Independent review into the future security of the NEM

Summary of the Independent review into the future security of the NEM The Finkel Review March 2017 Summary of Preliminary Report released December 2016

The national reform blueprint will outline national policy, legislative, governance and rule changes required to maintain the security, reliability, affordability and sustainability of the national electricity market. The review will be led by the Chief Scientist, Dr Alan Finkel AO. COAG Energy Council The time for incremental change has passed. The reforms likely to come from the Finkel Review will change the nature of electricity and gas provision in Australia for decades to come. Now more than ever utilities need to plan for change or risk being left behind. Simon Vardy & Simon Mezger Accenture Utilities Strategy Preliminary Report released December 2016 Submissions received ~400 Final report due mid year 2017 2

7 THEMES & 11 SUPPORTING QUESTIONSWERE COVERED IN THE PRELIMINARY REPORT IN RELATION TO THE DESIGN OF A NEW ENERGY SECTOR 1. How do we ensure the NEM can take advantage of new technologies and business models? 2. How do we ensure the NEM meets the needs of all consumers, including residential, large-scale industrial and vulnerable consumers? 1) Technology is transforming the electricity sector 2) Consumers are driving change 3) The transition to a low emissions economy is underway 4) Integration of variable renewable electricity 5) Market design to support security and reliability 6) Prices have risen substantially 7) Energy market governance is critical 3. What role should the electricity sector play in meeting Australia s emissions reduction targets? 4. What are the barriers to investment in the electricity sector? 5. What immediate actions can we take to reduce risks to grid security and reliability? 6. Is there a role for technologies at consumers premises in improving energy security and reliability? 7. What role is there for new planning and technical frameworks to complement current market operations? 8. How can markets help support additional system security services? 9. How can we improve the supply of gas for electricity generation to contribute to reliability and security? 10. How can we ensure that competitive retail markets are effective and consumers are paying no more than necessary for electricity? 11. What are the optimal governance structures to support system security, the integration of energy and emissions reduction policy, and affordable electricity? 3

EXECUTIVE SUMMARY Emergence of DER gives more choice and control, but suboptimal technology integration pose a threat to grid security and energy affordability Cost-benefit analysis to identify optimal solutions for grid security: synchronous condensers, synthetic inertia, power conversion systems Correct price signals and regulatory arrangements for efficient uptake of new technologies Big data analytics to facilitate unprecedented levels of DER integration Sensor and advanced energy management technologies to enable micro-grid platforms The Goal: Smooth integration of low emissions technologies into existing markets and frameworks, while maintaining power reliability and affordability Smarter demand management, and right prices and incentives are imperative to ensuring participation of a heterogeneous consumer base Granular real-time data collection about demand and impact of DER for more informed planning and systems operations Assessment of regulatory frameworks in context of DER, demand patterns, and consumer protection Investment in smart grid technologies: digital metering, communication services, technology enabled data management Low emissions economy requires integrated energy and emissions polices to build investor confidence, and maintain affordability and reliability Formulation of integrated emissions and energy policies to stimulate the necessary long-term investments in generation and network assets Looking beyond Renewable Energy to achieve emissions target: Fuel switching from coal-fired to gas-fired generators Switching from existing transport, heating and industrial fuels to grid-based electricity Closure of coal-fired generators and their replacement with wind and solar generators pose threat to grid security Technical solutions to increase grid security implemented through a mix of market mechanisms and regulatory requirements Formulation of adequate connection standards for VRE generators encouraging power conversion electronics in control circuits Formal national framework to collect information on DER to enhance AEMO s ability to balance instantaneous demand and supply VRE generators inability to provide ancillary services will cause demand of such services to rise substantially Technical solutions to increase grid security implemented through a mix of market mechanisms and regulatory requirements Formulation of adequate connection standards for VRE generators encouraging power conversion electronics in control circuits Formal national framework to collect information on DER to enhance AEMO s ability to balance instantaneous demand and supply Wholesale prices expected to rise in the next three years: driven by generator closures, gas supply constraints and international parity gas prices Opt-out cost reflective pricing strategy to drive down peak demand: critical to avoid network driven price rises Real-time data for operators and businesses to make informed decisions to support electricity supply and security: minimise impact on electricity prices Strategic policy leadership is urgently required to resolve the tensions that currently exist between energy and emissions reduction policies Review governance and regulation of other markets to formulate NEM s governance arrangement to support whole-of-system advice and planning Assess the availability of sufficient outcome statistics for regulators and policy makers to monitor the performance of the system 4

