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ENERGY SECURITY BOARD INTERIM RELIABILITY RESERVE

Response to submissions on Consultation Draft Interim Reliability

Measure Rule July 2020

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Contents 1. Introduction ........................................................................................................ 3 2. Summary of issues raised in submissions and ESB’s response ................... 4

2.1 Process undertaken by the ESB in recommending Interim Measures ......... 4 2.2 Impact on affordability/prices from the Interim Reliability Reserve .............. 5 2.3 Changes to the reliability standard .............................................................. 6 2.4 Modelling of costs and benefits of the Interim Reliability Reserve ............... 6 2.5 The role for out of market resources ........................................................... 8 2.6 The role for multi-year contracting ............................................................ 10 2.7 Interim Reliability Reserve interaction with other reforms .......................... 12 2.8 Operation of the Interim Reserve .............................................................. 14 2.9 Transparency of the Interim Reserve Costs .............................................. 15 2.10 Interaction between RRO and Interim Reserve ......................................... 16 2.11 Other interim reliability reserve issues ...................................................... 17

C Abbreviations and Technical Terms .................................................................. 18

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1. Introduction

The Energy Security Board (ESB) has developed a set of changes to the National Electricity Rules (Rules) to implement the temporary out-of-market capacity reserve agreed to by Ministers at the March 2020 COAG Energy Council Meeting. On the 12th May 2020 the ESB published draft Interim Reliability Measure Rules for consultation.1 The ESB received non-confidential submissions from sixteen organisations, including from regulators, industry groups, generators and customer groups:

• Generators/retailers: AGL, CS Energy, EnergyAustralia, Engie, Ergon Energy QLD, ERM, Hydro Tasmania, Infigen, Origin Energy, Snowy Hydro, Stanwell

• Industry bodies: Australian Energy Council • Consumer groups: Australian Aluminium Council, Major Energy Users, Energy

Users Association of Australia, QLD Electricity Users Network. • Regulators: ACCC

The submissions are published on the ESB’s website.2 They are summarised, together with the ESB’s response, in Chapter 2. The ESB, AEMC, AER and AEMO have subsequently worked together to consider issues raised in submissions and develop a set of recommended Rules to be submitted to Energy Ministers.

1 Energy Security Board, Consultation on the Draft National Electricity Amendment (Interim Reliability Measure)

Rule 2020, May 2020. Available at: http://www.coagenergycouncil.gov.au/publications/consultation-draft-national-electricity-amendment-interim-reliability-measure-rule-2020.

2 See above.

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2. Summary of issues raised in submissions and ESB’s response

2.1 Process undertaken by the ESB in recommending Interim Measures

Respondents Comments ESB response

AGL, CS Energy, EUAA, MEU, Origin Energy Stanwell, QEUN

Consultation on the Interim Reliability Reserve was not best practice, lacked public consultation prior to the decision to proceed with the Reserve and Interim Reliability Measure, and the ability to critique the ESB’s modelling and conclusions.

The implementation of the Interim Reliability Reserve undermines a number of recent processes focused on energy reliability and security in which consultation was broad and transparent.

The QLD Electricity Users Network requests a list of stakeholder engagement that was undertaken in preparing the response to COAG Energy Council.

In undertaking the review between November 2019 and March 2020, the ESB drew on the feedback from other recent reviews conducted by the AEMC and AER. The ESB also undertook informal consultation with a range of key stakeholders including the following organisations, the Australian Energy Council, the Clean Energy Council, the Energy Users Association of Australia, Grattan Institute, the Public Interest Advocacy Centre.

The proposed rule changes are intended to be an interim solution that targets resources that are not generally incentivised to participate in the market (ie respond to five-minute prices). This interim solution is proposed to be in place while the ESB and Market Bodies continue to work on longer term arrangements to improve reliability and security in a more enduring way. This will be developed and implemented as a part of the Post 25 Work Program (eg Two Sided Markets; resource adequacy mechanisms)

The Interim Reliability Reserve is intended to address the recent increased use of the Reliability and Emergency Reserve Trader mechanism in some regions. The Interim Reliability Reserve should allow AEMO to increase the pool of resources available for out of market reserves and put downward pressure on the cost of procuring these reserves when needed.

Jurisdictional oversight will continue to play an important role in ensuring that the risk of unnecessary amounts of emergency reserves being procured is minimised.

