On 12 November 2021, consultation quietly closed on the NSW Government’s Network Infrastructure Projects (Part 5 of the Electricity Infrastructure Investment Act 2020) Policy Paper. An uninspiring name for what may contain solutions to some of the biggest problems which have bedeviled the roll-out of large-scale renewables and the transmission infrastructure required to connect it for over a decade.
There is a ‘chicken and egg’ problem whereby new electricity grid infrastructure including transmission lines, and new electricity generation projects both need certainty of each other before investments can be made. New transmission lines are only viable if new generation projects are guaranteed to connect and without new transmission projects, new renewable energy generators cannot get their power to market. This problem has stymied the roll-out of new renewable energy generation projects, which would otherwise have been able to contribute to decarbonising our electricity grid and reducing wholesale electricity costs.
Regulators have been attempting to solve this problem for the last decade. The first reforms proposed to address this problem were the Optional Firm Access reforms proposed by the Australian Energy Market Commission (AEMC) around ten years ago. These reforms would have made generators pay for guaranteed access to transmission system capacity. However, existing generators would have largely received their access for free, while new entrants, including new wind and solar farms, would need to pay for their access. This proposed reform was very unpopular and was ultimately shelved.
In more recent years we have had the AEMC’s Coordination of Generation and Transmission Investment (COGATI) reform package which proposed the introduction of locational marginal pricing (LMP). Under LMP, electricity supply is priced based on local supply and demand conditions. Large-scale generators and storage would receive a spot price that would vary with their location. In essence, generators would be encouraged by pricing mechanisms to locate in areas of the network that are not congested. Critics of the LMP proposal, including the Clean Energy Council and the Clean Energy Investor Group, have argued that this proposed reform does not address the fundamental issue, which is the need for new transmission capacity.
Earlier this year the Energy Security Board proposed another mechanism to financially incentivise generators on where to locate - a congestion management model (CMM) involving congestion charges and congestion rebates. Last Thursday the AEMC outlined a scope of work and a year-long forward project plan for the proposed CMM. The CMM seems to continue along with the philosophy of LMP. The Clean Energy Council has claimed that the reform could significantly increase investment uncertainty for new wind and solar projects – while not incentivising investments in new transmission infrastructure that could alleviate the congestion issues.
Stepping around these processes, the NSW Government’s Network Policy Paper proposes an alternative approach, creating a central planning role for the NSW Infrastructure Planner, which will be EnergyCo.
In the past, state governments were responsible for planning new transmission infrastructure. With privatisation, and under the national regulatory arrangements administered by the AEMC, there has been an increasing focus on market-based measures incentivising generation companies to locate in certain areas, instead of a more traditional centralised planning approach.
A ‘back to the future’ centralised planning approach which involves Government planning new transmission infrastructure and directing where new generation projects should locate makes sense, especially in the contest of building Renewable Energy Zones (REZs). Given the scale of transformation and the speed at which it is required in NSW, the creation of a new central planner, EnergyCo, is eminently sensible.
There are three proposed new roles:
- The Infrastructure Planner, EnergyCo, will design and assess options and make recommendations to the Consumer Trustee about REZ network infrastructure projects.
- The Consumer Trustee will undertake energy market forecasting and publish a Development Pathway; authorise or recommend the Minister to direct a network operator to carry out a REZ network infrastructure project.
- The Regulator, the recently appointed Australian Energy Regulator, will calculate the “prudent, efficient and reasonable capital costs” for REZ network infrastructure projects, and determine a cost allowance for a network operator.
This definition is broader than the “efficient costs” as described in the National Electricity Objective (NEO). This will allow the NSW Regulator to consider important matters which are currently excluded from the national regulatory system, “including environmental externalities, fostering local community support, financing arrangements and other factors”.
In our recent report, Building Trust for Transmission, we highlighted the critical role of addressing local needs and desires in transmission planning and approval processes, so we are pleased to see that the NSW regulatory test will have the flexibility to consider measures to foster local community support, such as increased payments for hosting transmission towers.
This Policy Paper proposes solutions to three of the more difficult problems facing the energy market, and the communities hosting transmission infrastructure:
- reform of the National Electricity Objective to include externalities such as climate change;
- allowing additional expenditure for landholder payments for those hosting transmission infrastructure; and
- ensuring that transmission projects are built when required, through a contestable process, while simultaneously running tenders for new generation capacity which will connect to the new transmission infrastructure.
It is fantastic to see NSW adopting this approach, it will be great to see how it progresses in the rollout of the REZs.