Non-regulated Interconnectors NECA Seminar Tuesday 8 December 1998.

Non-regulated InterconnectorsNon-regulated Interconnectors

NECA SeminarNECA Seminar

Tuesday 8 December 1998Tuesday 8 December 1998

Opening RemarksOpening Remarks

Stephen KellyStephen Kelly

NECANECA

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IntroductionIntroduction

• Code provisionsCode provisions• programmeprogramme• key issueskey issues

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Obligations on promoterObligations on promoter

• establish connection agreements establish connection agreements with NSPswith NSPs

• register as market participantregister as market participant• provide an access undertaking to provide an access undertaking to

ACCCACCC• apply to NECAapply to NECA

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Obligations on NECAObligations on NECA

• establish rules for market establish rules for market participationparticipation

• within two years of market launch, within two years of market launch, develop provisions to address develop provisions to address financial risk to promoter as a result financial risk to promoter as a result of need for augmentationof need for augmentation

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Change in statusChange in status

• provision to switch from non-provision to switch from non-regulated to regulated link, regulated to regulated link, subject to conditionssubject to conditions

• meets Code criteria and meets Code criteria and technical standardstechnical standards

• passes “net public benefit” testpasses “net public benefit” test

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ProgrammeProgramme

• a role for entrepreneurial a role for entrepreneurial interconnectors?interconnectors?

• a proponent’s perspectivea proponent’s perspective• introduction to working group proposalsintroduction to working group proposals• market participationmarket participation• structural and competition issuesstructural and competition issues• extensions and alternativesextensions and alternatives• overall assessmentoverall assessment• conclusions and next stepsconclusions and next steps

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Key issuesKey issues

• generator competitors or TNSP generator competitors or TNSP companions?companions?

• regulated and non-regulated links: can regulated and non-regulated links: can they co-exist?they co-exist?

• hermaphrodite links: a freak of nature?hermaphrodite links: a freak of nature?• access, market power: how light-handed access, market power: how light-handed

can we be?can we be?• safe harbour provisions: smothering at safe harbour provisions: smothering at

birth?birth?

WHY NON-REGULATED WHY NON-REGULATED INTERCONNECTORS ?INTERCONNECTORS ?

An advocacy statement ..An advocacy statement ..

Stephen OrrStephen Orr

Hazelwood PowerHazelwood Power

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A REGIONAL MARKET DESIGNA REGIONAL MARKET DESIGN

• NEM is regionalised - conscious choiceNEM is regionalised - conscious choice• Simplified version of full nodal pricing -Simplified version of full nodal pricing -

• few intra-regional constraints (in real few intra-regional constraints (in real regions)regions)

• mechanism to redefine if constraints mechanism to redefine if constraints occuroccur

• Inter-regional constraints create heavy Inter-regional constraints create heavy risks for participants; market awakening risks for participants; market awakening 25 Nov 97 25 Nov 97

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NEMMCO IRH PROCESSNEMMCO IRH PROCESS

• Settlement Residue Auction (SRA) process Settlement Residue Auction (SRA) process developed as interim access to SR to underwrite developed as interim access to SR to underwrite inter-regional hedges and mitigate IR riskinter-regional hedges and mitigate IR risk

• Also developed view of the future, issues being:Also developed view of the future, issues being:•network performance drivers and standardsnetwork performance drivers and standards•firm inter-regional access - leading to IRHsfirm inter-regional access - leading to IRHs• regulatory risk for investing participant - regulatory risk for investing participant -

hence non-regulated interconnectorshence non-regulated interconnectors

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ISSUES FOR PARTICIPANTSISSUES FOR PARTICIPANTS

• Particularly generators, but others tooParticularly generators, but others too• Interconnectors look like wires, but … ...Interconnectors look like wires, but … ...• They perform like competitors, ie -They perform like competitors, ie -

•They introduce remote generation as They introduce remote generation as new entrants into a regionnew entrants into a region

•Conversely they add remote load to a Conversely they add remote load to a regionregion

