MMRE

Dr Finkel and the Panel

NEMSecurityReview@environment.gov.au

Dear Dr Finkel and the Panel

Thank you for the opportunity to provide a submission in response to the

Independent Review into the Future Security of the National Electricity Market
Preliminary Report. The South Australian Government considers that a coordinated
approach to the transition of Australias energy supplies to a low carbon future which
maintains the security of the system while delivering competitive energy to Australian
users has to be the central focus of the Review.
Australia has committed to reduce emissions to 26-28 per cent on 2005 levels by
2030. A significant increase in renewable generation from current levels will be
required for Australia to meet this commitment. Whilst communities support the
delivery of this commitment, they expect that affordability, reliability and security of
energy supplies will be delivered both during and after the transformation of the
energy sector.
To date, the incentive for the transformation of the energy sector has been the
Renewable Energy Target, which is an Australian Government scheme designed to
ensure that at least 33,000 Gigawatt-hours of Australias electricity comes from
renewable sources by 2020. Whilst this scheme has been a successful incentive for
renewable energy generation, particularly in South Australia, new policy is required
to provide a technology neutral, adaptive policy for further emissions reduction in
energy supply. This will ensure an orderly transition of the energy sector. Such a
transition will require the continued participation of gas-fired generation alongside
renewable energy generation to maintain reliability and security over the medium
term.
The South Australian Government supports a national market based mechanism for
reducing emissions. In the absence of national leadership in this area, however, it is
likely that each jurisdiction will move in separate directions to fill the policy vacuum
and take control of the delivery of Australias emission commitment. For the energy
sector, an emissions intensity scheme would require generators with an emissions
intensity above the set emissions target to buy credits and those with an emissions
intensity below the target create and sell credits. It will increase the costs of high
emissions generation such as coal and lower the cost of low emissions generation
such as gas and renewables.
The COAG Energy Council sought advice on this policy mechanism, as well as
expanding the Renewable Energy Target and a regulatory mechanism to further
transform the energy sector. Advice received by the COAG Energy Council indicates
that such a scheme has the lowest impact on prices relative to the business-as-usual
scenario and the other emissions reduction policy mechanisms. It also has the
lowest cost of abatement compared to the other emissions reduction mechanisms.
The South Australian Government therefore firmly believes that a national emissions
intensity scheme will ensure the energy supply sector is incentivised to transition to a
carbon constrained future in a measured and responsible way to maintain low cost,
sustainable and reliable energy supply. Most importantly a national EIS would
encourage the right balance of new investment into domestic electricity generation
and energy supply.
Whilst an emissions intensity scheme should be the primary mechanism for
supporting the transition of Australias energy supply, complementary measures will
be required to meet affordability, reliability and security objectives.
Interconnection
The South Australian Government firmly believes that better interconnection
between the National Electricity Market (NEM) regions will be required to support the
transition of our energy supplies. As renewable energy generation across the NEM
increases and power system security services become scarcer, there will be a
greater need for jurisdictions to share the services which are available.
A truly national electricity market, through further interconnection will also allow for
significant interregional trade and risk management, as well as ensure that there is
no barrier to constructing the renewable energy generation needed to meet
Australias emissions commitment.
To achieve our emissions commitment, we will require a very high level of renewable
energy generation in the system. Greater interconnection will provide for geographic
diversity in these facilities which will help address variability issues.
The Australian Energy Market Operator (AEMO) has identified net benefits from
interconnection investment across the NEM. What will be important is to ensure that
the right mechanisms are in place to ensure that this interconnector investment
occurs and the transition of our energy supply can occur in the most efficient
manner.
Technical standards and markets
The change in technology and generation mix which accompanies the transition of
the energy sector has a significant impact on how power systems are operated and
consequently on how underlying markets adapt to new modes of power system
operation.
Currently technical standards and markets have been designed based on
conventional power systems and they need to urgently adapt to respond to the
energy sector transition.
Clear technical standards are important for having a secure and reliable power
system. Standards should be set to accommodate a full range of potential
technological solutions at all levels of the power system. It is also important to
recognise that markets are required to deliver the most economically efficient
solutions to meet technical standards. Centralised planning methods with
prescriptive rules may lack the flexibility and efficiency to provide solutions that are
more diversified and granular in nature in a new power system. Market frameworks
need to be designed to encourage investment not just in the delivery of energy but
