Contracting electricity reserves to cover emergencies at the lowest cost

Source: Media Release - AEMC

Released 7 Feb 2019

The Australian Energy Market Commission today released a draft rule to boost the power system’s strategic reserve mechanism so it has the flexibility to effectively protect the reliability of the national electricity market at the lowest cost possible to consumers.

The reliability and emergency reserve trader (RERT) is a safety net which enables the system operator, AEMO, to pay a premium for ‘out of market’ generation or demand response to be on standby when it forecasts supply shortages ahead.

We are calling for public submissions on our recommendations to tighten the rules so they set clear requirements for industry to step up and offer least-cost supplies to the market so the RERT can be an effective tool in keeping the lights on during extreme weather events and emergencies.

AEMC Chairman John Pierce AO said more needs to be done by governments and the power sector as a whole to improve reliability. Procuring emergency reserves is only one part of a comprehensive framework that is designed to provide enough capacity to meet the reliability standard, he said.

“Emergency reserves are just that – for emergencies. Price signals through the spot and contract markets, along with forecasts and notices from AEMO, give the market incentives and information to supply longer-term generation and demand response when and where it is needed.”

“Emergency reserves are more expensive, which is why we need to keep them to a minimum. That’s why we also need a well-functioning market with clear price signals and information, backed up by policy certainty from governments, with tools like the retailer reliability obligation which is being developed by the Energy Security Board right now.

If approved by the COAG Energy Council as planned, the retailer reliability obligation could be in place mid year.

The Energy Security Board is conducting public consultation on the obligation in the weeks ahead – it is a long-term solution that will be designed to encourage investment in dispatchable generation which the system has to have to meet its reliability standard.

Mr Pierce said the draft rule released today would help address risks to power system reliability that are being caused by the changing characteristics of the power system as lower emission and non-synchronous, weather-driven generation like wind and solar connects to the grid while synchronous generators are closing.

“The national electricity market today is a far more complex interconnected system of renewable and non-renewable energy generation sources that need to interact effectively to provide essential power supply to households and businesses,” Mr Pierce said.

“Different arrangements are needed by AEMO to stabilise the system and manage emergency reserves as the transformation of the power system accelerates.

“Today’s draft rule is designed to minimise the cost of emergency reserves. It also directly links the level of strategic reserves to the reliability standard, which is set by an independent panel of experts including large energy users, consumer groups and industry,” said Mr Pierce.

The electricity market is designed to supply enough power to meet consumer needs 99.998% of the time – the reliability standard. Price signals from electricity spot and contract markets, along with information from AEMO’s forecasts of demand, tell generators and demand response providers when, where and how much power supply or demand response is needed.

But there are times when the power system’s capacity falls short – typically when extreme weather events are forecast. To fill the gap, AEMO uses a range of emergency mechanisms including the RERT to buy emergency reserves to be on standby.

Today’s draft rule makes a range of enhancements to the RERT process to lower procurement costs and improve transparency. Key changes include:

  • improving incentives for customers to reduce demand to minimise the need for emergency reserves: we want incentives for demand response – for example, retailers encouraging their customers to reduce energy use during heatwaves. So costs of emergency reserves will be recovered, where possible, from customers who caused the need for the RERT.
  • increasing transparency and awareness of options for emergency reserves supply: AEMO would provide regular updates on how the RERT is procured and how much emergency reserves cost.
  • clarifying the trigger:  the RERT can be triggered if AEMO forecasts a breach of the reliability standard which requires enough generation to service 99.998% of consumer demand. This clarity helps the market plan operations and budgets.
  • increasing the lead time to buy reserves from nine to twelve months:  with a longer lead time, AEMO can get better deals from a larger pool of providers, including demand response providers. This would ultimately lead to lower costs for consumers.
  • providing a price guide for emergency reserves:  the price should typically be less than the cost of load shedding. AEMO will use the AER’s assessment of the value customers place on reliability as an input.
  • encouraging a lower-cost competitive market response: by only letting providers enter into contracts for emergency reserves if they have not been in the market for the past 12 months. This avoids a more expensive ‘RERT-only market’ developing.

On very rare occasions – only a few days in the last decade, and most recently last month in Victoria – there is a shortage of supply even with emergency reserves. On these occasions, AEMO directs network businesses to interrupt supply to some customers to bring supply and demand into balance and help avoid a system-wide blackout.

“This controlled load shedding is regrettable and put in place as a last resort. Blackouts can be very distressing for customers, particularly on extremely hot days, and will impact some people and businesses more than others,” said Mr Pierce.

The AEMC is underway with an extensive system reliability and security work program which was started before South Australia’s system black event in 2016.

Submissions on the draft determination are due by 21 March 2019.