Post 2025 Market Design Consultation Paper

ENERGY SECURITY BOARDPost 2025 Market DesignConsultation PaperSeptember 20201

Dr Kerry Schott AOIndependent ChairEnergy Security BoardDavid SwiftIndependent Deputy ChairEnergy Security BoardClare SavageChairAustralian Energy RegulatorMerryn YorkChair (Acting)Australian Energy Market CommissionAudrey ZibelmanCEO and Managing DirectorAustralian Energy Market Operator2

CONTENTSCONTENTS . 3EXECUTIVE SUMMARY . 71.2.3.4.5.6.7.INTRODUCTION. 131.1.Background . 131.2.Consultation and submissions . 14THE EXISTING NEM DESIGN AND ITS CHALLENGES . 152.1.Meeting consumer needs . 162.2.Managing variability and uncertainty . 182.3.Need for capital replacement . 192.4.Need to value demand flexibility and integrate DER . 22MARKET DESIGN INITIATIVES . 263.1.Development of market design initiatives . 263.2.Transition period . 273.3.Relationship to other initiatives . 28RESOURCE ADEQUACY MECHANISMS – MARKET DESIGN INITIATIVE A. 294.1.What is the problem this initiative is addressing? . 294.2.What are the options considered? . 364.3.Which options are proposed for further development and consideration? . 444.4.Questions for consultation . 46AGEING THERMAL GENERATION STRATEGY – MARKET DESIGN INITIATIVE B . 475.1.What is the problem this initiative is addressing? . 475.2.What are the options for addressing these risks? . 545.3.What are we proposing to do next? . 585.4.Questions for stakeholders . 58ESSENTIAL SYSTEM SERVICES – MARKET DESIGN INITIATIVE C . 596.1.What is the problem this initiative is addressing? . 596.2.What are the options considered? . 606.3.Which options are proposed for further development and consideration? . 716.4.Regulatory framework changes . 726.5.Questions for stakeholders . 73SCHEDULING AND AHEAD MECHANISMS – MARKET DESIGN INITIATIVE D . 747.1.What is the problem this initiative is addressing? . 747.2.What are the options considered? . 793

8.9.7.3.Which options are proposed for further development and consideration? . 847.4.Questions for stakeholders . 85TWO-SIDED MARKETS – MARKET DESIGN INITIATIVE E . 868.1.What is the problem this initiative is addressing? . 868.2.What are the options considered? . 888.3.Questions for stakeholders . 95VALUING DEMAND FLEXIBILITY AND INTEGRATING DER – MARKET DESIGNINITIATIVE F . 969.1.What is the problem this initiative is addressing? . 969.2.What are the options considered? . 989.3.Which options are proposed for further development and consideration? . 1079.4.Questions for stakeholders . 10710. TRANSMISSION ACCESS AND THE COORDINATION OF GENERATION ANDTRANSMISSION – MARKET DESIGN INITIATIVE G. 10810.1.What is the problem this initiative is addressing? . 10810.2.What are the options considered? . 11210.3.Questions for stakeholders . 11511. OVERALL MARKET DESIGN – INTERDEPENDENCIES AND EVALUATION. 11611.1.Interdependencies between initiatives. 11611.2.Evaluation approach . 11712. ENGAGEMENT WITH STAKEHOLDERS . 11912.1.Consultation process and submissions . 120Appendix – Evaluation framework . 121Appendix – Summary of Questions for stakeholders . 125TablesTable 1Table 2Table 3Table 4Table 5Table 6Table 7Post-2025 market design initiatives . 26Factors that can deter investment . 32Operating reserve mechanism. 39Initial consideration of residual risks . 57Ahead mechanism design options. 80Stage One – workstream level assessment criteria . 122Stage Two – reform-wide assessment principles. 1234