also of system security services.
It is the balance struck between how certain market arrangements are and how
flexible they can be that will ensure investment in system security services are
available at all times for guaranteeing a secure power system. As opposed to
centrally planned solutions where risk of expenditure is likely to be borne by
customers, market participants are better placed to assume the risk and take
accountability of their investment decisions by making the necessary cost-risk trade-
off calculation themselves.
South Australia recognised early the need to address technical standards and
markets. Since 2005, the Essential Services Commission of South Australia
(ESCOSA) has put in place additional technical requirements for wind-powered
electricity generators in South Australia. These include additional requirements for
fault ride through capability and reactive power capacity. In the absence of robust
national regulation in this area, ESOCSA commenced a process to consider any
changes which may be needed to these technical standards in a transitioning energy
sector.
ESCOSA is now conducting an inquiry into whether current licence conditions for
wind generators should be changed and whether additional technical requirements
should be imposed on the other grid scale inverter-connected electricity generators
(such as solar generators). AEMOs preliminary advice to ESCOSA on their inquiry
supported the continuation of the licence conditions with few amendments. AEMO
further suggested additional requirements relating to frequency control, the rate of
change of frequency and system strength.
It is also worth noting that while the inquiry is still underway, ESCOSA has
implemented interim measures to ensure new generators do not exacerbate existing
issues with respect to reduced frequency control ancillary services (FCAS)
availability. ESCOSAs recent generation licence approval for Hornsdale 2 Wind
Farm included two new additional technical conditions relating to frequency
disturbances and provision of frequency control ancillary services.
In addition, Hornsdale 2 Wind Farm has undertaken to participate in an FCAS trial
and has been in discussions with AEMO regarding the parameters and timing of the
trial.
Whilst South Australian will continue with its process of ensuring robust technical
standards to support the transitioning energy sector, a unified approach to technical
standards for the NEM is a preferred approach.
Concurrently to ESCOSAs inquiry, the South Australian Government submitted rule
changes to the Australian Energy Market Commission to provide for mechanisms to
support a transitioning energy sector. In particular, it is recognised that services
which in the past have had little value are becoming scarce in the transitioning
energy sector and technical standards, market and other relevant mechanisms are
required to stimulate the investment in and provision of these services.
Increasing levels of non-synchronous generation are posing system security
challenges in the NEM and these challenges now have a national urgency as coal
fired generation continues to close around Australia. Coupled with the withdrawal of
synchronous generation from the NEM, power system inertia is decreasing. Low
system inertia is creating instances of high Rates of Change of Frequency (RoCoF).
A high RoCoF is detrimental to system security following a sudden supply/demand
imbalance, as both the existing frequency control ancillary services are insufficient to
arrest frequency change to keep frequency within prescribed standards and
emergency protection schemes are ineffective to prevent cascading failure and,
ultimately, a black system.
Given that there is no provision in the current energy framework for market or
regulatory means to acquire services to maintain RoCoF within acceptable limits, the
South Australian Governments rule change proposed that AEMO have the ability to
procure a broader range of ancillary services to assist in addressing issues such as
RoCoF.
After the consultation with stakeholders, the System Security Market Frameworks
reviews interim report released in December 2016 highlighted, in broad terms, three
technical solutions:
Minimising the initial RoCoF by the provision of extra inertia by utilising
synchronous generators/condensers to increase system inertia;
Increasing the capacity to return the system to stability by obtaining Fast
Frequency Response (FFR) services that exhibit a time delay but operate
within a shorter timeframe than the current fastest FCAS specification of six
seconds, including schemes that shed load and generation; and
Enhancing the tolerance of the system by imposing additional obligations on
generators to withstand higher RoCoF.
The interim report discusses a range of market and non-market procurement options
to implement the preferred technical solutions. Each option discussed in the interim
report is based on the level of inertia required, which is divided into two components;
a minimum amount basic component before any fast frequency response service
can operate and an energy cost reduction component beyond the basic component
that would potentially provide market benefits by alleviating costs, such as
constraining the power system.
While the immediate issues of high RoCoF are manifested on a regional level,
namely in South Australia and Tasmania at present, it will only be a matter of time
before the rule change request submitted by the South Australian Government will
become more relevant in other jurisdictions.
As a strategic view, the South Australian Government sees an urgent need to
develop the necessary regulatory and market frameworks to enable inertia and fast
frequency response service markets to exist in the NEM.
Gas as a transition fuel
In the medium term, the South Australian Government strongly believes that gas will
