Reports released by the Energy Security Board (ESB) in January 2021 have further highlighted the challenges facing the National Energy Market (NEM) as a result of an increasing amount of renewable energy generation.
If the NEM is to be able to cope with this now fast-paced transition towards a more renewables-heavy mix of generation in the grid, the ESB argues that urgent reforms are needed to address the challenges associated with the shift or risk paying for it in the future.
Renewable generation continues to increase
The NEM is currently undergoing a transition from what has historically been predominantly large scale thermal coal and gas generation, to a mix of large and small scale renewable generation.
The increasing penetration of renewables in the NEM has brought with it substantial reductions in emissions, with the ESB's Health of the National Electricity Market 2020 report confirming that emissions in the NEM are now 25% below 2005 levels and are expected to continue to reduce down to more than 50% by 2030.
This is a worldwide trend, with the ESB quoting the International Energy Agency's most recent World Energy Outlook which gives a figure of an expected 90% of the growth in electricity demand over the next two decades to be met by renewables.
This reduction in emissions has been aided not just by an increase in investment in renewables, but also by a decline in production from thermal coal and gas fired generation.
In the NEM, the once cost-effective fleet of coal fired power stations are becoming increasingly less competitive as they age and they will inevitably need to be replaced or refurbished over the next two decades.
Challenges with increased renewable penetration
An increase in renewables in the NEM brings with it a number of issues stemming from the fact that renewable generation is inherently variable, and requires firm and flexible back-up in order to effectively maintain supply to the grid.
The ESB says that security of the system remains the single most concerning issue in the NEM. Security has become increasingly difficult to maintain with the increased variable renewable generation coming into the grid. As non-synchronous wind and solar generators are weather dependent, they cannot offer the same baseload stability that thermal (and hydro) generators can.
Increased presence of these renewable generators, combined with the exponential growth of distributed energy resources (DER) – like rooftop solar – and an ageing fleet of thermal generators has led to increased variations in both load and supply in the grid.
These issues have resulted in the Australian Energy Market Operator (AEMO) intervening more than 250 times in the last year to either turn off grid-destabilising renewable generation or turn on gas-fired peak demand plants. The frequency of these security directions issued by AEMO have increased significantly over the last three years.
Reforms needed to facilitate the transition
It is increasingly clear that the rate at which renewable generators are coming online and displacing thermal generators in the NEM is rapid, and changes need to be made at a corresponding pace in order to accommodate this shift.
Along with the issues highlighted in the Health of the Market 2020 report, the ESB also released a Post-2025 Market Design Directions Paper on the same day which sets out a path forward in addressing these key challenges facing Australia's electricity supply.
The paper has set out four key directions for reform to be further mapped out over the coming months.
1. Resource adequacy mechanisms through the transition
In addition to projects already in the pipeline, the ESB expects a further 26,000 to 50,000 MW of new large scale variable renewable energy generation to come online, as well as flexible and dispatchable resources in the range of 6,000 to 19,000 MW over the next two decades. In the same period, 16,000 MW of thermal generation – making up 61% of the current coal fleet in the NEM – is expected to retire.
This seismic shift requires a large amount of new investment to ensure resource adequacy where the right mix of resources is available for the system to deliver reliable supply to customers while ensuring the system can continue to operate in a reliable state. Concerns have been raised as to whether the mechanisms in the NEM are sufficient to facilitate this.
While governments have been implementing incentive schemes to manage the transition, these are typically targeted at increasing new investment. The ESB is therefore seeking reforms to efficiently manage the entry of these new resources, as well as providing for the exit of retiring resources.
2. Essential system services and scheduling ahead mechanisms
It is noted that there is a need to refine frequency control arrangements, addressing the potential need for enhanced arrangements for primary frequency control and a new market for fast frequency response. The ESB also considers both the need to procure system strength in a structured manner and the need for a new operating reserve or ramping service to be priorities moving forward.
In order to achieve this, the ESB plans to continue to work on a spot market approach for valuing and procuring inertia as a priority. This is seen to be the most critical issue at the moment and will be done firstly by assessing the value of procuring inertia under structured procurement arrangements as an interim measure.
3. Opportunities for demand side participation in the market
The way that the NEM currently operates creates barriers to entry for new and innovative technologies and service providers to enter the market, and it does not provide much incentive to those customers who manage their own DER.
In the Health of the National Electricity Market 2020 report, the ESB points out that electricity systems were never designed with DER in mind, and there are increasing technical challenges and opportunities that arise from the resulting multi-way flows of energy. It is therefore important that DER is properly integrated into the system from a technical, regulatory, market pricing and tariff standpoint.
Demand side participation from those customers with DER should come by providing clear signals to those customers when more energy supply or demand is needed and can be efficiently provided to keep the system in balance. The customers can then manage output from the DER in response to this, and should be rewarded for doing so.
The ESB aims to achieve this by pursuing an integrated set of reforms incorporating market integration of DER and establishing a two-sided market with associated scheduling, technical, regulatory and consumer protection reforms.
4. Transmission and access to meet future needs
As the generation mix moves from large thermal generators towards large scale renewables in more decentralised localities, the transmission infrastructure needs to change to support investment and lower costs in order to enable efficient connection of new generators to the grid.
Technical issues are already becoming apparent with new assets taking much longer to connect due to low system strength, and once they are connected the system can suffer from high levels of congestion and significant reductions in marginal loss factors.
The current access arrangements in the NEM are not fit for purpose to support the rate at which new supply is coming online, and without a proper solution this will end up costing customers more.
The ESB proposes that, in the long term, the best way to drive both more efficient investment and more efficient dispatch and use of the network is the introduction of locational marginal pricing with financial transmission rights. However, there are significant issues to be addressed before these reforms can be implemented. As a result, developing the framework for Renewable Energy Zones (REZs), including connection, access and pricing frameworks, is the key focus for the ESB at present. REZs are seen as a key stepping stone towards the long-term goal of locational marginal pricing and financial transmission rights.
Where to from here?
The Post-2025 Market Design Directions Paper comes as part of an ongoing consultation process with industry and government. In March 2021 the ESB will consult on potential market designs before final recommendations are made to the Energy Ministers in mid-2021.
What is now clear is how important it is that appropriate reforms to the operation of the NEM are made promptly in order to match the pace of the transition to Australia's renewable energy future.
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