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2.2 Impact on affordability/prices from the Interim Reliability Reserve

ACCC, MEU, ERM Concerned that these reliability measures will impose additional costs on consumers, particularly small consumers.

Any marginal change in unserved energy from improved reliability in the wholesale market will make little difference to how consumers see reliability, yet the proposed change will significantly increase the costs they see.

The costs to consumers for the dispatching of RERT during summer of 2019/20 were higher than the market price cap and so if the new reliability levels had applied for summer 2019/20 then the process would have led to consumers paying more than was necessary.

The Interim Reliability Measure Rule is not one reform but three, all attempting to solve the same issue. ERM Power questions the need to adopt all of these arrangements at once, potentially increasing costs for consumers at a time when many households and businesses are facing serious financial and social pressures as a result of the COVID-19 pandemic.

The Interim Reliability Reserve is intended to address concerns about the increased reliability risk following the retirement of a number of baseload generators (including the Hazelwood, Northern, Munmorah, Wallerawang and Anglesea power stations) and the subsequent increased use of the Reliability and Emergency Reserve Trader mechanism in some regions of the NEM.

Analysis undertaken by ACIL Allen for the ESB indicates that a jurisdiction that just meets the current 0.002% standard could expect load shedding one in every three years on average – absent an intervention mechanism such as the RERT.

The volume of reserves activated over recent years reflects the operational requirements and actual lack of reserve conditions at the time.

The Interim Reliability Measure will not necessarily result in an increase in the amount of reserves activated and could reduce the total cost to consumers of the reserves that are activated relative to what would have been procured through short and medium notice RERT.

The Interim Reliability Reserve should allow AEMO to increase the pool of resources available for out of market reserves, putting downward pressure on the cost of procuring these reserves when needed.

AEMO will need to consider the relative total costs to consumers and will be subject to comprehensive reporting requirements. Jurisdictional oversight will continue to play an important role in ensuring that the risk of unnecessary amounts (and costs) of emergency reserves being procured is minimised.

The ESB will shortly issue a consultation paper on the changes required to be made to the Retailer Reliability Obligation (RRO), in which it will discuss the concerns about the interactions between the Interim Reliability Reserve and the RRO.

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2.3 Changes to the reliability standard

Respondents Comments ESB response

AEC, CS Energy, EUAA, MEU, Origin Energy, Stanwell

Several stakeholders questioned the 1 in 10-year standard and its alignment with community expectations.

The decision to increase the standard is also inconsistent with the findings of other recent reviews in this area.

ACIL Allen undertook analysis that underpinned the ESB’s recommendations to COAG Energy Council. Their analysis found that the current reliability standard may not represent the most economically efficient trade-off between the cost incurred during load shedding and the cost of resources that would prevent load shedding (where Reliability and Reserve Emergency Trader (RERT) offers were used as the best available indicator of the cost of demand response and certain assumptions about the Value of Customer Reliability). The analysis provides support for an interim tighter standard under certain scenarios, including when there is sufficient demand response at a cost that is lower than the cost of load shedding. An interim out of market solution was chosen by the ESB as this approach would allow for greater visibility and understanding of the availability and cost of demand side resources in the NEM.

2.4 Modelling of costs and benefits of the Interim Reliability Reserve

Respondents Comments ESB response

ACCC, ERM The modelling results for NSW show that the costs of meeting the interim reliability standard in NSW are higher than the benefits.

In the case of the Residential Only scenario, the benefit-cost analysis showed that the costs exceeded the benefits of targeting 0.0006% USE in the NSW simulation. However, the supply of demand side was relatively limited in this scenario (an arbitrary decision to use existing AEMO contracted levels). In the Reference case (higher value for VCR) and in the two scenarios where the availability of demand side was doubled (Expanded RERT), the benefits of targeting a USE of 0.0006% exceeded the costs. There is nothing to suggest that the existing volume of RERT contracts contracted by AEMO exhausts the supply of demand side in the NEM. The analysis shows that the with realistic volumes of demand side (evidenced by AEMO’s ability to contract under the RERT), the benefits of a USE target between 0.0005 and 0.001% of USE exceeds the costs.

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AEC, ERM, MEU ACIL Allen’s modelling fails to consider the classes of customer most likely to be subject to involuntary load shedding.