act as a transition fuel in the transformation of the energy sector. Whilst new markets
are developed to provide power system security services and the costs of
dispatchable renewable energy technology reduces, gas-fired generation will help
ensure a reliable and secure electricity supply.
A key barrier to this future is the range of jurisdictional moratoria that are curbing
onshore gas exploration and development. The South Australian Government has
taken action to support gas as a transition fuel by committing $24 million to
incentivise companies to extract more gas and supply it to the local market to
increase the supply of gas into the energy market, with South Australian energy
generators, industry and households having first offering. However, national
commitment is required for further exploration and development of gas.
This will be complemented by the suite of gas reforms being implemented by the
COAG Energy Council Gas Market Reform Group, which seek to provide for more
flexible gas markets. Reforms being implemented include a new commercial
arbitration framework for pipelines, market transparency reforms and pipeline
capacity trading reforms.
Competition and market power
The transition of our energy supplies will require existing high emissions coal fired
generation to withdraw from the market. The closure of South Australias Port
Augusta power stations and more recently the announced closure of the Hazelwood
power station provide evidence of the relatively short notice that the NEM received of
these structural adjustments.
Not only does the withdrawal of generation reduce generation capacity available to
meet demand, it also can reduce competition and has the potential to result in other
market participants having the ability to exercise market power.
The inability of the NEM to address competition and market power issues will result
in inefficient pricing outcomes for consumers. Accordingly, the review needs to
consider the appropriate mechanisms to protect against such outcomes as more
coal-fired generation exits the market.
Innovation
Currently, the bulk of renewable energy capacity which has been delivered by the
renewable energy target is wind generation. More recently, a significant interest is
being shown in large-scale solar pv systems. Other solutions with potential to
contribute to the transition of our energy supply over the medium term include
synchronous condensers, utility-scaled storage and general advancements in
renewable energy technology.
It is important that mechanisms are in place to encourage innovation, research and
development and the trial of new solutions in our power system. The South
Australian Government is a strong supporter of the role of the Australian Renewable
Energy Agency and Clean Energy Finance Corporation in this area.
Further, the national energy frameworks should not include barriers to new
technologies participating in the transition of our energy supplies. Markets and other
incentives for services required to deliver secure, reliable and affordable electricity
supply should be technology neutral.
This will ensure that we transition to a low emissions electricity supply in the most
efficient manner.
Governance
Energy Market governance arrangements need to be capable of managing a rapidly
changing energy sector, where change is driven by consumers and private investor
decisions. Neither the South Australian Government nor the South Australian
community accepts the proposition that a crisis needs to occur before action is
taken.
Our market institutions need to not only identify and analyse emerging issues in the
transition of our energy supply, but implement action before such issues cause harm.
This will require our market institutions to work swiftly and for our frameworks to
support such behaviour. It is a poor reflection on our national energy frameworks that
state-based policy is being implemented to address emerging energy issues which
are slow to be addressed nationally.
We consider that a close look at the governance framework is required to ensure a
clear framework for strategic decision making and implementation, as well as the
correct incentives on market institutions for the swift identification, analysis and
action in relation to emerging issues.
In relation to the COAG Energy Councils strategic work program, the Council should
have the ability to seek consolidated advice and a consolidated implementation
package from market institutions to keep pace with the rapid rate of change. Not only
would this increase the rate at which change can occur, but would also reduce the
number of consultation processes that stakeholders are required to participate in.
Importantly, the time for conservative interpretation of the energy frameworks is
gone. Where flexibility and discretion is provided to our market institutions, it should
be exercised to deliver our affordability, reliability and security objectives. The speed
at which change is occurring in the energy sector will not wait for prescriptive policy
to verify and affirm every action required of our market institutions.
Market institutions will need to have the appropriate expertise and resourcing to
successfully perform their roles in a transitioning market. In particular, AEMO
requires significant technical expertise to identify and assess emerging issues and to
perform their functions. AEMO is the primary adviser to the NEM on power system
security matters. It is important that AEMO focuses and dedicates significant
resources to this function and recognises the importance of technical standards and
advice in the security and reliability of our power system.
I thank you for the opportunity to contribute to the Independent Review into the
Future Security of the National Electricity Market and look forward to the next stage
of the process.

Yours sincerely

Hon Tom Koutsantonis MP

Minister for Mineral Resources and Energy

March 2017