A new mechanism to support energy system reliability came into effect on 1 July in Australia’s National Electricity Market (NEM).
The Retailer Reliability Obligation (RRO), if triggered, requires suppliers and some large energy users to hold contracts with or invest directly in generation or demand response. It has been introduced in response to concerns that rapid changes in the system, in particular the large increase in renewable generation and recent and forthcoming closures of thermal generation, and the potential threat to security of supply. The proposed mechanism is shown in Figure 1.
If the Australian Electricity Market Operator (AEMO) identifies a material gap in its reliability forecast three years and three months out – that annual regional expected unserved energy exceeds the reliability standard – it can apply to the Australian Energy Regulator (AER) to trigger the RRO. If triggered, the relevant parties are then on notice to cover their share of demand. Larger customers may also choose to opt in.
If the market response is insufficient and the AER confirms that a reliability gap still remains one year out, then specified parties must disclose their contract positions to the AER. In the case that actual system peak demand exceeds an expected one-in-two-year peak demand, the AER must then assess parties’ compliance with the RRO.
At this point, AEMO can start procurement of emergency reserves through the already established Reliability and Emergency Reserve Trader framework to address the remaining gap, with the costs recovered through a Procurer of Last Resort cost recovery mechanism. A portion of the costs, up to an individual maximum of AUD$100mn (£56mn), would be allocated to non-compliant parties to ensure that costs are paid by those who caused the problem and that costs to consumers are minimised. The AER can also pursue a civil penalty for failure to comply, with an upper limit of AUD$1mn (£560,000) for first offences and up to AUD$10mn (£5.6mn) for repeat offences.
Suppliers can choose to contract with any form of generation, but the “firmer” the contracted generation, the greater its contribution will be to meeting their obligation. Firmness is a measure of the extent to which a contract reduces exposure to the volatility of the spot price in a region during the gap period.
The AER has the responsibility for developing a methodology for firmness for standard contracts; bespoke methodologies can also be used but must be approved by the AER.
To address concerns about the liquidity and transparency of the contracts market and ensure sufficient contracts are available to smaller market customers, a Market Liquidity Obligation (MLO) will require generators with 15% or more market share to offer to buy and sell contracts with all participants in a region. The products offered through the MLO will be firm financial futures contracts offered through an approved exchange, with a 1MWh clip size. Three products are approved, and the AER has authority to approve others. AEMO will also run a Voluntary Book Build mechanism to help suppliers and relevant customers secure contracts with new resources.
This mechanism to prevent market failure seeks to build on existing spot and financial market arrangements and it is hoped it will boost rather than undermine competition through enhanced market liquidity and pricing transparency. It is essentially a contracting obligation on purchasers and is very different to our own Capacity Market under which a defined amount of generation and reserves are held on the system.
If you have enjoyed reading this article and want to read about the latest developments from energy markets around the world, please contact us on 01603 604400 for a free month’s trial.
Energy:2030 is a monthly publication covering relevant and interesting developments including:
- market mechanisms and regulatory incentives
- technological developments and their anticipated impact
- changing policy as it evolves both in the UK and worldwide.