The Value of Customer Reliability indicates on average what customers would be prepared to pay for lower levels of all supply interruptions, which tends to be heavily influenced by recent events in their respective distribution system, forty-one percent of respondents to the AER’s process indicated a willingness to pay of zero.

ACIL Allen ran two types of customer analysis – all excluding agriculture and only residential customers (having the lowest USE over the 1-3 hour outage period considered). They analysed the outages using the granular VCR values that underpin the AER’s headline ‘anytime’ values, which are very averaged. The ACIL Allen analysis using VCR for residential only customers (lowest average VCR value) supports a USE target of between 0.0005% and 0.001%, especially where higher demand side participation is available.

ACIL Allen recognises that using average VCR values for consumers has limitations. Ideally, the market price cap would be raised to the point where individual customers responded based on their own circumstances. However, in the current environment, it is a reasonable approach considering that the market operates over a shared network.

Willingness to pay surveys have inherent limitations as they require respondents to provide a response and these responses can be swayed by a variety of influences, including recent experience. It might be argued that customers with recent experience are more likely to provide an accurate assessment of their willingness to pay. Similarly, it is not unusual that customers with little or no disruption experience, should report a willingness to pay of zero (why pay for something that in their mind they already have).

ERM The closer the unserved energy forecasts are to meeting the interim reliability standard, the less expensive it will be for reserve contracts to bring reliability back to within the interim standard, therefore the ACIL Allen modelling approach is unstable.

The statement that the closer unserved energy forecasts are to meeting the interim reliability standard, the less expensive it will be for reserve contracts to bring reliability back to within the interim standard, is true in the following sense:

• The lower the demand, the less supply needed to meet that demand

• Supply meeting the lower demand would be the lowest cost (assuming a competitive market)

• The resulting market clearing price will be lower

• Supply meeting demand will be less expensive where there is less demand to meet

It is also true that the greater the volume of demand side available, the less expensive it will be to meet the interim standard. ACIL Allen developed four

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scenarios to provide a range of outcomes. The results were consistent and there is no indication of instability.

ERM The 2019 ESOO forecast does not include the supply provided by the South Australian emergency diesel generators which have been transferred to market participants and will be bid in using the normal market process in the future.

The existence or otherwise of the reserve generators in South Australia has no effect on the broader analysis. The analysis used the AEMO ESOO data to construct realistic USE data sets as an input to the analysis. Incorporating additional supply and removing USE from the data sets would have been counter to the purpose of undertaking modelling with significant volumes of USE.

ERM, CS Energy The modelling does not provide an adequate assessment of costs and benefits, in large due to the use of ESOO 2023-24 projections

Undertaking modelling on the costs and benefits to support the COAG Energy Council decision was generic and time independent. It was not designed to find the cost of meeting a particular standard in a particular region in 2023-24 (the data set used in the modelling). The purpose of using the 2023-24 data set was to easily extract realistic half hourly outage sequences for the analysis. 2023-24 was the year modelled in the 2019 ESOO that had the highest USE numbers. ACIL Allen used this year as it provided the richest data set to develop a series of simulations based on the three states that provided significant levels of USE.

2.5 The role for out of market resources

Respondents Comments ESB response

Infigen Given that the Market Price Cap is less than the average value of customer reliability, procuring demand response through the RERT therefore may allow for (arguably) more orderly load shedding, without needing to increase the Market Price Cap for all participants.

The Interim Reliability Reserve is an interim measure designed to be a last resort mechanism, intended to avoid distortions to the market and minimise the cost of procuring out of market resources. The framework builds on the current Victorian jurisdictional derogation for RERT Contracting.

The framework will allow AEMO to procure reserves if the ESOO (or any update) forecasts that the Interim Reliability Measure will be exceeded. AEMO will be allowed to enter multi year reserve contracts for up to three years if the Interim Reliability Measure is exceeded for at least two years including the first financial year.

The proposed rule changes are intended to target resources that are not generally incentivised to participate in the market (ie respond to five-

Hydro Tasmania In response to the previous Enhancement to the RERT rule change in 2018, Hydro Tasmania presented a set of guiding principles:

1. a last-resort response to maintain reliability;

2. designed to ensure efficient market responses, and avoid crowding out investment;

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3. activated rarely;

4. offered by truly additional capacity only (must be ‘out of market’ reserves);

5. transparent in nature (with a clearly understood process for procurement, enactment and timely publication of RERT outcomes); and

6. administered at the lowest-possible cost.

