Australia - Retailer Reliability Obligation.

Legal News & Analysis - Asia Pacific - Australia - Energy & Project Finance - Regulatory & Compliance

7 June, 2019

 

The Australian Energy Market Operator (AEMO), the Australian Energy Regulator (AER) and the Council of Australian Governments (COAG) are running several concurrent processes with an aim of instituting the Retailer Reliability Obligation (Obligation) from 1 July 2019 onwards.
 
This summary provides a high level review of the main mechanisms to be implemented as well as the steps that still remain in order for the Obligation to be implemented fully at law.
 
Reliability
 
AEMO predicts generation shortfalls over the next 10 years which will affect the reliability of supply in the National Electricity Market (NEM).
 
To address this, the Energy Security Board (ESB) was tasked with creating a mechanism to assist in the maintenance of reliability1 in the NEM.
 
This resulted in the development of the Retailer Reliability Obligation (Obligation) which aims to ensure that there are no generation shortfalls in electricity supply in the long run - ensuring better consumer outcomes and a stronger, more reliable electricity system moving forward.
 
Policy Intention
 
The Obligation aims to "incentivise retailers, on behalf of their customers, to support the reliability of the power system through their contracting and investment decisions".2
 
It has been designed to align with the following seven step process:
 

 

Energy Security Board, Retailer Reliability Obligation Final Rules Package (3 May 2019) COAG Energy Council, 7 <http://www.coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/
documents/Retailer%20Reliability%20Obligation%20-%20Cover%20Paper_1.pdf

 
Mechanisms

 
Broadly, the policy intentions of the Obligation are to be met by implementing legislative mechanisms that:

a.   guide reliability forecasting;
 
b.   identify who a liable entity is;
 
c.   describe what a qualifying contract is;
 
d.   describe the operation and cost recovery mechanisms associated with AEMO's role as Procurer of Last Resort (PoLR) who will contract for electricity in the event of a reliability gap existing a year out from a forecast reliability gap; and
 
e.   establish market mechanisms to incentivise market liquidity.

 

National Electricity Legislation 

The National Electricity (South Australia) (Retailer Reliability Obligation) Amendment Act 2019 (SA) (NEL Amendment Act) was assented to on 23 May 2019 and is due to come into operation on a day to be fixed by proclamation.

The substantive amendments proposed relate to the AER's powers to enforce the Obligation and the broad details of the Obligation that need to be included in the National Electricity Rules (NER).

National Electricity Rules 

The ESB released its revised amendments to the NER relating to the Obligation on 7 May 2019. These amendments set out the bulk of the mechanics necessary to enact the Obligation and identifies the guidelines to be developed by AEMO and the AER to support the implementation of the Obligation going forward.

The changes are due to commence on 1 July 2019, with the exception of the PoLR regime which is due to commence on 26 March 2020 in line with the Reliability and Emergency Reserve Trader amendments.

Steps 1 and 2: AEMO forecasting and updates

The new rules outline the information that must be included in the Electricity Statement of Opportunities3 (ESOO) released by AEMO.4 This information includes:
 

a.   projections of aggregate MW demand and energy requirements for each region;
 
b.   capabilities of existing generating units and generating units for which formal commitments have been made for construction or installation;
 
c.   capabilities of proposed generating units for which formal commitments have not been made for construction or installation, to the extent it is reasonably practicable to do so;
 
d.   planned plant retirements (including expected closure years and closure dates for any generating units in the subsequent 10 year period);
 
e.   a summary of network capabilities and constraints based upon Transmission Annual Planning Reports;
 
f.   proposed network developments for which formal commitments have been made for construction or installation;
 
g.   proposed network developments for which formal commitments have not been made for construction or installation to the extent it is reasonably practicable to do so;
 
h.   the operational assumptions made by AEMO in relation to generating units and contracted demand side participation, including outage information and auxiliary supply information;
 
i.   operational and economic information about the market to assist planning by: (i) Scheduled Generators, Semi-Scheduled Generators and Market Participants; and (ii) potential Scheduled Generators, Semi-Scheduled Generators and Market Participants; and
 
j.   a reliability forecast for each region for the financial year in which the statement of opportunities is published on its website and the subsequent four financial years and an indicative reliability forecast for the remaining financial years.