•They also potentially redefine the regionThey also potentially redefine the region

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INVESTMENT RISKINVESTMENT RISK

• Investment criteria for regulated Investment criteria for regulated interconnectors don’t match market criteria, interconnectors don’t match market criteria, eg: eg: • n-1 transmission reliability standardn-1 transmission reliability standard• Demand with 10% probability of exceedanceDemand with 10% probability of exceedance

• ACCC reviewing criteria for NEMMCO to ACCC reviewing criteria for NEMMCO to approve regulated status for interconnectorsapprove regulated status for interconnectors

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INVESTMENT RISK contdINVESTMENT RISK contd

• Regulated interconnectors see little Regulated interconnectors see little investment risk - if transmission planner investment risk - if transmission planner sees the need, customers pay until next sees the need, customers pay until next optimisationoptimisation

• Even if investment rules become market-Even if investment rules become market-commercial, regulated interconnector not commercial, regulated interconnector not at risk of failureat risk of failure

• Hence, some propose higher discount rates Hence, some propose higher discount rates for regulated interconnector assessments for regulated interconnector assessments

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REASONABLE INVESTMENT REASONABLE INVESTMENT CERTAINTYCERTAINTY

• Regulated interconnectors threaten the Regulated interconnectors threaten the price signals which underpin local price signals which underpin local generation and demand-side investment = generation and demand-side investment = regulatory riskregulatory risk

• Generation/demand investor confidence up Generation/demand investor confidence up if interconnector faces equivalent market if interconnector faces equivalent market riskrisk

• ““If you think it’s a good deal, you build it!”If you think it’s a good deal, you build it!”“If you don’t, don’t ask the market to “If you don’t, don’t ask the market to underwrite your errors ………underwrite your errors ………

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NON-REGULATED NON-REGULATED INTERCONNECTORSINTERCONNECTORS

• Are competitively neutralAre competitively neutral• Reduce the need for central interventionReduce the need for central intervention• Require a change in thinking away from Require a change in thinking away from

conventional interconnector perspectivesconventional interconnector perspectives• Can be free-flowing and open like normal Can be free-flowing and open like normal

transmission lines, or alternatively … … transmission lines, or alternatively … … • Can be actively traded in the market Can be actively traded in the market

through price-differential/volume offersthrough price-differential/volume offers

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NON-REGULATED NON-REGULATED INTERCONNECTORSINTERCONNECTORS

• Potentially remove the need for regulated Potentially remove the need for regulated interconnectors at all, ie -interconnectors at all, ie -• if regulated rules changed to achieve if regulated rules changed to achieve

competitive neutrality, no for regulatedcompetitive neutrality, no for regulated• if commercial hurdles not met, if commercial hurdles not met,

governments and others can build NRIs, governments and others can build NRIs, and take the riskand take the risk

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TODAY’S SESSIONTODAY’S SESSION

• Reflects the initial results of efforts Reflects the initial results of efforts of a diverse industry group to of a diverse industry group to define the nature and operation of define the nature and operation of non-regulated interconnectorsnon-regulated interconnectors

• The group has diverse views on The group has diverse views on some key issues, but sufficient some key issues, but sufficient consensus on the fundamentals to consensus on the fundamentals to encourage others to join the debate encourage others to join the debate

A Proponent’s Perspective A Proponent’s Perspective

Tony CookTony CookTransÉnergie Australia

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OutlineOutline

• Code requirementsCode requirements

• DirectLink DirectLink

• Transmission in a competitive Transmission in a competitive marketmarket

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National Electricity CodeNational Electricity CodeObligations of ProponentsObligations of Proponents

• Clause 5.6.6 (f) requires a connection Clause 5.6.6 (f) requires a connection applicant, in relation to a non-regulated applicant, in relation to a non-regulated interconnector, to:interconnector, to:– apply to NECA in accordance with clause 3.10 to apply to NECA in accordance with clause 3.10 to

determine the rules that will apply in terms of the determine the rules that will apply in terms of the connection applicant’s participation in the market connection applicant’s participation in the market as a market participant in relation to that as a market participant in relation to that interconnector.interconnector.

