REZ Access Rights and Scheme Design: Central-West Orana
Fast Facts.
In December 2021, the NSW Department of Planning, Industry and Environment (the Department) released a consultation paper on Access Rights and Scheme Design for the Central-West Orana REZ (Consultation Paper). Submissions close 14 February 2022.
This design falls within Tranche 3 of the accompanying regulations to the Electricity Infrastructure and Investment Act 2020.
The proposed design of the REZ scheme shifts away from the open access framework currently available to generation in the National Electricity Market (NEM), towards a competitive access model that aims to provide access and financial certainty to proponents when subscribing to the REZ. This is to ensure the efficient coordination of REZ investment and development.
Certain key elements of the access rights and scheme design are yet to be finalised; however, the Consultation Paper provides useful guidance to developers and investors on what these key elements will look like under final arrangements.
The CWO REZ is expected to be operationalised through a competitive tender in the fourth quarter of 2022. The access rights and scheme design is, therefore, likely to be finalised by the third quarter of 2022, although no specific timeframe has been set.
For REZ developers and investors, involvement in the REZ design process will be crucial to understand what will be available as part of the proposed access rights. There is also a need to stay across broader reforms in the NEM, such as the ESB’s proposed congestion management model, to understand whether and how they may interact with the CWO REZ access design, and implications for participation in the REZ.
The roll out of the CWO REZ, and accompanying reforms, will also provide useful insights for the potential design and processes that other jurisdictions may adopt when developing their own REZ programs.
The REZs present an opportunity for the unregulated businesses of existing TNSPs to obtain returns outside of the regulated framework if they are able to bring competitive offers for REZ infrastructure delivery or operation.
Background
Consistent with the themes across a number of recent RP Insights articles, the energy transition across the NEM is predicted to be fast paced, with the rate of renewable energy capacity entering into the system forecasted to see a nine-fold increase from current capacity as per AEMO’s most likely Step Change scenario. [1] Coal generation, under the Step Change scenario, is expected to exit two to three times faster than predicted in AEMO’s 2020 Integrated System Plan (ISP), with most brown and black coal generation forecasted to be withdrawn by 2032. The NSW Government has predicted that four out of the five coal-fired power stations, which currently produce three quarters of the State’s energy supply, will close down gradually from 2023 onwards. [2] Based on the Government’s modelling, the last of these thermal generators is expected to close by 2035 – although this timeframe may now be in doubt given market developments that will likely accelerate these closures.
What are the features of the Electricity Infrastructure Roadmap and supporting regulations?
The NSW Government is investing heavily in supporting the transition of the energy system in the State with their key policy – the NSW Electricity Strategy - setting out a whole-of-system approach that seeks both emissions reduction and long-term reliability and affordability. The Electricity Infrastructure Roadmap (the Roadmap) is the next step of the Electricity Strategy, and sets out an integrated plan to promote nearly $32 million in investment in critical new electricity infrastructure by 2030, spearheaded by the development of five REZs across the state. In total, the Roadmap seeks to facilitate at least 12 gigawatts of generation development, along with at least 2 gigawatts of long duration storage – this is in tandem with a reduction of emissions of at least 90 million tonnes by 2030.
The Roadmap is supported by enabling legislation, the Electricity Infrastructure and Investment Act 2020 (the Act) that provides for the major investments and developments necessary to facilitate REZ’s. This includes the development of transmission and the Electricity Infrastructure Investment Safeguard. The REZ’s, facilitated by EnergyCo and the Consumer Trustee (AEMO Services Ltd), will be established firstly in Central-West Orana, followed by New England, South-West, Hunter-Central Coast and Illawarra. So far, only the Central-West Orana and New England REZ’s have been formally declared by the Minister.
To accompany the Act, the Department is progressively developing the Electricity Infrastructure Investment Regulations 2021. This is being completed over three phases, Tranche 1, Tranche 2 and Tranche 3. Relevantly, Tranche 3 is now in the process of being developed and will focus on Parts 5, 6 and 7 of the Act, which include the access rights and scheme design.
What is an access right and why does the REZ need it?
Currently, an open access model applies in the NEM – generators wishing to connect to the shared transmission network have the right to negotiate connections with network service providers (NSPs), subject to the satisfaction of certain technical requirements. Under such arrangements generators receive no guarantee of market dispatch, or minimum guaranteed use of the shared network and, generally, NSPs have no obligation to build out the network based on generator needs alone.
These arrangements have led to fundamental challenges in coordinating investment in generation and network infrastructure, as well as inherent risks for generators related to revenue uncertainty, and network connection delays.
