AEMC Transmission Planning and Investment Review
Fast Facts.
On 19 August 2021, the AEMC published a Consultation Paper for the Transmission Planning and Investment Review. Submissions closed on 30 September 2021 with a Directions Forum and the completion of Stage 1 occurring this December. The AEMC’s Draft Report is due in April 2022.
Transmission investment has been flagged by the AEMC as a key factor that will underpin the transition towards geographically dispersed renewable generation away from a reliance on thermal generation.
The AEMC’s review is prioritising the following:
Whether the existing ex-ante incentive-based transmission planning framework is “fit for purpose”, and is supportive of timely and efficient major transmission project delivery; and
Whether TNSPs right to build and own transmission projects, and lack of an accompanying obligation, leads to uncertainty as to whether the projects will proceed.
For TNSPs, the review contains both risk and opportunity. Questions around ex-ante regulation provide an opportunity to better match the risk of major projects with revenue recover; while increasing contestability narrows the field of play and introduces the potential for new entrants into the transmission construction market. The potential broadening of market benefits, such as valuing carbon emissions in transmission planning and regulatory processes, opens the door to a valuation of broader community benefits in a manner that has been impossible since the present regulatory frameworks were designed.
For incumbent synchronous generators, there is much at stake. It remains to be seen how relevant the current Integrated System Plan (ISP) and Regulatory Investment Test for transmission (RIT-T) framework is when jurisdictions are fast-tracking and legislating their own projects which invariably promote renewables and enable transmission. This will see value shift from incumbent generators to renewable proponents, who will have access to the networks in ways that allow them to benefit from more favorable transmission connections and dispatch regimes. In this context, it will remain to be seen whether the Energy Security Board’s proposed resource adequacy mechanism, which is intended to provide a form of capacity payment, will be enough to keep incumbent synchronous generation in the system.
Background
On 19 August 2021, the AEMC published a Consultation Paper for the Transmission Planning and Investment Review. Submissions closed on 30 September 2021 with a Directions Forum and the completion of Stage 1 occurring this December. The AEMC’s Draft Report is due in April 2022.
The AEMC’s overall objective is to balance the demanding assessment regime currently in place with the need to facilitate beneficial investment in the long-term interests of consumers. To do so, the AEMC will:
Explore improvement options for how investment options are assessed, and how TNSP’s undertake activities related to overall delivery; and
Recommend changes to the rules and other regulatory instruments to reflect their findings.
The AEMC is following a two-stage approach, with stage one identifying and testing the issues (including stakeholder consultation), and stages two and three developing solutions to address the short-term and long-term issues respectively. Separate Draft and Final Reports will be made for the short-term and long-term issues. The Draft Report for short-term issues (stage 2) is expected 28 April 2022. The Draft Report for long-term issues will depend on the scope of this work.
Key Issues
The AEMC has focused on changes to the framework to “streamline the regulatory processes for key projects identified in the ISP whilst retaining a rigorous cost benefit assessment”. The scope of the review focuses on:
Transmission network planning and pre-delivery framework; and
Transmission investment framework.
Transmission planning and pre-delivery framework
In relation to the transmission network planning and pre-delivery framework, the AEMC is considering the impact and appropriateness of ex ante incentive based regulation, in particular, whether the reduction of uncertainty intended by the framework may not be occurring in relation to major transmission projects. The AEMC is considering a number of issues and potential reforms in this area, including introducing greater levels of contestability into the market.
As well as this, the AEMC is also considering opportunities to streamline the process for the economic assessment of projects, amid a concern that inter-relationships between the ISP, the RIT-T mechanism, and the AEMO feedback loop (written advice confirming benefits of the preferred RIT-T option) ) may be leading to inefficient outcomes. Ultimately, the AEMC is seeking to uncover through the review whether there is a potential to streamline these processes to create a more efficient mechanism for the economic assessment of project benefits.
The AEMC is conscious, and in some senses driven by, an awareness that overall market conditions are changing quickly, and that many planning and approval processes require assessment on a static basis. It can be difficult, for example, to review market benefits in an environment of rapid growth in renewable assets within a region, given that these types of changes necessitate the updating of inputs while a process is in flight, creating uncertainty and delays.
Broadly, the AEMC has called for the development of a “fit-for-purpose” assessment process, one which is underpinned by a strong protection for consumers, and which does not unduly stifle or delaying beneficial projects. There are no details in the Consultation Paper around how this might be achieved.
In relation to the way in which project benefits are dealt with in the ISP and RIT-T, the AEMC is seeking stakeholder comments on a number of key questions:
1. Whether the ex-ante incentive-based regulatory model appropriate in light of the significant uncertainty of costs and benefits for major investments;
2. Whether a market (versus consumer) benefits test is still appropriate for the changing energy sector;
3. Whether a sufficiently broad range of benefits are being captured currently, including wider economic benefits;
4. Whether changes are warranted to the manner in which carbon emissions inform transmission planning and regulatory processes; and
5. Whether guidance should be provided on “hard to monetise benefits” (e.g., those for which the effort to undertake analysis is disproportionate to the likely benefits).