Hydro Tasmania consider that the above guiding principles will most likely be met under the proposed rule change.

minute prices) and ultimately lower the cost of procuring out of market resources.

This interim solution is proposed to be in place while the ESB and Market Bodies continue to work on longer term arrangements to improve reliability and security in a more enduring way. This will be developed and implemented as a part of the Post 25 Work Program (eg Two Sided Markets; resource adequacy mechanisms)

AEMO will also need to consider the relative costs to consumers, including whether a single year contract is more cost effective than a multi-year contract (see below), and will be subject to comprehensive reporting requirements that will support an AEMC review that is required to be undertaken by July 2023.

AEMO will also need to request single year as well as multi-year contracts. Based on a suggestion by stakeholders (eg AGL), this will minimise distortions to the wholesale market as it will encourage demand response providers to consider becoming participants in the wholesale market where possible, including through the new in-market demand response mechanism.

Jurisdictional oversight will continue to play an important role in ensuring that the risk of unnecessary amounts of emergency reserves being procured is minimised.

Snowy Hydro The Reliability and Emergency Reserve Trader (RERT), the current out of market reserve, is a function conferred on AEMO to maintain power system reliability and system security using reserve contracts. RERT in the Short-Notice or Medium-Notice RERT are currently appropriate tools which allows AEMO to purchase reserves 7 days and 10 weeks respectively from the anticipated shortfall, providing an appropriate trade-off for maintaining sufficient levels of unserved energy in the NEM. There is a recognition that there is a trade-off with cost per unit of the Short-Notice RERT and Medium-Notice RERT being more expensive than a multi-year out of market capacity reserve.

The out of market capacity reserve mechanism is instead non market based and suffers a complete lack of transparency in both the tendering phase and also the cost of using the service, which is ultimately borne by customers. The existing market design can be relied upon to support reliability in the long-term with the NEM.

AGL Considers that there may be some benefits of multi-year contracting such as creating a greater pool of potential suppliers with more diverse system capabilities, along with potentially lower cost solutions when the contract is required for multiple years.

However, these benefits need to be considered in the context of the impacts multi-year RERT contracting may also pose to the market, and ultimately to customers through possible impacts on other market participants and wholesale markets. These risks must be carefully managed, particularly measures to prevent over procurement of

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emergency reserves, avoiding indirect costs such as market inefficiencies, and preserving the RRO framework.

Stanwell

There should be an expectation that out-of-market resources be made in-market resources where feasible. This will reduce the distortions of out-of-market procurement on the energy market.

Out-of-market procurement has the potential to cause distortions in the energy market, including the withdrawal of generation capacity from the market, dampen investment signals in capacity to participate in the market, inefficient risk allocation, and unpredictable reliability reserve costs

EUAA The EUAA has also consistently argued in favour of in-market measures to achieve the reliability standard as an over reliance on out-of-market measures can lead to unnecessary costs for consumers from unnecessary or inefficient procurement of RERT.

ERM A tighter reliability standard with an unchanged MPC and the potential for out-of-market contracts of three years will possibly drive any new supply to the RERT rather than moving into the market. This is likely to distort the market as new entrants may try to strike a RERT contract with AEMO rather than participate in the market and unscheduled reserves (like demand response) could prefer to wait to strike a contract with AEMO than to commit to participating in the market.

The proposed approach contains no change to the reliability settings. It is therefore unclear how any new capacity would be expected to make a return in the market and instead, potential new suppliers may be incentivised to stay out of the market in the hope of striking a multi-year contract with AEMO. As this capacity remains “off-market”, this would also increase wholesale market prices above that which would have otherwise occurred, further increasing costs to consumers.

2.6 The role for multi-year contracting

Respondents Comments ESB response

Infigen While RERT is a valuable tool, we consider that in-market mechanisms should be pursued where possible, such as Infigen’s proposed Operating Reserves framework. Infigen is concerned that procuring RERT resources for multiple years risks drawing valuable

ACIL Allen undertook analysis that underpinned the ESB’s recommendations to COAG Energy Council. Their analysis found that the current reliability standard may not represent the most economically efficient trade-off between the cost incurred during load shedding and the cost of resources that would

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demand response resources out of the market. This prevents their use in delivering lower-cost retail contracts.

