The proposed reforms to Standalone Power Systems (Micro-grids)

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The Australian Energy Market Commission (AEMC) recently released two reports about changes to the regulatory framework for Standalone Power Systems. The first report, Review of the Regulatory Frameworks for Stand-alone Power Systems – Priority 1 (the final report) is a finalised set of recommendations with respect to stand-alone power systems operated by Distribution Network Service Providers (DNSPs).

The second report is is a draft report Review of the Regulatory Frameworks for Stand-alone Power Systems – Priority 2 (the draft report). This concerns standalone power systems run by third parties.  Submissions on this report are due on August 8.  

In this article, we look at the implications of these changes for retailers and third parties that seek to operate a standalone power system.

You can read more about the changes at https://www.aemc.gov.au/market-reviews-advice/review-regulatory-frameworks-stand-alone-power-systems.

1.      What is a standalone power system?

A Standalone Power System (SAPS) is an electricity supply arrangement which is not physically connected to the gird. It includes:

  • Micro-grids. These arrangements supply multiple customers;
  • Individual power systems. These arrangements supply just one customer.

SAPS should be distinguished from:

  • Standard supply arrangements, where customers are supplied electricity via the interconnected grid;
  • Supply via an embedded network, where the network connected to the interconnected grid at the parent connection point or ‘gate meter’.

SAPS are often placed in remote communities, island resorts and remote mining towns. In SAPS,  power may be generated by renewable generation, energy storage, diesel generators or a combination of those methods.

2.      What is wrong with the existing framework?

DNSPs are responsible for ensuring that customers in their distribution region have reliable and safe access to the interconnected grid. In addition, the revenue of DNSPs is regulated, so the DNSPs need to ensure that electricity supply is planned in a cost-effective fashion. In many cases, supply via the interconnected grid is a very costly arrangement for customers at the ‘fringes’ of the grid.  Increased costs arise from:

  • Low population density. A significant portion of the costs of supplying in a given geographical area are fixed, so supply in those areas is comparatively expensive compared to built-up areas;
  • Managing bushfire risk. Remote areas of Australia often have an increased bushfire risk which means the ‘poles and wires’ of the distribution network are more expensive to manufacture in order to mitigate that risk;
  • Poor access. If there is a fault in a remote area it is more expensive for the DNSP to arrange for that fault to be fixed.

In light of the cost inefficiencies outlined above, DNSPs have been exploring increased supply via SAPS solutions (DNSP-led SAPS).  However, DNSPs who have sought to implement these solutions have faced a range of regulatory barriers.  Below we list the proposed changes and the regulatory barriers that they are a response to.

3.      The key changes in the final report

The proposed changes from the final report make a range of recommendations to allow for a smoother development of DNSP-led SAPS than is currently permitted. The key changes proposed are:

  • Altering the distribution planning and investment framework for DNSPs to permit switching customers to SAPS. Currently, the regulated planning and investment framework assumes provision via the interconnected grid;
  • Extending eligibility standards and other consumer protections required of DNSPs to SAPS. Currently, there is a regulatory gap for SAPS, where only electricity supply connected to the grid is subject to a range of reliability and safety standards;
  • Maintaining access to grid competition. Retail customers who are switched from supply via the interconnected grid to supply via SAPS should be supplied under conditions that emulate standard supply arrangements and leave those customers ‘no worse off’. Under current arrangements, customers switched to supply via SAPS would lose their access to their retailer of choice;
  • Ensuring full access to consumer protections under the National Energy Customer Framework. This includes billing requirements, minimum contractual entitlements, hardship and life support protections and so forth. Currently, the National Energy Retail Law does not apply these protections to customers that are not supplied via the interconnected grid.

4.      What this means for retailers

Retailers that purchase energy from the wholesale market (‘market retailers’) will be able to continue to supply energy to customers switched to DNSP-led SAPS supply and will be able to compete for other customers that have been switched to DNSP-led SAPS supply.

The AEMC recognises, however, that it would be inappropriate for the price of SAPS supply to be set by the spot price of the wholesale market, as the retailer would need to hedge against that price fluctuation. And because the SAPS supply is not produced by a registered generator connected to the grid, over time there would be insufficient physical generation to back those hedge contracts.

In light of this, AEMC proposes a separate ‘administered price’ which will be set by the Australian Energy Regulator in a form of price regulation. The market retailer will settle the energy delivered to SAPS customers with AEMO at the administered settlement price.

A new participant, a ‘SAPS generator’ will, in turn, receive an energy payment from Australian Energy Market Operator at the administered settlement price, together with a ‘make-whole payment’ from the DNSP.

5.      What does this mean for third parties who might want to provide SAPS Generation?

The SAPS reforms also provide opportunities for all those who may wish to set up SAPS. In many cases, the DNSP-led SAPS will have SAPS generation provided by an affiliate of the DNSP. However, there will still be opportunities for third parties to set up SAPS (such as microgrids) just as there is now. The AEMC is still consulting on these proposals. It proposes a high-level regulatory framework along the following lines:

  • Category 1: Very large microgrids, large enough to warrant regulatory determinations by the AER. These will have equivalent regulation to DNSP-led SAPS;
  • Category 2: Medium-sized micro-grids. These will be subject to jurisdictional licenses with risk-based conditions.  They will be subject to light-handed price regulation, such as oversight by the jurisdictional pricing body (e.g. Queensland Competition Authority or the NSW Independent Pricing and Regulatory Tribunal);
  • Category 3: Very small microgrids with a handful of customers, microgrids which only supply large customers, and an individual power system where there is a sale of energy. These will continue to be subject to state-based regulation as they currently are and stand outside the proposed new regulatory framework.

If you would like to submit on any matters contained in the draft report you have until 8 August to do so.

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