FiguresFigure 1Figure 2Figure 3Figure 4Figure 5Figure 6Figure 7Figure 8Figure 9Figure 10Figure 11Figure 12Figure 13Figure 14Figure 15Figure 16Figure 17Figure 18Figure 19Figure 20Figure 21Figure 22Figure 23Figure 24Figure 25Figure 26Figure 27Figure 28Figure 29Figure 30Figure 31Figure 32Figure 33Figure 34Figure 35Figure 36Figure 37Phased market development – a representative example . 11Post-2025 program key deliverables . 14ECA Energy Consumer Sentiment Survey – 'How confident are you that the overallmarket is working in your long-term interests’ (% scoring 7 or higher out of 10). 16Penetration of variable renewable energy resources is increasing . 18Instantaneous penetration of wind and solar generation, actual in 2019 and forecastfor 2025 under ISP Central and Step Change generation build scenarios . 19Thermal synchronous generation exiting the NEM . 20Installed wind and solar capacity in the NEM for 2019, with 2025 and 2040 forecastsfrom final 2020 ISP Central and Step Change generation build scenarios . 21Poll of leading debt and equity investors in Australia regarding the challenges facinginvestors in large-scale renewable energy . 22Effect on South Australian operational demand from increasing distributed PVgeneration (10 November 2019) . 23Minimum operational demand projections for South Australia . 24Coal-fired and gas-powered generation retirements . 49Impacts on price and reliability with different numbers of units exiting – stylisedexample . 51Wholesale prices following the exit of Hazelwood Power Station. 52New generation and storage technologies reduce price cycles . 53Relevant reliability measures in the sudden exit scenario . 55procurement options for Essential System Services (with identification of currentprovision mechanisms for services in bold) . 61An illustrative demand curve for an essential system service . 63Initial assessment of market design characteristics of Operating Reserves . 64Percentage of dispatch intervals during which Contingency FCAS prices exceeded 25/MWh, September 2019 to June 2020 . 65Initial assessment of the market design characteristics of frequency control . 67Initial assessment of the market design characteristics of inertia . 68Initial assessment of market design characteristics of system strength . 70A possible roadmap of procurement and scheduling options for essential systemservices . 72Possible checks and balances of regulatory oversight, allowing regulatoryadaptability .73Actual less Residual Demand forecasts (MW) approaching real time for Victoria(2011-20) . 77Actual less Forecast Prices ( MWh) approaching real time for Victoria (2011-20) . 77The Current Directions process and UCS . 81NEM-wide demand by time of day 2019-20 . 87NEM-wide price by time of day (weighted by demand) 2019-20 . 87benefits of participation from price elastic demand and supply . 90Small scale solar installations by size in kW since Jan 2007 . 97Solar PV and battery storage forecast . 98Overview of DER interactions and supporting architecture along the supply chain . 102Installed capacity by year (ISP central scenario) . 109Instances of congestion in the NEM 2013-19. 111Phased market development . 117Overview of Post-2025 program evaluation framework . 1215

LIST OF CMT PASANEMNEONSPPSSASPVRAMsRERTRIT-TRoCoFRROST PASATOUTNSPUCSVPPVREWDRMAustralian Competition and Consumer CommissionAustralian Energy CouncilAustralian Energy Market CommissionAustralian Energy Market OperatorAustralian Energy RegulatorAustralian Renewable Energy Agencycommercial and industrialCouncil of Australian GovernmentsCommonwealth Scientific and Industrial Research OrganisationDistributed Energy Integration Programdistributed energy resourcesEnergy Adequacy Assessment ProjectionEnergy Consumers AustraliaEnergy Networks AustraliaEnergy Security BoardEssential System ServicesElectricity Statement of Opportunitieselectric vehiclefrequency control ancillary servicesfast frequency responseGigawattinverter based resourcesIntegrated System PlanMarket Design Initiativemarginal loss factorMarket Price CapMedium Term Projected Assessment of System AdequacyNational Electricity MarketNational Electricity ObjectiveNetwork Service ProviderPower System Security Ancillary ServicesPhotovoltaicResource Adequacy MechanismsReliability and Emergency Reserve TraderRegulatory Investment Test – Transmissionrate of change of frequencyRetailer Reliability ObligationShort Term Projected Assessment of System AdequacyTime of UseTransmission Network Service ProviderUnit Commitment for SecurityVirtual Power Plantvariable renewable energyWholesale demand response mechanism6

EXECUTIVE SUMMARYWhy the market design needs to changeThe energy system is changing. New technology and digitalisation are providing new choices andopportunities to customers. At the same time, the rapid uptake of Variable Renewable Energy(VRE) and Distributed Energy Resources (DER) is well underway and the existing ageing thermalgeneration fleet is progressively retiring. The National Electricity Market (NEM) of the future isvery different to that of the past.Similar changes are occurring in many electricity markets across the world. But the rapid paceof change occurring in Australia and the adoption of distributed (rooftop) solar photovoltaic (PV)systems is remarkable. At least 2.2 million households now have solar PV on their rooftops, upfrom 100,000 a decade ago. This means the changes to the NEM design are likely to be amongthe first in the world to meet these needs.All the changes occurring mean that the current set of systems, tools, market arrangements andregulatory frameworks is no longer entirely fit for purpose and able to meet the changing needs ofthe system and customers. To address these matters, the Energy Security Board (ESB) is taskedby the former COAG Energy Council to develop a market design for the NEM that delivers secureand reliable power at least cost to consumers, and accommodates the changes underway andexpected in the future. This paper sets out for consultation a number of potential solutions toidentified problems and opportunities.Overview of workstreams within Post-2025 market design programTo deliver future market designs, the ESB set up seven workstreams to consider the issues anddevelop potential solutions. The initial work has been done by the market bodies the AustralianEnergy Market Commission (AEMC), Australian Energy Market Operator (AEMO) and AustralianEnergy Regulator (AER) working together with ESB staff. Industry and consumer groups andother stakeholders have been involved and consulted along the way. The outputs from each ofthe individual workstreams have inter-relationships and need to be considered together for acoherent whole design.The seven workstreams are: Resource adequacy mechanisms (RAMs). Ageing thermal generation strategy. Essential system services. Scheduling and ahead mechanisms. Two sided markets. Valuing demand flexibility and integrating DER. Transmission access and the coordination of generation and transmission investment.Resource adequacy mechanisms (RAMs)While the system requirements change over the next 10-15 years, the issue is whether existingmechanisms are sufficient to support the needs of the system, or whether other complementarymeasures are needed. In particular, are existing mechanisms sufficient to support the requirednew investments?7