P390 Submission to CCA AEMC special review security price

P390 Submission to CCA AEMC special review security price

AustraliaInstitute
The
Research that matters.
3May2017
ClimateChangeAuthority
JohnGortonBuilding
KingEdwardTerrace
ParkesACT2600
[email protected]
DearSirorMadam
SubmissiontoClimateChangeAuthority/AustralianEnergyMarketCommission
SpecialReviewonpowersystemsecurity,electricitypricesandemissionreductions
TheAustraliaInstitutewelcomestheopportunitytomakethissubmissiontotheSpecial
ReviewconductedbytheClimateChangeAuthority(CCA)inconjunctionwiththeAustralian
EnergyMarketCommission(AEMC).
TheAustraliaInstituteagreeswiththeAEMCthatfundamentalmarketreformisneeded,and
withtheCCAthatenergyefficiencyshouldbeapriority.Bymakingtheenergymarketmore
flexiblewecansolvethe‘energytrilemma’:simultaneouslyloweringprices,increasing
securityandloweringemissions.Ourthreepolicysuggestionsencourageproducersand
consumersofelectricitytorespondtoperiodsofhighdemand,whichwilllowerthesepeaks
andthereforeelectricitypricesoverall:
• FiveMinuteSettlementwouldhelpmajorconsumersreducedemandinresponseto
pricepeaks.
• Demandaggregationcouldfacilitate‘virtualpowerplants’abletocontributeto
balancingsupplyanddemandinasimilarwaytophysicalpowerplants.
• Aggregateddemandreductionrewardsconsumersforreducingtheirenergyusage
duringperiodsofhighdemand.
TheAustraliaInstituteisaCanberra-basedeconomicsandpolicyresearchinstitutewhich
publishesregularlyonenergy-relatedtopics.
Beatingtheenergytrilemma
Thisspecialreviewhasthetaskofsolvingthreeseeminglyopposedgoals.ThePreliminary
reportoftheIndependentReviewintotheFutureSecurityoftheNationalElectricityMarket
identifiesan‘energytrilemma’ofthreecompetingpriorities:price,securityandemissions.1
Whilethisisapowerfulmodelofpolicychallengesacrossclimateandenergy,thereare
specificmeasuresthatthatbeattheenergytrilemmabysimultaneouslyimprovingsecurity,
1
“PreliminaryReportoftheIndependentReviewintotheFutureSecurityoftheNationalElectricity
Market”(CommonwealthofAustralia,2016),p.10.
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2 reducingpricesandcuttingemissions.Keyamongthemisenergyefficiency.Anyreductionin
demand,particularlyattimeswhenelectricitypricesarehigh,benefitsboththeconsumer,
whobuyslessofthecommodity,andallusers,whoseepricesdropacrossthemarket.It
benefitsthesystemoperator,theAustralianEnergyMarketOperator,byimprovingsecurity
andreliability.Ithelpsdistributionnetworkserviceproviders(DNSPs)byloweringstresson
criticalnetworkelementsandallowingcostly‘goldplating’tobedeferredoravoided
altogether.
NewICTsystemsenabledramaticpeakmanagementservicestobeprovidedatminimalor
negativecosttoAEMOandDSNPs.Akeyissueforpolicymakersandregulatorsisthatpeaks
meanprofits.TheAustralianEnergyCouncilsubmissiontotheFiveMinuteRulechange
admittedthisfact.2
HighpeakpricesforelectricityinAustraliacontributesignificantlytotheprofitabilityof
incumbentgenerators.Thatfactpitstheinterestsofincumbentsagainstconsumersandalso
companieswithnewtechnologiesandapproachesenteringthemarket,suchasMojoPower,
Reposit,Greensync,WattwatchersandBuildingsAlive.AstheProductivityCommissionnoted
in2013,‘inNewSouthWales,peakdemandeventsoccurringforlessthan40hoursperyear
(orlessthan1percentofthetime)accountforaround25percentofretailelectricitybills.’ 3
SupportforAEMCandCCApositions
TheAustraliaInstitutesupportstheCCA’semphasisonenergyefficiencydividendsandthe
AEMC’sfocusontheneedforfundamentalmarketredesign.Marketreformthatencourages
energyefficiencyandremovesbarrierstodecentralisedgenerationwilladdresstheenergy
trilemma.
AstheCCAstatedinits2015-16SpecialReviewthirdreport,energyefficiency‘offers
significantemissionsreductionpotentialatlowcostornetsavings.’4Thisisthecentral
technologicalopportunityforthecurrentspecialreview.Itisthisemissionsreduction
opportunitythatrulereformscansecure.