We recommend that AEMO should only procure RERT to the extent level needed to meet the agreed standard in the upcoming year, with those contracts extended for multiple years only if AEMO has a high degree of confidence it will be required and AEMO can demonstrate that expected costs will be lower to consumers relative to sequential contracts.

prevent load shedding (where Reliability and Reserve Emergency Trader (RERT) offers were used as the best available indicator of the cost of demand response and certain assumptions about the Value of Customer Reliability). The analysis provides support for an interim tighter standard under certain scenarios, including when there is sufficient demand response at a cost that is lower than the cost of load shedding. An interim out of market solution was chosen by the ESB as this approach would allow for greater visibility and understanding of the availability and cost of demand side resources in the NEM.The Interim Reliability Reserve is an interim measure designed to be a last resort mechanism, intended to avoid distortions to the market and minimise the cost of procuring out of market resources. The framework builds on the current Victorian jurisdictional derogation for RERT Contracting.

The proposed solution has been put in place to take care of immediate reliability concerns. This interim arrangement will cease in March 2025. The proposed solution builds on interim arrangements in place for Victoria but can now apply to other regions. This interim arrangement, along with the RRO,will be reviewed by the AEMC in 2023. At the same time, the ESB and Market Bodies are currently working on longer term arrangements to improve reliability and security in a more enduring way. This will be developed and implemented as a part of the Post 25 Work Program (eg Two Sided Markets; resource adequacy mechanisms).

The maximum period AEMO will be allowed to enter a multi-year reserve contract for the Interim Reliability Reserve is three years, and this will only be permitted when there is forecast Interim Reliability Exceedance in at least two of the three years including in the first year. As noted above, where AEMO is considering entering into a multi-year reserve contract, AEMO must have regard to whether it is a more cost-effective option, compared to procuring single year contracts over the same period. To enable this comparison, AEMO must request from providers in its tender process single year and multi-year bids.

For multi-year contracts, the maximum volume that can be procured by AEMO in any financial year in any region to meet the Interim Reliability Measure shall be:

Aluminium Council The Council has concerns that Contract terms of up to three years, proposed in the Paper, are still only short term in the context of the investment cycle for aluminium smelters, so do not fundamentally offer a change to a smelters long term strategy. Also, three years does not provide a sufficient time horizon for investment which would allow smelters to enhance their capability to provide additional services to the market.

Hydro Tasmania It is integral that longer-term contracting for RERT is only undertaken if clear and enduring reliability gaps are identified. The paper suggests longer-term contracting should occur where there is capacity shortfall two years out of the three years. We consider this appropriate.

Snowy Hydro A multi-year out of market capacity reserve is fundamentally contrary to the design of the NEM. Any out of market capacity reserve should be intended as a last resort mechanism, to deal with instances of genuine market failure, and should be rarely used. Snowy Hydro therefore strongly oppose the contract terms of up to 3 years. There is only one market in the NEM and all regulatory settings should be calibrated to incentivise participation in the market.

ERM By tightening the reliability standard, the volume of any RERT procured is also likely to be higher than it would have been under the existing reliability standard. This means that any potential efficiencies from multi-year contracts may be lost by the higher volumes of reserves needed in order to meet the interim reliability standard.

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Origin Energy Origin agrees AEMO should only be permitted to enter into multi-year contracts of up to three years in length where: the forecast level of unserved energy exceeds 0.0006 per cent for two out of the three years; and the multi-year contract is more cost effective than entering into shorter duration contracts covering the same period.

- on an annual basis, no more than is reasonably necessary to address the largest Interim Reliability Exceedance identified during the period for which the contract would apply, and

- with respect to the total amount of reserve procured over the contract term, no more than reasonably necessary to secure reliability of supply in the relevant region.

AGL Considers that there may be some benefits of multi-year contracting such as creating a greater pool of potential suppliers with more diverse system capabilities, along with potentially lower cost solutions when the contract is required for multiple years.

However, these benefits need to be considered in the context of the impacts multi-year RERT contracting may also pose to the market, and ultimately to customers through possible impacts on other market participants and wholesale markets.

2.7 Interim Reliability Reserve interaction with other reforms

Respondents Comments ESB response

Infigen

Facilitating an active two-sided market, where both supply and demand participate in price setting, will allow for more efficient outcomes and contribute towards the National Energy Objectives.