1) TECHNOLOGY IS TRANSFORMING THE ELECTRICITY SECTOR Emergence of distributed energy resources (DER) has given consumers more product choice and control, but suboptimal technology integration into existing markets and regulatory arrangements could lead to adverse outcomes Trends Evidence / Examples* Implications Opportunities LOW EMISSIONS ELECTRICITY GENERATION THREAT TO GRID SECURITY Transition towards low emissions forms of electricity generation: wind and solar PV Fall in the costs of wind turbines, and both rooftop and utility-scale solar panels DISTRIBUTED ENERGY RESOURCES (DER) Declining battery costs: 40%-60% by 2035 Third party aggregators providing advanced energy management solutions Increasingly attractive offerings from electric car manufacturers 1.5 million rooftop solar PV systems installed to date in Australia: 16% penetration (higher than most countries) Renewable Energy Target requires 6,000 MW of new renewable power stations to be built by 2020 (75% wind and 25% solar) Wind turbine costs fell from 2.5M (1984) to 0.2M (2014) EUR/MW 50% of Australia s annual electricity consumption to be provided by DER by 2050 1.1 million battery storage systems to be installed in households across NEM by 2020 1.5 million electric vehicles in the NEM by 2030:10% of all vehicles in Australia (0.2% current) Integrating two way DERs to one way network pose threat to grid security INCREASED ENERGY COSTS Risk of increased costs to consumers due to suboptimal DER integration NEW ENTRANTS AND PRODUCTS Rise of third party aggregators and energy management solutions Cost-benefit analysis to identify optimal solutions for grid security: synchronous condensers, synthetic inertia, power conversion systems (nonexhaustive) Right price signals and regulatory arrangements for efficient uptake of new technologies Big data analytics to facilitate unprecedented levels of DER integration Sensor and advanced energy management technologies to enable micro-grid platforms 5

2) CONSUMERS ARE DRIVING THE CHANGE Active role of consumers is imperative to the future security and affordability of the power system, but this requires smarter demand management and right prices and incentives for a heterogeneous consumer base Trends Evidence / Examples* Implications Opportunities LOW EMISSIONS ELECTRICITY GENERATION UPGRADE COSTS BEARED BY CONSUMERS Flexible consumer demand can help achieve security and reliability benefits: rather than adding more supply, actively manage demand Energy productivity measures help optimise security, reliability, affordability and emissions reduction DISTRIBUTED ENERGY RESOURCES (DER) Vulnerable consumers with a limited ability to pay large up-front costs are at an increased risk of getting left behind and incurring increased costs to subsidise more affluent users Large industrial users face a more comprehensive set of price signals: given its scale, responsive demand management can be effective in balancing peaks Consumers shifting demand from peak to off-peak periods could help save direct costs and defer network upgrades that add costs to all consumers Australian Government and the COAG Energy Council targets a 40% improvement in energy productivity by 2030 Consumers who rent properties or live in apartments are limited in their ability to install DER technology Limited English language skills or poor financial literacy might make it harder to engage in a market that offers increasingly complex choices Adding more supply, rather than actively managing demand, could add constant network upgrade costs beared by all consumers VULNERABLE CONSUMERS Consumers lacking resources to invest and passive consumers not engaged in managing their demand would be impacted the most SUBOPTIMAL INVESTMENTS Suboptimal incentives would foster inefficient investment by consumers and networks resulting in consumers disconnecting from the grid Granular real-time data collection about demand and impact of DER for more informed system operation Investment in smart grid technologies: digital metering, communication services, technology enabled data management Assessment of regulatory frameworks in context of DER, demand patterns, and consumer protection 6