TheAEMC’srecentlypublishedDirectionsPaperontheFiveMinuteRulemakesclearthatthe
electricitysectorisundergoingatechnologicaltransitionwhichrequiresreformofthe
market.
AstheAEMCnoted,
itisincreasinglyimportantthattheNEMmarketdesignprovidestherightprice
signals,asthiswillaffecttheincentivesfortheefficientuseofgenerationassets,the
efficientconsumptionofelectricity,andefficientinvestmentingenerationand
demand-sidetechnologies.5
2
KieranDonoghue,“FiveMinuteSettlement(ERC0201),”June16,2016,p.2.
AustraliaandProductivityCommission,ElectricityNetworkRegulatoryFrameworks :Volume1,2013,
p.16.
4
“ClimateChangeAuthoritySpecialReviewReportThree”(ClimateChangeAuthority,August2016),
p.12.
5
“DirectionsPaper :FiveMinuteSettlement”(AustralianEnergyMarketCommission,April11,2017),
p.i.
3
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Thetransitionfromcentralised,baseloadgenerationtodistributed,variablerenewable
generationisanunstoppabletechnologicalevolution.Thiswilltakeplacewhetherornotthe
Commonwealthadoptsalong-termclimatepolicydirectionandsoneedstobeaddressedby
ourenergymarketinstitutions.
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Allocativeefficiencybenefitsandbarriers
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TheAEMChasmadeclearthatfastermarketsincreasethe‘allocative’dimensionof
efficiency.6Largeloads(orlargenetworksofsmallaggregatedloads)canreducetheir
demandwhenpricesarehigh,shiftingthisdemandtoperiodsoflowerprice.Thisaspectof
efficiencyisaprimarilyeconomicphenomenonanddoesnotentailasignificantreductionin
aggregate,long-termenergydemand.Butitcansignificantlyreducetheoverallcostof
energybecauseitimprovestheallocationofresourcesandthebalanceofdemandand
supply.
TheCCAnotesthattherearemanybarrierstoenergyefficiency,includingopportunitycosts,
skillsgapsandthe‘hasslefactor’forfirmsthatarenotintheenergybusinessandforwhom
makingenergyefficiencydecisionsisdifficult.7TheCCAmakesclearthatinordertohelp
breakdownthesebarriers,itisimportantforpoliciestoallowforaggregation,wherebythird
partyserviceproviderswithexpertiseinenergyefficiencyareabletoimplementmanysmall
projectsonbehalfofenergyendusers.ThisisoneofthestrongpointsoftheFiveMinute
RuleascurrentlyframedbytheAEMC:itwillallowaggregatorstoparticipateinthemarket.8
FiveMinuteRule
WholesaleelectricityintheNEMisdispatchedinthespotmarketinfiveminuteintervalsbut
thepriceforthesetradesissettledoverathirty-minuteinterval.AsOriginEnergyhas
pointedoutinitssubmissionontheFiveMinuteRule,thismismatchproblemhasbeenin
debatesincethecommencementoftheNEMin1998.9TheRulechangewasproposedtothe
AEMCbySunMetals.Thecompanyisseekingtheoptiontoreduceitsowndemandoverfive
minuteperiods,whenpricesarehigh,inordertocontrolitsenergycosts.
ThisproposalissupportedbyboththeAustralianEnergyMarketOperator(AEMO)andthe
AustralianEnergyRegulator(AER).Thetrendtowardsfastermarketsisalsobackedbythe
InternationalEnergyAgency(IEA).
TheAustraliaInstitutemadeasubmissiontotheAEMCoverthisrulechange.Wearguedthat
therulewillhavesignificantmarketandwiderbenefits.Itwill:
1. Enablehigherlevelsofvariablerenewableenergygeneration
2. Betterintegratebatteryandotherstoragetechnologies
3. Moderatewholesalepricepeaks10
Ifthemarketsupportsstorageandfastertrading,thiswillhelpimprovesystemsecurityby
reducingthepriceandtechnologicalstressescausedbyhighdemandpeaks.Whendemand
6
Ibid,pp.4-5.
7
Ibid,p.90.
8
“DirectionsPaper:FiveMinuteSettlement.”Seep.56.
9
SteveReid,“FiveMinuteSettlement–ConsultationPaper,”June20,2016,p.1.
10
RoderickCampbell,“SubmissiontoAEMC5MinSettlementRule,”June24,2016.
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4 outpacessupply,thisincreasespricesintheshorttermdueandalsoincreasepricesoverthe
longtermbyrequiringdistributionnetworkserviceproviders(DNSPs)tobuildnetworksto
copewithperiodsofhighdemand.