The ESB should fast track the Two-Sided Market workstream, which should reduce the need for RERT interventions and may also avoid the need for the proposed Demand Response Mechanism (avoiding the need for centrally determined baselines, and providing options for residential consumers currently excluded under that scheme).

The proposed rule changes are intended to be an interim solution that targets resources that are not generally incentivised to participate in the market (ie respond to five-minute prices). This interim solution Is proposed to be in place while the ESB and Market Bodies continue to work on longer term arrangements to improve reliability and security in a more enduring way. This will be developed and implemented as a part of the Post 25 Work Program (eg Two Sided Markets; resource adequacy mechanisms)

Aluminium Council The proposed mechanism will only be triggered if the Electricity Statement of Opportunities (ESOO), indicates a requirement for at least two of the following three years including the summer of 2020-2021. At this stage, forecasts indicate that it does not appear likely to be triggered, reducing the bankability of this mechanism. Smelters seeking to recontract are facing difficult decisions, especially under current economic conditions. The Council believes the ESB should consider how it can expedite these Interim Reliability Reserve Rules to increase certainty in the bankability of this mechanism.

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Ergon Energy We note that the proposed interim reliability reserve does not appear to impose extra risks on the wholesale market or retailers, except where contracted plant is dispatched in competition with the energy only market requiring intervention pricing. Ergon Energy Retail expects that investors in peaking plant or demand response that is currently out-of-market will seek reserve contracts from AEMO rather than compete in the wholesale market where the MPC is too low to provide a sufficient return for higher-cost peaking plant. This could entrench the need for the ‘interim’ reliability reserve and lock the NEM into two markets - an energy only market and a reserve capacity contract market. Should this occur, Ergon Energy Retail is concerned how this scenario will be resolved in the ESB’s post 2025 market design.

Hydro Tasmania The RERT interacts with the market broadly and impacts on incentives/signals for investment in future capacity/storage and resources. The ESB should continue to be clear on the intent of the RERT and ensure it does not distort other market processes or negatively impact on future market design choices being considered in the post 2025 work.

Snowy Hydro The ESB should consider the recommendations from their consulting report if there are any changes to the reliability standard through the post 2025 market design. The ACIL Allen Consulting report notes that if there is a need for a tighter reliability standard through the current NEM market arrangements then this can be achieved through changes to the market settings. This approach as the paper notes is the “most economically efficient approach as it allows the market to naturally clear based on price”

Origin Energy The operation of the mechanism and AEMO’s reserve procurement activities should be reviewed by 1 July 2023 as proposed, with a view to sunsetting the mechanism at that time. This would be consistent with the view that the Interim Reliability Measure is intended to be temporary, noting further consideration is being given to the need for other more enduring reforms to the NEM framework under the ESB’s Post-2025 work program.

CS Energy There is a risk that this mechanism will crowd out any potential demand response participation in the Wholesale Demand Response

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Mechanism, a mechanism that has a material cost associated with its implementation next year.

It is unclear how this mandate of increased community appetite will align with the ESB’s longer-term market reform program and whether it will allow potential new frameworks to be considered appropriately. For example, there is an apparent conflict with the two-sided markets design initiative which seeks to explore a desire for consumers to opt for lower reliability.

2.8 Operation of the Interim Reserve

Respondents Comments ESB response

AEC Supports obligation on AEMO to have regard to whether total payments are likely to be lower than a number of shorter-term reserve contracts.

Latitude for reserve contracts to address an interim reliability exceedance across multiple regions.

Suggested Drafting Changes - Proposes to limit the volume procured by AEMO to no more than necessary for each year.

Disagrees with Clause 3.20.6(d)(4) not being applicable and believes it should remain or be incorporated in 11.xxx5(d)

The maximum period AEMO will be allowed to enter a multi-year reserve contract for the Interim Reliability Reserve is three years, and this will only be permitted when there is forecast Interim Reliability Exceedance in at least two of the three years including in the first year. As noted above, where AEMO is considering entering into a multi-year reserve contract, AEMO must have regard to whether it is a more cost-effective option, compared to procuring single year contracts over the same period.

For multi-year contracts, the maximum volume that can be procured by AEMO in any financial year in any region to meet the Interim Reliability Measure shall be:

- on an annual basis, no more than is reasonably necessary to address the largest Interim Reliability Exceedance identified during the period for which the contract would apply, and

- with respect to the total amount of reserve procured over the contract term, no more than reasonably necessary to secure reliability of supply in the relevant region.