• TransEnergie Australia and NorthPower TransEnergie Australia and NorthPower made application to NECA on 1 October made application to NECA on 1 October 1998.1998.

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National Electricity CodeNational Electricity CodeObligations of NECAObligations of NECA

• Clause 5.6.6 (g) provides that, if an Clause 5.6.6 (g) provides that, if an application is made to NECA under application is made to NECA under clause 5.6.6 (f) (4), NECA must clause 5.6.6 (f) (4), NECA must determine those rules within a determine those rules within a reasonable time after receipt of the reasonable time after receipt of the application. application.

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DirectLink FeaturesDirectLink Features

• 180 MVA capacity between Qld and 180 MVA capacity between Qld and NSW.NSW.

• DC technology.DC technology.• 1 January 2000 commissioning date.1 January 2000 commissioning date.• Non-regulated interconnectorNon-regulated interconnector

– Recoup costs through trading in Recoup costs through trading in financial instruments tied to the financial instruments tied to the interconnector capacity.interconnector capacity.

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Geographic LocationGeographic Location

Darwin

PerthAdelaide

Melbourne

Sydney

Brisbane

Hobart

Canberra

WA

QLD

SA

NT

TAS

NSW

VIC

DirectLink region

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Transmission in Competitive Transmission in Competitive MarketsMarkets

• Objective:Objective:– Provide sufficient transmission capacity to Provide sufficient transmission capacity to

ensure a competitive energy market, while ensure a competitive energy market, while fairly and efficiently pricing the use of that fairly and efficiently pricing the use of that capacity. capacity.

• Outcomes:Outcomes:– Facilitate competition in:Facilitate competition in:

• generation, generation, • transmission (as an alternative to local generation).transmission (as an alternative to local generation).

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• Commercial framework for Commercial framework for transmission expansion:transmission expansion:

– ““Top Down” projects for reliability and Top Down” projects for reliability and competition - determined by NEMMCOcompetition - determined by NEMMCO

– ““Bottom Up” projects in response to Bottom Up” projects in response to energy price differentials - proposed by energy price differentials - proposed by developers. developers.

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• Top Down ProjectsTop Down Projects– Competitive tendering e.g. VictoriaCompetitive tendering e.g. Victoria

• Bottom Up ProjectsBottom Up Projects– Entrepreneurial interconnectors.Entrepreneurial interconnectors.

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Benefits to Consumers and Benefits to Consumers and GeneratorsGenerators

• Effective competition in Effective competition in generation.generation.

• Lower transmission costs. Lower transmission costs.

Introduction to the Working Introduction to the Working Group’s ProposalsGroup’s Proposals

John HowarthJohn Howarth

VPXVPX

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WG’s Terms of ReferenceWG’s Terms of Reference• One of the group’s terms of reference is -One of the group’s terms of reference is -

– ““recommend rules to govern the participation recommend rules to govern the participation of entrepreneurial interconnectors in the of entrepreneurial interconnectors in the national electricity market and advise on national electricity market and advise on implications for other aspects of the market implications for other aspects of the market design such as network augmentation criteria.”design such as network augmentation criteria.”

– this is a problem - how can you write this is a problem - how can you write rulesrules for for an an unregulatedunregulated interconnector? interconnector?