These are broad considerations, and the AEMC has made it clear that they are open to examining the majority of these questions as a priority of the review. They have made definitive statements, however, that the market benefits test remains fit-for-purpose and does not, in their view, need to be changed.
The AEMC has also noted the potential for unequal treatment of (and barriers for) non-network options relative to network option, in the context of the RIT-T, the most obvious of which being that TNSPs may have an intrinsic preference for network focused solutions. This is an issue they have considered previously; the AEMC’s Electricity Network Economic Regulatory Framework Review has twice concluded that no such bias exists in an obviously systematic way. That said, it remains open for review through this process.
Transmission investment framework
In relation to the transmission investment framework, the AEMC is considering how best to ensure that the transmission framework yields, or at least does not inhibit, the delivery of the investment that is required to connect the markets of the next 20 years. There are several critical issues under consideration, the first being TNSP’s current exclusive right to build, own and operate major transmission projects, and the second being the financeability of these projects under the current regulatory regime.
In relation to project planning and delivery, the AEMC is considering those factors which impact upon a TNSP’s ability to deliver projects in an efficient and timely manner, and is specifically focusing on:
How preparatory activities and cost recovery arrangements for early works are treated – particularly regarding the clarity and meaning of such; and
Delays resulting from processes for meeting jurisdictional requirements – including the procurement of easements and accompanying property rights, in addition to environmental planning requirements. The AEMC is also reviewing how crossovers between national and jurisdictional frameworks occur, and whether current cost recovery arrangements are suitable and allow TNSPs to meet their requirements in an efficient and timely manner.
Our Insights
This review has long been anticipated by industry and different participants are expecting different outcomes from it. Like all reforms currently underway, the issues raised in this review converge with other reviews and reforms, for example the ESB’s congestion management model for the NEM.
Ultimately, this review is seeking to balance and establish a roadmap in relation to a number of complex issues, including for example:
How to conduct static assessments in a dynamic market, and how broadly to consider the benefits from a transmission project which could potentially have more important, broader economic and social benefits than lowering electricity prices;
How to blend the requirements of real and incumbent investors with the assumed regulatory rates of return for hypothetical new market entrants; and
Where to draw the lines between different types and rates of equity, and how to encourage and obtain the benefits from greater competition in a sector which has been administered, planned and executed under jurisdictional arrangements.
Obtaining the right long-term balance between the multiplicative range of options will be difficult, primarily because no matter where the balance is struck, there will be short term impacts and incentives created through the design.
For TNSPs, the review contains both risk and opportunity. Questions around ex-ante regulation provide an opportunity to better match the risk of major projects with revenue recover; while increasing contestability narrows the field of play and introduces the potential for new entrants into the transmission construction market. The potential broadening of market benefits, such as valuing carbon emissions in transmission planning and regulatory processes, opens the door to a valuation of broader community benefits in a manner that has been impossible since the present regulatory frameworks were designed.
To date, stakeholders are generally split on whether to retain the current market benefit test or to broaden it to include additional benefits (particularly decarbonisation). Previous reviews, such as the Productivity Commissions Electricity Network Regulation Inquiry 2013, and Coordination of Generation and Transmission Investment: Final Report 2018, along with the COAG Energy Council’s Review of the RIT-T 2017 have all rejected a broader test. What underpins this rebuttal is the view that the incorporation of wider benefits will not enhance decision making, because of a distortion of efficient investment due to a lack of industries adopting a wider model, and such distortions creating inaccurate measurements of market benefits.
For incumbent generators, there is much at stake. There is a broader question at play in relation to the ISP and its role, particularly given jurisdictions are increasingly developing frameworks that circumvent the projects (or order) outlined within the ISP. Where jurisdictions have fast-tracked projects which don’t align with the “optimal development pathway”, as seen in the NSW’s and Victoria’s development of their REZ network, along with rumblings of a potential REZ in Far-North Queensland, new baseline policy positions are created which in turn bring different projects into play.
The question could fairly be posed: how relevant is the framework then if jurisdictions can fast-track and legislate their own projects? This is a question for Energy Ministers to consider; whether they want to continue with a uniform national framework, or whether there is now an acceptance that transmission is accelerated on a jurisdictional needs basis. This will see value shift from incumbent generators to renewable proponents, who will have access to the networks in ways that allow them to benefit from more favorable transmission connections and dispatch regimes. In this context, it will remain to be seen whether the Energy Security Board’s proposed resource adequacy mechanism, which is intended to provide a form of capacity payment, will be enough to keep incumbent synchronous generation in the system.
For more information, contact Simone Rennie at srennie@renniepartners.com.au
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