 1 July 2023.
For more information, contact Simone Rennie at srennie@renniepartners.com.au
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