– need to define the boundary of acceptable need to define the boundary of acceptable behaviour without being prescriptive behaviour without being prescriptive

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WG’s Terms of ReferenceWG’s Terms of Reference• Addressed in three stages:Addressed in three stages:

– identify “safe harbour” provisionsidentify “safe harbour” provisions– define the degree of discretion used in other approvalsdefine the degree of discretion used in other approvals– define scope for future extensions and variations to the define scope for future extensions and variations to the

“safe harbour” provisions“safe harbour” provisions• This workshop is a result of the first stage and some This workshop is a result of the first stage and some

progress has been made on the other stagesprogress has been made on the other stages• The work presented today is new and requires a The work presented today is new and requires a

change in thinking - there are still many challengeschange in thinking - there are still many challenges– inter-regional hedginginter-regional hedging– completion of other stages etccompletion of other stages etc

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Other Terms of ReferenceOther Terms of Reference• Remaining TasksRemaining Tasks

– ““if possible recommend a practical and effective if possible recommend a practical and effective implementation path for introducing firm link-based inter-implementation path for introducing firm link-based inter-regional hedges, i.e. inter-regional hedges that are regional hedges, i.e. inter-regional hedges that are underwritten by settlements residues and are as firm as underwritten by settlements residues and are as firm as practicable against residual risks such as those associated practicable against residual risks such as those associated with network availability.”with network availability.”

– ““advise on the scope and appropriateness of aligning the advise on the scope and appropriateness of aligning the inter-regional and intra-regional hedging provisions with inter-regional and intra-regional hedging provisions with frameworks such as the transmission congestion contract frameworks such as the transmission congestion contract concept and others. This should include identifying the concept and others. This should include identifying the implications for other aspects of the market design.”implications for other aspects of the market design.”

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What are “Safe Harbour” What are “Safe Harbour” ProvisionsProvisions

• Safe harbour provisions.Safe harbour provisions. – A set of provisions conformance to which would A set of provisions conformance to which would

ensure an application’s approval. There is no ensure an application’s approval. There is no implication that non-conforming applications implication that non-conforming applications would necessarily be rejected, although they would necessarily be rejected, although they would not be assured of receiving approval.would not be assured of receiving approval.

– not code requirements but a set of criteria to not code requirements but a set of criteria to judge automatic acceptability.judge automatic acceptability.

– because we are naturally risk adverse the because we are naturally risk adverse the provisions are conservative.provisions are conservative.

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What are “Safe Harbour” What are “Safe Harbour” ProvisionsProvisions• ObligationsObligations

– Configuration limitsConfiguration limits– Must be scheduledMust be scheduled– Must have controllable flowMust have controllable flow– Pay network service chargesPay network service charges– Enter into connection agreementsEnter into connection agreements– Exposure to costs and benefits of interconnectorExposure to costs and benefits of interconnector– NEMMCO to have power to directNEMMCO to have power to direct– Subject to competitionSubject to competition– Sunset clauseSunset clause– Subject to market power provisionsSubject to market power provisions– Ring-fencing provisionsRing-fencing provisions– Must make an access undertakingMust make an access undertaking

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What are “Safe Harbour” What are “Safe Harbour” ProvisionsProvisions

• RightsRights– Entitled to the spot market revenueEntitled to the spot market revenue– Can enter into Reserve Trader Can enter into Reserve Trader

contractscontracts– Option to convert to regulated statusOption to convert to regulated status

• Having fulfilled the obligations, the Having fulfilled the obligations, the entrepreneurial interconnector has entrepreneurial interconnector has access to spot market revenueaccess to spot market revenue

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Status of Working Group PaperStatus of Working Group Paper• The WG has not endorsed all the The WG has not endorsed all the

provisionsprovisions• There are still differing viewsThere are still differing views• However the WG has agreed that it is However the WG has agreed that it is

time for wider consultation and time for wider consultation and exposure of the proposalexposure of the proposal

• WG may need to review provisions in the WG may need to review provisions in the light of feedback from this workshoplight of feedback from this workshop

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Post - implementation ReviewPost - implementation Review

• WG recommends post - implementation WG recommends post - implementation reviewreview– > one application but,> one application but,– < 3 years< 3 years

• Needed due to keep pace with innovation!Needed due to keep pace with innovation!• Needed because the concepts are new and Needed because the concepts are new and

quite different from other approaches - quite different from other approaches - therefore need to consider developmentstherefore need to consider developments

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DefinitionsDefinitions• Interconnector.Interconnector. A network element that connects A network element that connects

networks located in different regions of the networks located in different regions of the National Electricity Market (NEM).National Electricity Market (NEM).