 
The new rules:
 

a.   require AEMO to release reliability forecasts for a 10 year period, the last 5 years of which will only be indicative in nature; and
 
b.   allow AEMO to update reliability forecasts (out of its regular annual cycle) if there are material changes in some of the assumptions made in the ESOO.

 
Relevant to registered participants will be the ability for AEMO to request information that it reasonably requires for the preparation of an ESOO. This is a broad provision that is only limited by the Reliability Forecast Guidelines, that are yet to be finalised.

The method adopted by AEMO in relation to forecasting will be guided by the AER's Forecasting Best Practice Guideline (or Interim Forecasting Best Practice Guidelines5) and the Reliability Forecasting Guidelines. However, the broad framework of the guidelines require any forecast to include:
 

a.   AEMO's unserved energy forecast and whether or not there is a forecast reliability gap;
 
b.   if there is a forecast reliability gap:
 
    i. the expected unserved energy for the forecast reliability gap period;
 
    ii. the size of the forecast reliability gap (in MW);
 
    iii. the forecast reliability gap period; and
 
c.   if there is a forecast reliability gap in a reliability forecast, the trading intervals during the forecast reliability gap period in which the forecast unserved energy observed during the forecast reliability gap is likely to occur.​6

 

 
Step 3 - Triggers (T-1 and T-3)

AEMO will request that the AER releases a reliability instrument if it forecasts that there will be a material departure from the reliability standards in three years (T-3), triggering the Market Liquidity Obligation, discussed below.7

AEMO may once again request that the AER publish a reliability instrument one year out from a forecast material gap (T-1) if an expected material reliability gap remains, requiring entities to disclose their net contracting positions (discussed below).

The AER is entitled to reject an AEMO request and not publish a reliability instrument if it is not satisfied that a forecast reliability gap (Reliability Gap) will occur in the region identified by AEMO.

COAG has confirmed through new rule 4A.A.2 that a material Reliability Gap exists if the reliability forecast exceeds the reliability standard.

Step 4 - Liable Entities and Opt-in

Liable entities will be required to comply with the Obligation, if triggered

liable entity8 is:
 

 

a.   Market Customer for a connection point in that region (provided there aren't any opt-in customers for the connection point);
 
b.   a large opt-in customer;
 
c.   a prescribed opt-in customerand
 
d.   a new entrant.9

 
Opt-in regime
 

The Obligation provides for certain:
 

a.   prescribed opt-in customers (with annual peak demand for a connection point equal to or greater than 30MW and with a percentage of the annual peak demand being equal to or greater than 5MW);10 and
 
b.   large customers (with consumption levels in excess of 50GWh per annum),11

 
to manage their own reliability requirements instead of a retailer/market customer as these customers may be able to manage the obligation (as it relates to their load) more efficiently than their retailers.

To manage their own reliability requirements, entities must apply to the AER and seek approval for a connection point. 

Step 5: How does a liable entity respond to the Trigger?

If the AER makes a T-1 Reliability Instrument for a region, then liable entities must provide the AER with a report about their net contract position for the stated trading intervals during the Reliability Gap period.12

What constitutes a Qualifying Contract?

Under the proposed amendments to the NEL, qualifying contracts must be:
 

a.   directly related to the purchase or sale, or price for the purchase or sale, of electricity from the wholesale exchange during the stated period; and
 
b.   entered into voluntarily by the liable entity to manage its exposure in relation to the volatility of the spot price.

 
The proposed NEL amendments facilitate the NER dictating other forms of qualifying contracts. At this point in time, no additional criteria has been provided for in the NER.
 
That being said, a further enabling mechanism has been included in the NER that allows the AER to decide what is a qualifying contract through the Contracts and Firmness Guideline being developed by the AER ('firmness' is discussed below).
 
The only limitation on the types of contracts that the AER may prescribe in the Contracts and Firmness Guideline, is that the qualifying contracts must relate to the:
 

a.   supply of energy that may be dispatched; or
 
b.   reduction of the demand of energy that may be activated,
 

as required to meet energy requirements in the relevant regions.13
 
At this point in time, the ESB has decided to step away from the concept of "dispatchable" energy, instead opting for an approach that is more technology agnostic. The AER is due to release its final Contracts and Firmness Guideline on 31 December 2020.