The existence of these issues is not new to the market, with various rule change determinations and reviews having been conducted by the Australian Energy Market Commission (AEMC) for over a decade in an attempt to solve these problems, including:
the Scale Efficient Network Extensions rule changes made in June 2011;
the Optional Firm Access, Design and Testing review, completed in July 2015;
the Coordination of Generation and Transmission Investment reviews, which has been rolled into the Energy Security Board’s (ESB) Post-2025 market design program.
The ESB is now attempting to deal with these issues through its work on a Congestion Management Model (CMM). AEMO and the Clean Energy Council are also co-sponsoring the Connections Reform Initiative, with the recent release of the Connections Reform Roadmap (see the recent RP Insights article on this topic) to address challenges and delays in the connections process.
The design of NSW REZ access arrangements attempts to overcome these a number of these issues, namely through:
Ensuring delivery of the transmission within the REZ via Ministerial direction under the Electricity Infrastructure Investment Act, rather than via existing planning and delivery processes;
Implementation of an access scheme that will run for 15 years, [3] and will authorise generation, long duration storage, and firming operators access to and use of, the specified network in the REZ (while prohibiting other participants). [4] The Consumer Trustee, as REZ administrator, will run a process to allocate access rights and define the rights of each operator to access and use the REZ network once connected. This access right provides a promise to operators to limit generation capacity connected to the REZ network infrastructure based on a targeted level of transmission curtailment. Access rights will be allocated through a competitive tender process to promote the efficient utilisation of the network.
To connect, proponents will need to pay an access fee, which is still being designed and consulted on, and has not yet been set.
An access control mechanism that will control projects connecting to REZ infrastructure in order to prevent overcrowding of the REZ. The Government is still considering whether the mechanism will apply to existing network infrastructure inside or outside the boundary of the REZ, where it is over a specific threshold.
In combination, these arrangements are intended to provide greater certainty for generators, including forecast NEM locational price signals (marginal loss factors) and curtailment levels, and market dispatch and associated revenues. The scheme is also intended to provide greater certainty and timeliness about the connections process and access standards.
The access rights and scheme design is expected to be finalised by the third quarter of 2022, with the competitive tender process to take place in the fourth quarter of 2022, although no specific date has been set.
Submissions on the consultation paper close 14 February 2022.
Key Issues
The access right and scheme design is intended to deliver a range of benefits for project proponents, in particular:
Introducing a streamlined connection process – though delivering an access standard, a batched connections process, and centralised system strength assessment;
Promoting pre-defined and predictable design and operation standards – to address the issue of being a first mover, by coordinating the delivery of the shared network with the development of generation infrastructure;
Increasing generator certainty on any curtailment risks – by introducing an aggregate maximum capacity cap that provides initial limits on access rights (this is open for consultation with three options being proposed); and
Allowing an efficient level of transmission curtailment – by introducing target transmission curtailment levels that are flexible and provide clear guidance.
Allocation Approach
The Government has proposed that access rights will be awarded via three separate staggered allocations, to ensure policy objectives are met (investor certainty, efficiency and financing), and consumer interests are maintained. The staggered approach is intended to preserve the more suitable features of open access models, and allow for augmentation and efficient network utilisation.
Allocation 1 allows for an access right up to an initial Aggregate Maximum Capacity Cap (which is still under consultation), informed by internal modelling undertaken by EnergyCo. Access rights will be tendered through a combined process with the Long-Term Energy Services Agreements (LTESA) put option tender. Other allocations may be possible on a basis if more rights can be granted because the forecast transmission curtailment levels are lower than anticipated (known as “headroom’), or on an ad-hoc basis to expand the intended REZ capacity (where network augmentation would be required).
Target Transmission Curtailment Level
One of the key promoted benefits for generators locating in the REZ is that they will avoid some of the curtailment risks associated with the open access regime faced in the NEM. The target curtailment level, which has not yet been set, intends to provide certainty that other proponents will not be connected when the curtailment level is forecasted to be met or exceeded. However, REZ projects will still exposed to curtailment, in situations where there are technical constraints either inside or outside the REZ or there is ‘economic spill’ (i.e., where output is reduced as the NSW Regional Reference Price is less than a generator’s bid).
Streamlined connection process
Integrated with the combined tender process, the Government has proposed: a streamlined connections processes for REZ proponents designed to alleviate system resourcing constraints as multiple proponents connect at the one time; and reduce the timeframe and cost of the connecting to the network. The consultation paper proposes the following design elements:
Access Standards – as a condition of the tender process, proponents will be required to agree, and explain how they will meet the Generator Performance Standards and Inverter-Based Resource Standards (which will be consulted on soon);
System Strength – the REZ network operator will be required to meet particular system strength requirements, based on forecasts of the types and quantity of generation;
Batching – proponents who have submitted access right applications within a specified time frame, and have been allocated their access rights, will be batched together for the undertaking of performance of power system studies. This will minimise the need for re-work;
Connection via designated network assets – any projects that are connected to designated network assets (being shared transmission networks that apply a special access regime) which connect to the REZ scheme network, will require access rights before connecting.