• Entrepreneurial interconnector.Entrepreneurial interconnector. An interconnector An interconnector for which there is an entitlement to derive income for which there is an entitlement to derive income through its participation in the spot market.through its participation in the spot market.

• Non-regulated interconnector.Non-regulated interconnector. An entrepreneurial An entrepreneurial interconnector for which there is no entitlement to interconnector for which there is no entitlement to recover any revenue through regulated network recover any revenue through regulated network service charges.service charges.

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Definitions cont’dDefinitions cont’d

• Regulated interconnector.Regulated interconnector. An An interconnector for which there is an interconnector for which there is an entitlement to recover a determined entitlement to recover a determined level of revenue through the level of revenue through the imposition of regulated network imposition of regulated network service charges. There is no service charges. There is no entitlement to retain any additional entitlement to retain any additional revenues arising from the operation of revenues arising from the operation of the interconnector in the spot market.the interconnector in the spot market.

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Definitions cont’dDefinitions cont’d• Hybrid interconnector.Hybrid interconnector. An entrepreneurial An entrepreneurial interconnector for which there is an entitlement to interconnector for which there is an entitlement to recover some revenue through the imposition of recover some revenue through the imposition of regulated network service charges. As with other regulated network service charges. As with other entrepreneurial interconnectors, income may also entrepreneurial interconnectors, income may also be obtained through participation in the spot be obtained through participation in the spot market.market.

• A mix of regulated and non-regulated has been A mix of regulated and non-regulated has been identified but further work required. This and identified but further work required. This and general areas where the safe harbour provisions general areas where the safe harbour provisions can be extended in the future will be the subject of can be extended in the future will be the subject of Rod Ward and Dave Roberts talk at 2:15pmRod Ward and Dave Roberts talk at 2:15pm

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NECA WORSHOP ON NECA WORSHOP ON ENTREPRENEURIAL ENTREPRENEURIAL INTERCONNECTORSINTERCONNECTORS

Introduction - End User PerspectivesIntroduction - End User Perspectives

Roman DomanskiRoman Domanski

Executive DirectorExecutive Director

Energy Users GroupEnergy Users Group

Sydney Airport SheratonSydney Airport Sheraton

8 December 19988 December 1998

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Entrepreneurial InterconnectorsEntrepreneurial Interconnectors• Supportive of ConceptSupportive of Concept• Why?Why?

– ‘‘virtual’ generator & competition for virtual’ generator & competition for generatorsgenerators

– competition for TNSPs - ‘right’ to providecompetition for TNSPs - ‘right’ to provide– adds depth to NEM by strengthening links adds depth to NEM by strengthening links

between regionsbetween regions– can help augmentation become more can help augmentation become more

competitivecompetitive– consistent with reformconsistent with reform

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Safe HarboursSafe HarboursHow do I stop my entre-preneurial interconnectorgetting torpedoed?

Simple, just park itin this ‘safe harbour’

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‘‘Safe Harbors’ ConceptSafe Harbors’ Concept

• Could go without rules, butCould go without rules, but• Rules provide some certainty for a new Rules provide some certainty for a new

conceptconcept– certainty for investors, owners & customerscertainty for investors, owners & customers– may improve chances of getting proposals upmay improve chances of getting proposals up

• Rules should not hinder proposalsRules should not hinder proposals• Need to be flexible enough to foster Need to be flexible enough to foster

changechange– but firm enough not to stop investmentbut firm enough not to stop investment

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Need for DebateNeed for Debate

As rules are new and innovative, As rules are new and innovative, important to expose to broader important to expose to broader debate and get feedback. debate and get feedback.

Need to be prepared to modify SHP to Need to be prepared to modify SHP to take account of informed comment.take account of informed comment.