Grandfathering14

We note that contracts for large customers (market customers, or large customers that have opted-in) in place prior to 10 August 2018 will be grandfathered and deemed to be qualifying contracts with a firmness factor of 1. Extensions of these contracts will result in this benefit being lost. If a contract does not contain a set expiry date, it will be grandfathered until 1 July 2023.

Contracts entered into prior to 13 December 1998 will be deemed as qualifying contract and granted a firmness factor of 1 until they expire or until 1 July 2023 if there is no set expiry date after which they will remain qualifying contracts but instead have firmness factors set in accordance with the Contracts and Firmness Guideline and rules.

These rules do not apply to self-generation or self-curtailment contracts.

Step 6 - What obligations do liable entities have under the regime?

A liable entity must ensure its net contract position submitted to the AER equates to the liable entity's share in the one-in-two year peak demand forecast for the relevant trading interval in which a material Reliability Gap exists.15

What is a net contract position and how does firmness affect it?

The net contract position for an entity is calculated by adjusting the megawatts of electricity under a liable entity's qualifying contracts by:
 

a.   a firmness factor to be determined by the AER in accordance with the Contracts and Firmness Guideline; or
 
b.   any further adjustments required to be made in accordance with the Contracts and Firmness Guideline.16


What is a firmness factor?

Firmness factors are, for the most part, to be determined by the AER in accordance with the Contracts and Firmness Guideline. However, a mechanism has also been included in the proposed rules to allow liable entities to calculate a firmness methodology for non-standard qualifying contracts approved by an Independent Auditor.

The AER, in determining firmness factors for common qualifying contracts, must have regard to firmness principles which are as follows:
 

a.   that the megawatts the subject of a qualifying contract are to be attributed with a firmness factor between zero and one;
 
b.   that the firmness factor when applied to a qualifying contract will take into account:
 
    i. the degree to which the price terms of the qualifying contract reduces the liable entity's exposure to the volatility of spot prices during the gap trading intervals;
 
    ii. the variability and profile of the volume settled or supplied under the qualifying contract;
 
    iii. the likelihood of the qualifying contract providing cover to the liable entity during the gap trading intervals (including the extent to which that contract endures for the Reliability Gap period)
 
    iv. any other contractual terms which limit the cover under the contract or otherwise reduce the incentive for the counterparty to the qualifying contract to cover its contract position during the gap trading intervals; and
 
    v. any other matters specified in the Contracts and Firmness Guideline.

 

Step 7 - What happens if all else fails? (PoLR)

If there is a gap at T-1 (as calculated after each liable entity has disclosed their net contract position), then AEMO will step in as the PoLR, procuring the relevant energy as necessary to fill the reliability gap.17

The costs associated with the PoLR regime will be payable by liable entities by reference to:

 

a.   the costs associated with a liable entity's share in the one-in-two year peak demand forecast for the period in which the PoLR regime was enacted; and
 
b.   the extent to which liable entities have covered their liability under their reported net contract positions.

 
Liability for the PoLR costs associated with non-compliance are capped at $100 million.

Enabling market mechanisms - Voluntary Book Build

A voluntary book build must be operated by AEMO if a T-3 Reliability Instrument is issued, and may be operated by AEMO if a T-2 Reliability Instrument is issued.

Enabling market mechanisms - Market Liquidity Obligation

Two distinct groups of entities will be obligated to comply with the Market Liquidity Obligations during a T-3 and T-1 Reliability instrument, these being (for a region, in a quarter):

 

a.   (MLO Generators) a Market Generator where a parcel of its traced capacity is allocated to an MLO group for a region in a quarter;18 and
 
b.   (MLO Group) a trading group in relation to which its trading group capacity at the end of the two preceding quarters exceeds on average, 15% of the average aggregate of the average trading group capacity of all trading groups in the relevant region, at the end of the two preceding quarters.19

 
Compliance requires these obligated entities to simultaneously buy and sell on an MLO Exchange (being a trading facility approved by the AER), MLO products relating to the entirety of the relevant forecast Reliability Gap period, such that, in the trading period, an aggregate quantity of MLO products (equal to or greater than the minimum block) are either:

a.   accepted via the MLO Exchange; or
 
b.   available on the MLO Exchange for at least 25 minutes.

