Understanding the Reliability Obligation: Part 2 of the NEG Consultation

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We recently discussed the Energy Security Board’s (ESB) consultation on high-level design for the emissions obligation in the National Energy Guarantee (https://compliancequarter.com.au/information-national-energy-guarantee/). Today we look at the second component, the reliability obligation. That is, the obligation that market retailers (and perhaps other market customers or the AEMO) have to ensure that there is sufficient dispatchable energy available for reliable energy provision.

the Reliability Obligation
Photo by Gabriel Spenassatto on Unsplash
By Dr Drew Donnelly, Compliance Quarter.

Note, this is not a comprehensive summary of the consultation document and to see the full document and list of consultation questions go to;   http://www.coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/Energy%20Security%20Board%20National%20Energy%20Guarantee%20-Consultation%20Paper_0.pdf

1.How should the ‘reliability gap’ be forecast?

ESB asks how reliability pressures which would trigger the obligation might be forecast. The ESB proposes that the forecasting horizon be between 2-3 and 10 years. This would align forecasting for the reliability obligation with that currently used for medium-term projected assessment of system adequacy (MTPASA), currently a 2-year horizon and the Electricity Statement of Opportunities (ESoO), currently a 10-year horizon. The ESB asks whether either of the processes used for these current forecasts should be adapted for use for the reliability obligation or whether a bespoke process should be established. Other questions include how the consultation process on such a methodology should look operate and how often the forecasts should be updated.

2. What will count as qualifying Instruments for retailers?

In order to meet an identified reliability gap, retailers and other participants will need to know which instruments (such as contracts) “qualify” for meeting their share of the reliability obligation.
Retailers generally ‘hedge’ against fluctuations in the spot price for electricity using financial derivative contracts with generators. Usually, these contracts are ‘cash-settled’ meaning there is no obligation on the generator to actually produce energy. This raises the question, do such contracts need to be ‘certified’ as backed by a specific, physical, dispatchable energy source to qualify for meeting the reliability obligation?
Another way of meeting the reliability obligation would be for a retailer to physically own generation assets as part of an integrated retail and generation portfolio.

3. Who has the responsibility of meeting the gap?

The assumption so far is that retailers would be required to enter into contracts sufficient to meet any reliability gap. Any ‘over-achieving’ retailers could trade their excess dispatchable capacity to other ‘under-achievers’ in a secondary market. Another possibility would be for AEMO to manage the process more directly through a ‘book-build’, where generators offered dispatchable generation and retailers purchased it. The cost of the mechanism would be allocated to retailers relative to their participation in the process.

4. Should the requirement be expressed as a total or an increment?

The reliability gap could be expressed as a shortfall (e.g. 500 MW) or a total (e.g. 5,000 MW). Retailers would either need to meet collectively meet the shortfall, or the total amount.

5. Who is required to respond?

Should the reliability obligation be extended, not just to retailers who are market participants, but to ‘large energy users’ who are market customers in their own right? As these users are a significant source of demand on the National Energy Market, one might argue that they should also help meet the obligation. However, the ESB notes that there would also be considerable complexities, including compliance burdens in doing so.

6. What should the compliance framework look like?

The compliance framework could use either an ex-ante (where compliance is required before the forecast reliability gap) or an ex-post approach, or use a combination of both.

7. Should there be a ‘procurer of last resort’ and how would this work?

It is suggested that AEMO would be the procurer of last resort, if the reliability gap is not filled by retailers. The ESB asks if this should be the case and what should trigger this last resort function.

8. What should be the penalties for non-compliance?

ESB considers what the consequence should be for retailers who fail to meet the requirements of the reliability gap. Possibilities include civil penalties and allocation of the cost of centrally procuring resources to meet the shortfall (such as where AEMO is the procurer of last resort).

Consultation details

The ESB will hold a public forum and webinar on this consultation paper in Sydney on 26 February 2018. Information about how to register for this public forum and webinar is available on the COAG Energy Council’s website.
The ESB invites comments from interested parties in response to this initial consultation paper by 8 March 2018. All submissions will be published on the COAG Energy Council’s website, subject to any claims of confidentiality. All submissions should be sent to info@esb.org.au.

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