Need to also consider links between Need to also consider links between this work and ACCC review of this work and ACCC review of regulated interconnectorsregulated interconnectors

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Competition IssuesCompetition Issues

• Market PowerMarket Power– considerable discussion about threshold considerable discussion about threshold

market sharesmarket shares

• AccessAccess• Ring FencingRing Fencing• HybridsHybrids• ConversionConversion

These issues need broader inputThese issues need broader input

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The FutureThe Future

• Monitor and reviewMonitor and review• Adapt to practical experience & Adapt to practical experience &

NEM/reform goals:e.g.NEM/reform goals:e.g.– review requirement that flow must be review requirement that flow must be

independently controllableindependently controllable– perhaps move to calculating the price perhaps move to calculating the price

difference with and without interconnectordifference with and without interconnector

• Should all future links be entrepreneurialShould all future links be entrepreneurial– intra- & inter-regional?intra- & inter-regional?

Market ParticipationMarket Participation

Stephen Wallace Stephen Wallace Snowy Mountains Hydro-Electric Snowy Mountains Hydro-Electric

AuthorityAuthority

Michael Green Michael Green Transend Networks Pty LtdTransend Networks Pty Ltd

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OverviewOverview

• Market issuesMarket issues– bidding, dispatch and pricingbidding, dispatch and pricing– spot market revenuesspot market revenues– system securitysystem security– contractingcontracting

• Network issues Network issues – configuration and controllabilityconfiguration and controllability– connection agreements and network pricingconnection agreements and network pricing

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Spot Market ParticipationSpot Market Participation

• Networks characterised byNetworks characterised by– economies of scale economies of scale – short run marginal costs are insufficient to short run marginal costs are insufficient to

cover costs of optimally sized interconnectorcover costs of optimally sized interconnector

• Three models for interconnector operationThree models for interconnector operation– passive participationpassive participation– bids capacity bids capacity – bids price differential (above marginal losses) bids price differential (above marginal losses)

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Interconnector Market ModelInterconnector Market Model

• Passive participation - due to Passive participation - due to economies of scale is likely to economies of scale is likely to encourage undersized links encourage undersized links

• Bids capacity - subset of price Bids capacity - subset of price differential modeldifferential model– a capacity bid is equivalent to bidding two a capacity bid is equivalent to bidding two

prices, $0 and VoLL, with the MWs bid at 0 prices, $0 and VoLL, with the MWs bid at 0 the same as capacity offered the same as capacity offered

• Bids price differential - best model Bids price differential - best model

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Bidding & Rebidding Price Bidding & Rebidding Price DifferentialsDifferentials

• Similar to generators or customersSimilar to generators or customers• 10 prices for each direction 10 prices for each direction

(monotonically increasing)(monotonically increasing)• For each price MWs of capacity offered For each price MWs of capacity offered

for each half hour for each half hour • Total capacity offered each half hour is Total capacity offered each half hour is

equal to link capacityequal to link capacity• Obliged to follow dispatch instructions Obliged to follow dispatch instructions

and provide PASA informationand provide PASA information

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Dispatch & Pricing (SPD)Dispatch & Pricing (SPD)

• Bidding model can be incorporated Bidding model can be incorporated easily into SPD frameworkeasily into SPD framework

• Objective function is maximiseObjective function is maximise value of supply (demand bids dispatched)value of supply (demand bids dispatched)

- cost of supply (gen offers dispatched)- cost of supply (gen offers dispatched)

- cost of interconnector (link offers - cost of interconnector (link offers dispatched)dispatched)

- cost of ancillary services- cost of ancillary services

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Dispatch & Pricing (Ctd)Dispatch & Pricing (Ctd)

• Link energy balanceLink energy balanceexport = import + link losses export = import + link losses (this brings in dynamic marginal losses for flows over (this brings in dynamic marginal losses for flows over

linklink))

• SPD essentially the same as now SPD essentially the same as now but current interconnector but current interconnector violation penalties approach is violation penalties approach is extended to transport capacity bidsextended to transport capacity bids

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Spot Revenue (energy)Spot Revenue (energy)