AEMO will need to consider the relative total costs to consumers and will be subject to comprehensive reporting requirements. The final rule requires AEMO to request single year reserve contract bids (where it also requests

Stanwell Further consideration should be given to whether interim reliability reserve costs could be reduced by procuring multi-region reserve contracts that simultaneously address interim reliability exceedances across multiple regions, with costs shared appropriately across regions on a user-pays basis.

Origin Energy Origin considers Clause 11.xxx.4(i) should be strengthened by specifying that procurement volumes associated with a given contract (single or multi-year) should be capped at the level reasonably required to address an interim reliability exceedance, having regard to any other reserve contracts entered into over the same period.

AGL In addition to the requirement that a multi-year contract can only be entered if that would be more cost effective than entering successive single year contracts, we suggest that AEMO should only enter into a multi-year contract with a provider when there is a

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material saving in costs compared to a shorter contract with that provider.

multi-year bids) that should support AEMO’s ability to assess and demonstrate the benefits of entering multi-year contracts.

Clause 11.xxx.4(g) - The rule changes do not prevent the use of reserves located in one region helping a different region. If AEMO can lower the costs of procuring reserves by sharing these across multiple regions, then it is able. This would be subject to jurisdictional agreement.

Clause 3.20.6(d)(4) is not applicable because it refers to a low reserve condition trigger which is not relevant to an interim reliability reserve.

Clause 11.xxx.4 (i) (2) (ii) now includes the words “in total” to remove some concerns about apparent confusion. Clause 11.xxx.4 (i) continues to provide the flexibility needed by AEMO with limitations – this flexibility is mitigated by the transparency and reporting elements that are incorporated into the Interim Reliability Reserve rule changes.

ERM Re Clause 11.xxx.4 (i) (2) – ERM’s interpretation is that clauses 2 (i) and (ii) are in conflict. Clause 2(i) suggests that any contract should have a volume limit no larger than the largest exceedance over the course of the contract’s duration. While clause 2(ii) seems to impose a volume limit for each year. The consultation paper describes the intent of this clause is that for multi-year contracts “with respect to the contract term, no more than reasonably necessary to secure reliability of supply in the relevant region.”

2.9 Transparency of the Interim Reserve Costs

Respondents Comments ESB response

Hydro Tasmania Hydro Tasmania supports all reasonable opportunities to enhance transparency around the operation of the RERT (without compromising commercially sensitive information).

Costs for retailers should be as predictable as possible. While we acknowledge that it is only ex-post that RERT costs will be known, AEMO should aim to provide as much guidance as is reasonably practicable to retailers so that they can forecast likely RERT costs and pass-throughs.

The final rule now includes Rule 11.xxx.4(j) which requires AEMO to request bids for single year reserve contracts (in the event it seeks multi-year bids), which will support AEMO’s ability to assess and demonstrate the benefits of entering multi-year contracts.

During consultation stakeholders requested that the costs of multi-year contracts and the Interim Reliability Measure should be more transparent. It is important to note that AEMO already have an obligation to report on costs under 3.20.6(d)(i) which will apply to the Interim Reliability Reserve. However, the final rule now includes additional requirements on AEMO to provide final bid data annually to the AEMC that will assist the AEMC in conducting its review by July 2023.

As the arrangements are an interim measure and the requirement on the AEMC to conduct a review by July 2023, the implementation of a Transparency Review and Report by the AER is not necessary.

Snowy Hydro Any new RERT measures and triggers must include greater transparency, to improve the ability of retailers to explain the costs and benefits of emergency reserves to consumers and the industry more broadly.

Stanwell

Stanwell requests transparent reporting on the procurement costs associated with the interim reliability measures. This will ensure the

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costs incurred to meet a reliability standard tighter than that recommended by the Reliability Panel are visible to all stakeholders.

EUAA We think that a useful addition to the rules change would be a requirement for the AER to undertake a Transparency Review and Report in relation to the level of detail and transparency contained in quarterly and annual AEMO’s RERT Reports. This is the same concept as the Transparency Report proposed by the ESB to enhance oversight and increase transparency in the ISP rule changes.