AlthoughtheFiveMinuteRuleisprimarilyfocusedonfixingamarketdesignflaw,itwillalso
loweremissionsatlowornegativecost.Whendemandpeaksarelower,thereislessneed
forgaspeakingplantsortherampingupofcoal-firedturbines.Moreelectricitycanbe
suppliedbyvariablerenewables,dramaticallylowingtheemissionsintensityofelectricity.
Virtualpowerplants
Inresponsetoenergysecuritypressures,theCommonwealthandSouthAustraliahave
proposedthatgovernmentsreturntothebusinessofplanning,payingforandowningpower
plantsaftertwodecadesofprivatisationconsensus.Theseplantswillcosthundredsor
billionsofdollarsandwilltakeyearstobuild.
Inthemeantime,thereformsweareadvocatingcanunlock‘virtualpowerplants’that
requirenocapitalinvestmentbecausetheyhavealreadybeenbuilt.Physically,these
comprisenetworksofprivatelyownedassets,rangingincapacityfromdomesticsolarand
batterysystemstolargeindustrialsmelters.Theseassetsareownedandfinancedforother
purposes;theonlycostistheminorexpenseofinstallingcontroldevicesandmanaging
energydispatchthroughsoftware.
Thesevirtualpowerplantnetworksofdiscretephysicalassetsarecoordinatedbythirdparty
operatorsusingcloudsoftware.Thesystemoperator,AEMO,cantheninstructtheseassets
togenerate,storeordischargeelectricityasneeded,justasitwoulddispatchagaspeakeror
ordertheramping-upofacoalpowerstation.
AgroupofprominentAustraliansrecentlysignedanopenlettertoPrimeMinisterMalcolm
Turnbullinsupportofreformstoacceleratethesenewtechnologies,whichwasorganisedby
TheAustraliaInstitute.11Signatoriestotheletter,whichwaspublishedintheAustralian
FinancialReview,included
• FormerLiberalPartyleader,JohnHewson
• Chair,EmbarkAustralia,SimonHolmesàCourt
• Director,AustralianCentreforAdvancedPhotovoltaics,ProfessorMartinGreen
ASFRSFAAFTSE
• Chairman,GreenSync,NeilGibbs
• GeneralManagerofKeppelPrince,SteveGarner
• FormerIndustryCommissioner,EmeritusProfessorTorHundloeAM
• EmeritusProfessor,BarbaraPocock.
11
KatharineMurphy,“OpenLetterUrgesMalcolmTurnbulltoDeliverEnergyMarketReforms,”The
GuardianAustralia,April5,2017,https://www.theguardian.com/australia-news/2017/apr/05/openletter-urges-malcolm-turnbull-to-deliver-energy-market-reforms.
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Aggregateddemandreduction
Aggregateddemandreduction(ADR)isacoreaspectofvirtualpowerplants.Itissimplythe
remotemanagementofconsumerdemandinordertostabilisethebalancebetweensupply
anddemand.TherearenospecificprovisionsintheNationalElectricityLawforADRsoitis
worthexplainingthebasicsofitsfeaturesandbenefitshere,toencourageitsconsideration
bytheSpecialReview.
TheAEMC’sDirectionsPaperontheFiveMinuteRulemakesclearthatimprovementsto
allocativeefficiencybenefitsconsumersandthussupportthe‘basiclaw’ofelectricityin
Australia,theNationalElectricityObjective(NEO).12TheFiveMinuteRulewillcreatean
incentiveforADR,whichwillimproveallocativeefficiency.ADRdeliverseconomicbenefitsto
theindividualfamiliesorfirmsthatowntheloadswhichareswitcheddownorofforusedto
deliverfrequencysupport(seeFCASsectionbelow).Itlowerspeakpricesandthuslowers
billsforconsumersacrosstheNEMregion.Italsohaslocalisednetworkbenefitsbecauseit
canbeusedtoreducecongestiononkeydistributionnetworkelementsandacross
interconnectorsattimesofhighdemand.Thisimprovessystemsecurityandlowersthecost
ofenergyservices.Overthelongterm,itcandeferoravoidcostly‘goldplating’,benefitingall
consumersonagivennetwork.