3) THE TRANSITION TO A LOW EMISSIONS ECONOMY IS UNDERWAY A smooth transition to lower emissions economy requires policy stability to build investor confidence, and integrated energy and emissions policies to avoid regulatory and technical blind spots Trends Evidence / Examples* Implications Opportunities MEETING EMISSIONS REDUCTION TARGETS Current policy settings not aligned with Australia s commitments under the Paris Agreement to reduce emissions by 26-28% below 2005 levels by 2030 PREDICTABILITY AND POLICY STABILITY Due to policy instability, investment in electricity sector has stalled and made investors less responsive to investment signals Long-term nature of electricity sector investments demands strong long-term policy signals Safeguard Mechanism policy sets sector s baseline at 198 million tonnes of CO2-e: well above the current level of 178 million tonnes Renewable Energy Target policy not designed to increase renewable generation beyond 2020 Investment in renewable energy dropped by 52% between 2013 and 2014 and has not yet recovered to satisfy Renewable Energy Target LGC spot price $89/MW hour over Oct 2016: higher than what s required to make renewable generation competitive INTEGRATING ENERGY AND EMISSIONS REDUCTION POLICIES Ensuring security and affordability requires energy system to be able to adapt to technology and demand/supply changes stimulated by emissions reduction policies Emissions Intensity Scheme best integrated with the current framework - lowest impact on economic costs, prices and system security This scheme also forecasts gas fired generation increasing to 30% of the mix by 2030 INVESTMENT UNCERTAINITY Policy instability creates uncertainty around which generation and network assets investors should invest or divest posing risk to security and reliability DECREASED ENERGY AFFORDABILITY If renewable energy investment targets are not met on time, high LGC prices will ultimately lead to higher electricity prices for consumers Some retailers will fail to acquire sufficient LGCs and will pay shortfall charge consumers would bear costs of energy not generated Formulating integrated emissions and energy policies to stimulate the necessary long-term investments in generation and network assets Looking beyond Renewable Energy to achieve emissions target: Fuel switching from coal-fired to gas-fired generators Switching from existing transport, heating and industrial fuels to gridbased electricity 7

4) INTEGRATION OF VARIABLE RENEWABLE ELECTRICITY The closure of coal-fired generators and their replacement with wind and solar PV generators pose technical implications: frequency control, reduced system strength, and inadequate DER visibility Trends Evidence / Examples* Implications Opportunities DECLINE OF TRADITIONAL GENERATION CREATES TECHNICAL CHALLENGES Synchronous generators are increasingly displaced by nonsynchronous ones, challenging the fundamental operational characteristics of the power system Gas-fired generators can help address technical challenges, but there has been a reduction in gas-fired generation capacity Nine coal-fired power stations have closed since FY2012, representing 3,600 MW of installed capacity 1,600 MW Hazelwood Power Station in Victoria will close by 31 March 2017 Operational parameters, especially frequency, are being controlled within narrow ranges to avoid major disruptions INTERCONNECTION: GETTING THE BALANCE RIGHT Increasing penetration of wind and solar PV generators creates a need to develop new processes for integrating them into the NEM, along with any other future sources of VRE or related technology With growing VRE generation, it may be necessary to invest in new and upgraded interconnectors Lack of formal national framework to collect data on increasing DER VRE generators lack spinning inertia and the ability to contribute to medium and longterm frequency control, reactive power control, system voltage control, and system restart Recent analysis of interconnector solutions in South Australia found some proposed solutions to be effective, but they are expensive and have long lead times CHANGE IN OPERATIONAL PARAMETERS Operational parameters such as system inertia, transient security, fault levels, load and generation balance reactive power balance, frequency and system voltage need to be controlled within narrower ranges Higher rates of frequency changes caused by VRE are challenging the effectiveness of existing frequency control mechanisms Frequency control ancillary services inherent to traditional generators will need to be acquired from other sources: wind turbines fitted with inertia controllers INNACURATE FORECASTS Inaccurate forecasts due to inadequate DER visibility compromise AEMO s ability to balance instantaneous and medium term supply and demand expected to be even more challenging with the installation of energy storage Formulate adequate connection standards for VRE generators encouraging power conversion electronics in control circuits Technical solutions to increase grid security implemented through a mix of market mechanisms and regulatory requirements Formal national framework to collect information on DER (location, controller settings, real-time energy statistics) 8

