Brace for a major electricity shake-up

The Australian Energy Market Commission has recommended a major shake-up for how the east coast electricity market (the NEM) pays and plans for transmission capacity that transports electricity from generators to major cities, towns and large industrial facilities (not the small-scale distribution lines that connect up homes and businesses).

The key recommendations are:

1. Generators will have the option of paying a fee that would enable them to reserve transmission line capacity, giving them firm access to the prevailing market price. So when a power line becomes congested due to too much generation, the holder of firm access will be unaffected. These firm access rights would be tradeable between generators connected to the same line. This will go some way towards providing an economic signal to incumbent generators as well as new entrants about the cost of transporting their electricity to market. It also enables transmission augmentation to be driven more by demand from generators and not entirely by a transmission company's centralised planning.

2. An extension of the recommendation above is that retailers and generators could also acquire firm access to capacity of transmission interconnectors between states within the NEM. This would allow them to benefit from the differentials in prices between each state, and will create a demand driven incentive to encourage transmission companies to build additional interconnector capacity.

3. In an effort to counter the excessive market power of transmission companies relative to new generators in negotiations over grid connection, the rules will be made less ambiguous and network businesses will be forced to disclose greater information about the costs incurred in connecting a generator. This will include providing the power developer with access to tender bids.

4. AEMO will be stripped of its role as procurer of transmission augmentation in Victoria with this handed to the private-sector owner of the Victorian transmission system – SP AusNet.

Forcing transmission companies to be more open about costs for connecting new generators is definitely a good thing. Based on conversations with a wide range of power project developers, transmission companies can often behave as a law unto themselves. To reduce carbon emissions we need to be connecting a lot more new generators and so making connections cheaper and easier is critical.

In terms of the other recommendations, these have the potential to improve the overall efficiency of the electricity system but the impacts on the clean energy sector are complicated.    

Under current market arrangements incumbent generators pay no charge at all for transport of their electricity to customers. They are dispatched into the market based solely on their own production costs without any account paid to the cost of transmitting this electricity to customers. It's a bit like visiting a supermarket in Brisbane to buy fruit where you were charged a fixed cost for transport irrespective of whether you bought fruit sourced from the outskirts of Brisbane or from Cairns.

This understandably provides weak incentives to locate generation closer to customers. So these changes are probably a good thing for co-generation projects.

It also results in a market that is less transparent and open to manipulation by favoured insiders. This is because decisions around where new transmission gets built are based more on subjective judgement of the transmission planners about what is best for customers, rather than what actual market players are explicitly offering to pay for. Queensland in particular has been subject to criticism in the past over transmission investment decisions that seemed to be shaped around the interests of coal generators in that state, rather than purely customers.

Also the existing structures can to some degree act to favour incumbent fossil fuel generators over new entrant renewables. This is because transmission lines have already been built to locations rich in coal, but many areas rich in renewable resources don't have particularly good transmission capacity. Coal generators get to free ride off this existing capacity, while developers of new projects in regions without transmission capacity have to pay if they want to be connected (at least in practice, if not in theory).

However this is not clear cut. It's possible that if more coal generators close due to emission reduction policies, there will be little transmission congestion in these regions and little need for the remaining generators to buy firm access to the transmission line.

Meanwhile there's likely to be increasing pressure on the inadequate existing transmission in areas rich in wind and solar. This could mean renewables projects will be facing additional transmission costs without seeing a compensating increase in electricity pool prices.  

Yet at the same time at least this might offer a clearer avenue for getting desperately needed new transmission capacity built. So while renewable energy developers would prefer to not have to pay for transmission capacity, it's far better than having no capacity at all.  

Watch this space for more on the implications of these proposals.