MEU The MEU considers that greater transparency through more comprehensive and timely reporting by AEMO in relation to the RERT (how much RERT was required, what was used, what its cost was, how much RERT is contracted for more than 12 months, etc) and by doing so will increase the transparency of the RERT process.

Origin Energy Origin is supportive of the additional reporting requirements proposed under 11.xxx.5(d). However, AEMO should also be required to outline the payments made for each contract entered into under the Interim Reliability Measure, noting that is a requirement for contracts procured under the RERT framework.

2.10 Interaction between RRO and Interim Reserve

Respondents Comments ESB response

AGL As the Interim Reliability Measure may have contracts running until 2024/25, there are several years of overlap where a forecast breach may be driving both retailer contracting and AEMO reserve contracting. AGL proposes that in the event the RRO is triggered, AEMO should be cautious about procuring reserves for that reliability gap before the RRO contract position date, to give retailers every opportunity to secure contracts and to minimise the risk of unnecessary procurement. AEMO’s decision around reserve procurement and volumes should then be based on the most up to date information.

Clause 11.xxx.4 AEMO to have regard to the RERT principles, which aim to minimise impacts on customer bills and market distortions, and the potential impact on the interaction with the Retailer Reliability Obligation.

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2.11 Other interim reliability reserve issues

Respondents Comments ESB response

Snowy Hydro

Snowy Hydro believes it is sensible to replace the Victorian Jurisdictional Derogation final rule for multi-year contracting of RERT by a NEM wide approach. Jurisdictional RERTs can lead to significant uncertainty for market participants in Victoria and complications for AEMO’s management of power system operations across regions with different RERT arrangements. In an interconnected NEM, it is inefficient that possible future challenges facing the market need be managed at a jurisdictional level.

The Interim Reliability Reserve is intended to replace the need for the Victorian Jurisdictional Derogation final rule for multi-year contracting.

ERM ERM Power notes the proposed approach that the ESOO will be used to determine if there is a breach of the Interim Reliability Standard. We do see that the MTPASA and EAAP can be a particularly important ‘sense check’ for the first two years given the differences in approaches between the MTPASA and ESOO. We are not arguing for an approach where a breach of the interim reliability standard in the ESOO is invalidated if there is no breach in the MTPASA or EAAP. Rather, a material difference in forecasts between the two should be seen as a cause to reconsider the need for a multi-year contract.

The ESB considered using the MTPASA and EAAP but decided to restrict it to the ESOO because this is the most rigorous forecast, covers all 3 years and is aligned with the trigger for the RRO. If there is a material change in circumstances, then there is a rules requirement for AEMO to update the ESOO. AEMO is constantly checking the various reliability assessments to ensure consistency and understand any material differences in outcomes that may indicate an ESOO update is warranted.

QLD Electricity Users Network

Concerned that the 2020 ESOO will overforecast demand due to COVID-19. Should small business demand, and business demand in general, be overstated in the August 2020 ESOO it is possible the T-1 instrument could be triggered as early as 2020-21 for the following year.

AEMO has engaged economic consultants to consider the impacts of COVID19 on key sectors of the economy, analysed meter data to monitor changes in residential and business sector consumption, and collaborated with the Forecasting Reference Group and Energy Networks Australia to consider the impacts on demand for the 2020 ESOO forecast.

AEC The enthusiasm to change the reliability standard must also be assessed in light of the COVID-19 pandemic. The COAG Energy Council is concerned that the supply-demand balance has tightened, and there is a risk that outages will occur. In contrast, economic commentators are predicting Australia will experience a recession, which will reduce demand markedly. Furthermore, there is no indication from market reports such as the Medium Term Projected Assessment of System Adequacy that there will be any shortfall within the next two years.

AEMO’s demand forecasts will incorporate an assessment of the impact of COVID19. More broadly, in light of the economic down turn, the final rule has strengthened the checks and balances in relation to minimising costs to consumers.

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C Abbreviations and Technical Terms AEC Australian Energy Council AEMC Australian Energy Market Commission AEMO Australian Energy Market Operator AER Australian Energy Regulator COAG EC Council of Australian Governments Energy Council ESB Energy Security Board EUAA Energy Users Association of Australia MEU Major Energy Users NEL National Electricity Law NEM National Electricity Market NER National Electricity Rules

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Contact details: Energy Security Board E: info@esb.org.au W: http://www.coagenergycouncil.gov.au/energy-security-board