5) MARKET DESIGN TO SUPPORT SECURITY AND RELIABILITY Wind and solar generators inability to provide ancillary services inherent to thermal generators will cause investment incentives and value of these services to rise to ensure power system security Trends Evidence / Examples* Implications Opportunities SECURITY OF SUPPLY VALUE OF ANCILLARY SERVICES THREAT TO SYSTEM SECURITY The need to integrate large volumes of VRE generation has stimulated discussion about whether the ancillary services are appropriately valued With penetration of VRE generators increasing and synchronous generators exiting, availability of ancillary services ensuring system security has decreased market to the NEM LIQUIDITY IN ELECTRICITY FINANCIAL MARKETS With thermal generation exiting the market, liquidity in the contract market has become a problem - participants are less keen to enter long term contracts for electricity generation that is variable The total value of ancillary services purchased in the NEM was $112 million, being 1.4% of the $8.3 billion traded on the NEM The total value of Frequency Control Ancillary Services has risen from $30M in 2010 to $63.2M in 2015 AGL has submitted a change request to the AEMC to introduce an Inertia Ancillary Services South Australian industrial consumers have reported that retailers are not offering them supply contracts - consistent with a lack of liquidity in contract markets making it difficult for retailers to manage their risks VRE generators inability to provide ancillary services, and misaligned investment incentives for such services pose threat to power system security and reliability HIGH DEMAND FOR ANCIALLARY SERVICES Decreasing ancillary services availability will significantly increase their value over time and encourage creation of an ancillary services market LIMITED SUPPLY CONTRACTS Fewer long-term contracts for VRE generation - upward pressure on the overall cost of electricity or limited availability of retail offers Reformulation of market mechanisms to incentivise investment in ancillary services: ensure system security as the power generation becomes increasingly variable Promote liquidity by ensuring the availability of longer-term products to support hedging of risk exposure to large changes to prices 9

6) PRICES HAVE RISEN SUBSTANTIALLY Prices are expected to rise in the next three years because of increases in the wholesale prices, which are driven by generator closures, gas supply constraints and international parity gas prices Trends Evidence / Examples* Implications Opportunities WHOLE SALE ELECTRICITY COSTS Increases in residential electricity prices likely to be driven by an increase in the wholesale prices, which have been suppressed by excess supply Rising gas prices, driven by tight supply and international price parity, affect wholesale electricity prices NETWORK CHARGES Increased network charges main driver of electricity price rises: increase was required to replace aging assets, meet stricter reliability standards, augment the grid to cope with forecast increases in peak demand, and also due to industry inefficiencies and flaws in the regulatory environment Cost reflective pricing has been proposed as an efficient method for reducing peak demand Retirement of two large coal-fired generators: Northern in South Australia in May 2016, and Hazelwood in Victoria in March 2017 Australia s east coast gas market, previously quarantined from international markets, has transformed into a major liquefied natural gas export industry with prices dependent upon international oil prices. Network charges accounted for 43% of residential electricity prices in FY2015 (network charges: 7% and distribution network charges: 36% AER estimated network operating revenues over the five-year regulatory cycle (2008 to 2012) at $60B a 30% increase over previous cycle The AEMC has estimated that cost reflective pricing will result in up to 80% of consumers having lower network charges in the medium term HIGH RETAIL PRICES Increased wholesale prices due to the generator retirements, higher gas and network charges will inevitably result in higher retail prices for consumers OPT-IN COST REFLECTIVE PRICING Analysis by Energeia estimates economic benefits of $1.8 B by moving to an opt-out basis from 2021, with a reduction in network bills of 9.6% by 2026 compared to opt-in approach TRANSPARENCY Increased NEM transparency will help businesses make informed decisions that will support security of electricity supply and minimise the impact on electricity prices Opt-out cost reflective pricing strategy to drive down peak demand: critical to avoid network driven price rises Promote greater transparency within NEM: real-time generator and fuel supply data for operators, and market supply and demand data for businesses 10