 
Obligated entities must perform these requirements for at least the target trading period, which in respect of a month in which a T-3 reliability instrument is active means:

 

a.   the number of trading periods occurring in that month during which the relevant MLO Exchange is open for trading, less 10; and
 
b.   where a liquidity period starts or ends during that month, the number of trading periods referred to above as proportionately reduced in accordance with the Market Liquidity Obligation Guidelines to be determined by the AER on 31 December 2020.20

 
MLO Product
 
An MLO Product (published on an AER register) is an electricity derivative21 (or other instrument approved by the AER) that:

 

a.   relates to electrical energy bought and sold in the region in which the forecast Reliability Gap has been identified;
 
b.   is monthly or quarterly, provided the contract period covers all of the trading intervals identified in the relevant forecast Reliability Gap period, in that month or quarter;
 
c.   has a maximum contract unit of 1 MWh;
 
d.   has a contract price in AUD per MWh; and
 
e.   is for an identical contract unit in each trading interval.22

​ 
Timelines for moving pieces:

 
AER      
       
Document Consultation 
close on interim guideline
Interim guideline published Final publication date
Reliability Instrument Guideline 24 April 2019 31 July 2019 31 July 2020
Market Liquidity Obligation Guideline 10 May 2019 31 August 2019 31 December 2020
Contracts and Firmness Guideline23 19 June 2019 31 August 2019 31 December 2020
Forecasting Best Practice Guideline24 19 June 2019 30 September 2019 30 November 2020
Opt-in Guideline Late 2019 / early 2020 TBC No interim arrangements 30 June 2020
Reliability Compliance Procedures and Guideline Mid 2020 No interim arrangements 31 December 2020
        
        
AEMO
 
     
Document Consultation 
close
Final publication
date
 
Reliability
Forecasting
Guidelines
22 May 2019 To be confirmed

 

Baker McKenzie

 

For further information, please contact: 

 

Paul Curnow, Partner, Baker & McKenzie

paul.curnow@bakermckenzie.com

 

 

1 Maintaining reliability in this context of the NEM means ensuring that the power system has enough generation, demand response and network capacity to supply customers with the energy that they demand.
2 Energy Security Board, Retailer Reliability Obligation Final Rules Package (3 May 2019) COAG Energy Council, 7 <http://www.coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/Retailer%20Reliability%20Obligation%20-%20Cover%20Paper_1.pdf>
3 The annual ESOO provides technical and market data that informs decision-making processes of market participants, new investors, and jurisdictional bodies as they assess opportunities in the NEM over a 10 year outlook period.
4 Proposed Rule 3.13.3A NER.
5 Proposed Rule 11.116.3 NER.
6 Proposed Rule 4A.B.2 NER; NEL Amendment Act cl 14I.
7 NEL Amendment Act cl 14G(1).
8 Proposed Rule 4 A.D.2.
9 Proposed Rule 4 A.D.3.
10 Proposed Rule 4 A.D.6 NER.
11 Proposed Rule 4 A.D.4 NER..
12 NEL Amendment Act cl 14P.

13 Proposed Rule 4A.E.1(b) NER.
14 Proposed Rule 11.116.8.
15 NEL Amendment Act cl 14R; Proposed Rule 4.A.A.3 NER.
16 Proposed Rule 4A.E.2 NER.
17 Proposed Rule 4A.F.2 NER.
18 Proposed Rule 4A.G.11 NER.
19 Proposed Rule 4A.G.10 NER.
20 Proposed Rule 4A.G.18(c) NER.
21 Within the meaning given to that word in the Corporations Act 2001 (Cth).
22 Proposed Rule 4A.G.23 NER.
23 A draft interim Contracts and Firmness Guideline was released for consultation by the AER on 23 May 2019 and can be accessed here.
24 A draft interim Forecasting Best Practice Guideline was released for consultation by the AER on 23 May 2019 and can be accessed here.