Forexample,theAmericancompanyEnerNOCclaimsitcandeliver100MWtoSouth
Australiaby1December2017,usingpre-existinginfrastructureinthatstate.13Thisis
importantbecausetheNationalElectricityMarket’slatestsystemsecurityhealth-check
predictsthatifrainfallislowandthemarketdoesnotrespondadequately,therecouldbean
energyshortfall(or‘unservedenergy’)inFebruary2018of816.1MWhinSouthAustraliaand
3987.9MWhinVictoria.14
Greensync,anAustralianstart-up,claimsthatitistechnicallyfeasibleforitsgenerationand
demandaggregationsystemtooffer300MWofvirtualpowerbynextsummer.15The
Victoriangovernmentgranted$0.5millionforatrialofGreensync’ssystemonthe
MorningtonPeninsula,withthelocaldistributionnetworkcompanyUnitedEnergy.
EnerNOCproposesthattheNEMshouldallowADRtosellfourclassesofservices(Table1
below).
12
AEMC,“DirectionsPaper :FiveMinuteSettlement.”,chapter2.
GilesParkinson,“SouthAustraliaShouldDumpDieselPlanandThinkSmarter :RenewEconomy,”
RenewEconomy,accessedMarch31,2017,http://reneweconomy.com.au/south-australia-dumpdiesel-plan-think-smarter-83644/.
14
“EnergyAdequacyAssessmentProjection:November2016Update”(AEMO,2016),p.11.
15
BenPotter,“GreensyncJoinsEnergyBiddingWar,”AustralianFinancialReview,March14,2017,
http://www.afr.com/news/greensync-joins-energy-bidding-war-20170313-guwz2y.
13
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6 Table1:ADRservices
Source:“EnerNOCSubmission-NationalElectricityMarketReview”(EnerNOC,March1,2017),
p.6.
FrequencyControlAncillaryServices(FCAS)
Stabilityofthegridandqualityofthesupplydeliveredtoconsumersaretechnically
intertwinedissues,deliveredintheNEMthroughasetofeightancillaryservicesmarkets
operatedbyAEMO.16Thesemarkets,likethewholesalespotmarket,aresubjecttopeak
pressure,whichaddstothecostforconsumersandcanthreatensecurity.Forexample,the
AustralianEnergyRegulatorhasannouncedaninquiryintounusuallyhighpricesinSouth
AustraliaonTuesday18April,whenregulationancillaryservicesexceeded$5,000/MWhfor
32tradingintervals.17
IntheprevioussectionweflaggedthatnewtechnologiessuchasADRcanprovideancillary
servicesandshouldbeallowedtocompeteagainstincumbentstoprovidetheseintheNEM.
AustraliahasfallenbehindinthisregardalthoughtheSouthAustralianGovernmentflagged
initsenergyplanthatallnewutility-scalegeneratorswillberequiredtoprovideenergy
securityservices.18Forexample,in2005Québec'sgridoperatormandatedthatwindturbines
16
“AncillaryServices,”AustralianEnergyMarketOperator,accessedApril26,2017,
https://www.aemo.com.au/Electricity/National-Electricity-Market-NEM/Security-andreliability/Ancillary-services.
17
“AERtoReportonHighAncillaryServicesPricesinSouthAustralia,”AustralianEnergyRegulator,
April19,2017,https://www.aer.gov.au/communication/aer-to-report-on-high-ancillary-servicesprices-in-south-australia-0.
18
“OurEnergyPlan.”,p.4.
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hadtoprovidesyntheticfrequencyservices,tosupportsecurityandqualityofsupplyonthe
regionalgrid.19
Renewableenergyandbatterystoragecancompetewithincumbentgeneratorstoprovide
securityservices.WeencouragetheAEMCandCCAtoexploreinternationalbest-practicein
FCASregulation,tofindmarketmechanismsthatcanimprovesecuritybyencouraging
competitionagainstincumbenttechnologies,loweringcostsforconsumers.
Insummary,newtechnologyprovidespressureformarketreformandanopportunityto
deliverconsiderablebenefitsthroughmarketmechanismsalone,atnocosttogovernment.
WebelievethattheCCAandAEMCcandiscoverarangeofNEMrulechangesthatcan
simultaneouslysolveallthreeobjectivesintheenergytrilemma.Inparticular,theFive
MinuteRulecurrentlybeforetheAEMCshouldbesupportedbytheSpecialReview
Wewouldbehappytoexpandonthissubmissioninwritingorinperson.Pleasefeelfreeto
[email protected].
Yourssincerely
DanCass
Strategist
TheAustraliaInstitute
19
PeterFairley,“CanSyntheticInertiafromWindPowerStabilizeGrids?,”IEEESpectrum:Technology,
Engineering,andScienceNews,November7,2016,
http://spectrum.ieee.org/energywise/energy/renewables/can-synthetic-inertia-stabilize-power-grids.
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