7) ENERGY MARKET GOVERNANCE IS CRITICAL Strategic policy leadership is urgently required to resolve the tensions that currently exist between energy and emissions reduction policies Trends Evidence / Examples* Implications Opportunities WHOLE-OF-SYSTEM PERSPECTIVES INVESTMENT UNCERTAINITY Strategic policy leadership is urgently required to resolve the tensions between energy and emissions reduction policies, and for the better integration of renewables Governance body needs to find ways of achieving a comprehensive understanding of challenges facing the sector by maximising insights across all bodies ACHIEVING A NATIONAL APPROACH Variations in the application of national laws to address specific state conditions make it difficult to achieve a national approach to energy policy Currently there is no mechanism to ensure that emissions reduction and energy market policies operate together Market institutions work closely on cross-cutting issues and advise energy ministers on their respective areas - division of responsibilities means no single entity provides a whole-ofsystem perspective Incentives in the national Renewable Energy Target combined with feed-in tariffs introduced by states and territories drove a boom in small-scale solar installations and subsequent collapse in the certificate price due to oversupply - created uncertainty in the industry and forced urgent policy changes to correct the imbalance Differing and inconsistent approaches to renewable energy can act as a barrier to the integration of new technologies and amplify investment uncertainty LACK OF CROSS CUTTING INSIGHTS Division of responsibilities between rule-maker, operator and regulator has a sound rationale, but makes it difficult to achieve a comprehensive understanding of issues facing the sector by maximising insights across these bodies Review governance and regulation of other markets to formulate NEM s governance arrangement to support whole-of-system advice and planning Assess the availability of sufficient outcome statistics for regulators and policy makers to monitor the performance of the system 11

Further information For more information please contact: Simon Vardy Managing Director Accenture Strategy, Australia & New Zealand +61 405 182 051 Simon Mezger Managing Director Accenture Strategy, Australia & New Zealand +61 412 116 398 About Accenture Accenture is a leading global professional services company, providing a broad range of services and solutions in strategy, consulting, digital, technology and operations. Combining unmatched experience and specialized skills across more than 40 industries and all business functions underpinned by the world s largest delivery network Accenture works at the intersection of business and technology to help clients improve their performance and create sustainable value for their stakeholders. With approximately 401,000 people serving clients in more than 120 countries, Accenture drives innovation to improve the way the world works and lives. Visit us at www.accenture.com. Accenture Strategy Accenture Strategy helps leading organisations shape and drive their plans for growth and innovation, competitiveness, new operating models, talent and leadership, and digital transformation. Accenture Strategy integrates business, technology and function strategies to improve agility and deliver tangible outcomes. Visit our site to learn more about Accenture Strategy: accenture.com.au/strategy Disclaimer This document and the information contained herein are proprietary to Accenture. This document is prepared for the Australian Utilities Industry only. This document, either in whole or in part, may not be reproduced, distributed, transmitted in any form, or by any means without Accenture s prior written permission. This document provides no warranties with respect to the offerings described within. Accenture, its logo, and High Performance Delivered are trademarks of Accenture. Any thirdparty names, trademarks and copyrights contained in this document are the property of their respective owners, and the use of such trademarks is not an assertion of ownership of such trademarks by Accenture and is not intended to represent or imply the existence of an association between Accenture and the lawful owners of such trademarks.