Access Fees
In exchange for the access rights, the Government has proposed that, on a REZ-by-REZ basis, developers will be required to pay an access fee to the Scheme Financial Vehicle. The access fee will be set based on the following principles:
Maximise value for consumers;
Recover the cost of operating the access scheme; and
Ensure the optimal use of current and future REZ network infrastructure.
The design, quantum and operation of the access fee is currently under consideration by the Government. The consultation paper has requested feedback on this issue, with more guidance expected in the near future.
Our Insights
Engagement is important as the design is being finalised
NSW intends to finalise the specifics of the access scheme, and supporting regulations by the third quarter of 2022, in preparation for the CWO REZ being operationalised through the access rights and LTESA competitive tender in the fourth quarter of 2022. For interested developers and investors, now is the time to be closely engaged with the process. It will be critical to understand what the final version of the scheme and access rights will offer in terms of revenue certainty and risk mitigation, as this will inform whether and on what basis developers should participate in the tender process. We suggest that even investors which may not be in a position to participate in this initial REZ tender process should keep a watchful eye on the design and how the competitive arrangements are structured – as development through REZs is likely to become a significant opportunity in NSW and other jurisdictions.
If NSW can successful establish a fully subscribed REZ, it will represent a significant shift in the way transmission and generation is delivered – particularly in an environment where there remains uncertainty in the current NEM access and connection frameworks despite reform programs underway. While derogations by states away from the uniform arrangements established under the Australian Energy Market Agreement are not unprecedented, the size and scale of the changes envisaged by the NSW REZ arrangements signal a fundamental change to renewable energy investment in Australia. If these arrangements can attract a large amount of currently unavailable international capital, other Australian jurisdictions are likely to follow suit.
Both Queensland and Victoria are in the process of developing their own REZ infrastructure: Queensland is looking at locating three REZ’s across the Northern, Central and Southern regions of the state – whilst Victoria has indicated an intention to establish five REZs across the South-West, Western, Murray River, Central-North, Ovens Murray and Gippsland regions. If capital markets tighten, other states may follow suit by designing REZs that offer beneficial terms to developers to attract capital in their respective states.
The broad-scale roll out of REZs is likely to impact incumbent TNSP’s existing and future business opportunities. NSW has indicated that the entity responsible for owning, constructing and financing the CWO REZ network infrastructure (the ‘network operator’) will be appointed through competitive procurement. With CWO REZ likely to serve as a test case for how other NSW REZs, and potentially other jurisdictional REZs, may be structured, this competitive process presents an opportunity for the unregulated businesses of existing TNSPs to obtain returns outside of the regulated framework if they are able to bring competitive offers for REZ infrastructure delivery or operation. On the other hand, competitive REZ infrastructure roll-out presents a risk to the expansion of the existing regulated assets of TNSPs who may find themselves locked out of transmission delivery for state based REZs through their regulated entities. Transmission businesses should be watching and planning for how they may best apply their expertise to more commercially focused opportunities.
Reforms are also happening at the broader NEM reform level
A critical question for developers and investors is whether reform at the national level is likely to keep pace with development through the state based REZ schemes. National level reforms are already in train, with the ESB developing a the CMM to incentivise generators to locate in areas of the network that are less congested, including in future REZs. The issues that the CMM seeks to address are similar to those targeted by the NSW’s REZ access model: namely locational issues (including congestion, crowding and revenue), and connection risk. But there is currently little understanding of how national reforms would interact with state-based initiatives.
At this stage, our view is that state-based initiatives are likely to provide more certainty to investors and developers than the status and timing of national reforms. This may change over time as reforms are progressed and implemented, however, precedent suggests that states can and will derogate from national reforms that jeopardise a state’s broader energy and economic policies.
The NSW Government is aware of the potential impacts that national reforms may have on its scheme, and is planning to evaluate the impacts and potential avenues for derogation of the scheme if the CCM model is implemented.
The ESB plans to release a detailed design consultation paper for the CMM in March 2022, and is tasked by Energy Ministers to bring a proposed rule change by December 2022 for their consideration. The interaction between NEM reforms and state-based REZ schemes remains to be seen, and stakeholders should keep an active watching brief on both.
For more information, contact Simone Rennie at srennie@renniepartners.com.au
[1] AEMO, Draft 2022 Integrated System Plan (2022)
[2] NSW Government, Electricity Infrastructure Roadmap (2020)
[3] From the commissioning of the first substation required for the shared network.
[4] NSW Government, REZ access rights and scheme design: Central-West Orana – Consultation Paper (2021)
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