• Similar to other participantsSimilar to other participants• Metering at each terminalMetering at each terminal• Prices at each terminal determined Prices at each terminal determined

much the same as for other participantsmuch the same as for other participants• Since flows may change direction or be Since flows may change direction or be

highly variable there is an issue highly variable there is an issue concerning choice of marginal loss concerning choice of marginal loss factors factors

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Spot Revenue (energy)Spot Revenue (energy)exportexport

• Buys FBuys F11 energy in region 1 at spot price energy in region 1 at spot price adjusted for marginal losses, SPadjusted for marginal losses, SP11 x MLF x MLF11

importimport• Sells FSells F22 energy in region 2 at spot price energy in region 2 at spot price

adjusted for marginal losses, SPadjusted for marginal losses, SP22 x MLF x MLF22

revenuerevenue = = import - exportimport - export• Rev = FRev = F22 x SP x SP22 x MLF x MLF22 - F - F11 x SP x SP11 x MLF x MLF11 Note: Note: There are problems with flows and prices on 5 minute There are problems with flows and prices on 5 minute

dispatch interval vs half hour averagesdispatch interval vs half hour averages

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Marginal Loss Factors Marginal Loss Factors ((Prices for Energy at Connection Points)Prices for Energy at Connection Points)

• Many possible models for marginal loss Many possible models for marginal loss factors (MLFs)factors (MLFs)– fixedfixed– variable with time of day/day of week/season variable with time of day/day of week/season

etcetc– variable with direction of flow and 1 or 2 variable with direction of flow and 1 or 2

aboveabove– dynamicdynamic– nodal pricing of connection point (dynamic + nodal pricing of connection point (dynamic +

intra regional constraints) intra regional constraints)

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Ancillary servicesAncillary services

• Co-optimisation approach allocates Co-optimisation approach allocates interconnector capacity between energy interconnector capacity between energy and ancillary servicesand ancillary services

• Interconnector receives spot market and Interconnector receives spot market and ancillary services income like other ancillary services income like other participantsparticipants

• Interconnector pays for ancillary services Interconnector pays for ancillary services • If optimal SPD will schedule ancillary If optimal SPD will schedule ancillary

services to enhance flow services to enhance flow

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System SecuritySystem Security

• Same as for generators & other Same as for generators & other participantsparticipants

• NEMMCO has power to direct for system NEMMCO has power to direct for system security reasonssecurity reasons

• When directed interconnector is When directed interconnector is compensated in the same way as for other compensated in the same way as for other participants (fair market value -ACCC)participants (fair market value -ACCC)

• May be involved in Reserve Trader May be involved in Reserve Trader contractscontracts

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ContractingContracting

• Actively operates in contract Actively operates in contract marketmarket

• Offers inter-regional hedges (IRHs)Offers inter-regional hedges (IRHs)• May have firm access compensation May have firm access compensation

arrangementsarrangements• Basically like any other participantBasically like any other participant

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ConclusionConclusion

• Market operation is much like a generatorMarket operation is much like a generator– biddingbidding– requirement to be scheduled and provide requirement to be scheduled and provide

informationinformation– spot market revenuespot market revenue– ancillary service income and chargesancillary service income and charges– subject to direction etcsubject to direction etc

• What about network connection, TUOS etc?What about network connection, TUOS etc?– Mike Green will reveal allMike Green will reveal all

TRANSEND NETWORKS PTY TRANSEND NETWORKS PTY LTDLTD

MICHAEL GREENMICHAEL GREEN

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CONFIGURATION NO. 1

Region 1

Region 2

Proposed Interconnector

ExistingInterconnection

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CONFIGURATION NO. 2

Two Terminal Between Regions

Regional Definitions

Network Service Charges

Bidding & Scheduling

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CONFIGURATION NO. 3

30MVA Minimum Capability

In Line with Scheduled Generator, Clause 2.2.2

Cross Zonal Boundary Windfalls

Regulator Shopping

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NEED FOR CONTROLLABILITY

Follow Dispatch Instructions

Avoid Adverse Impacts on other Network Elements

Forms a Clear Basis for Settlements

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FREE FLOWING

Interconnector Actual Flows Depend Upon:

Generator Dispatch

Customer Demands

Network Characteristics

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ISSUES IF NOT CONTROLLABLE

Safe Harbour Does NOT Preclude This Option

Need to Develop Basis of Settlements

Need to Develop Basis of Compensation

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CONNECTION AGREEMENTS

Service Levels

Connection Fees

Arrangements Subject to Negotiation

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CONNECTION FEES

Dedicated Entry/Exit Assets - Payable by Proponent

Attributable Agreed Deep Augmentation - Payable by Proponent

Transmission Use of System - Matter for Resolution

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ISSUES NO. 1

Is there a need for a level playing field between regulated & non-regulated interconnectors?

Regulated Face Stringent Regulatory Tests Non-regulated Face Connection Fees?

Must Provide for Efficient Investment

Interface with NECA Incidence & Allocation Review

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ISSUES NO. 2

See Appropriate Forward Looking Costs

See Appropriate Forward Looking Benefits

Difficulty With Identifying :

Magnitudes of Costs/Benefits

Duration of Costs/Benefits

Funding of Benefit Rebates

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ISSUES NO. 3

Should non-regulated interconnectors result in financial transfers between Network Service Providers?

Many Factors Drive Financial Transfers.

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SUMMARY

MARKET ISSUES

Spot Market Revenue

Ancillary Services Revenue

Required To Be Scheduled

Able To Offer Into Market

Subject To NEMMCO Direction

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SUMMARY

NETWORK ISSUES

Configuration

Controllable Flow

Must Enter Into Connection Agreements

Subject to Efficient Network Connection Fees

STRUCTURAL AND STRUCTURAL AND COMPETITION ISSUESCOMPETITION ISSUES

Conversion to Regulated Status, Sunset Clause, Conversion to Regulated Status, Sunset Clause, Market Power IssuesMarket Power Issues

Stephen OrrStephen Orr

Hazelwood PowerHazelwood Power

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CONVERSION TO REGULATED CONVERSION TO REGULATED STATUSSTATUS

• Safe harbour should allow interconnector Safe harbour should allow interconnector owner to apply for conversion to owner to apply for conversion to regulated status at any timeregulated status at any time

• Revenue entitlement assessed at the timeRevenue entitlement assessed at the time• Recognises uncertainty regarding non-Recognises uncertainty regarding non-

regulated design at present - hence may regulated design at present - hence may encourage investmentencourage investment

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• Also supports utilising economies of Also supports utilising economies of scale, eg hybrid converts to fully scale, eg hybrid converts to fully regulated when justifiedregulated when justified

• Proponent must not be shielded Proponent must not be shielded from commercial risks, eg mis-from commercial risks, eg mis-assessment of demand or priceassessment of demand or price

• Hence apply rules Hence apply rules atat thethe timetime• No scope for strategic alternationNo scope for strategic alternation

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• Note -Note -• If rules for regulated interconnector If rules for regulated interconnector

investment change to match investment change to match commercial conditions,commercial conditions,

•Then why would the non-regulated Then why would the non-regulated interconnector owner want the interconnector owner want the change to regulated status?change to regulated status?

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SUNSET CLAUSESUNSET CLAUSE

• Conversion to regulated status offers Conversion to regulated status offers protection to the non-regulated protection to the non-regulated interconnector investorinterconnector investor

• The sunset clause approach protects the The sunset clause approach protects the market as a whole from unexpected outcomesmarket as a whole from unexpected outcomes

• Suggest 15 years minimum reasonable Suggest 15 years minimum reasonable approval for long life, high cost approval for long life, high cost interconnectorsinterconnectors

• ACCC Code authorisation may limit approval ACCC Code authorisation may limit approval period to 2010period to 2010

82

MARKET POWER ISSUESMARKET POWER ISSUES

• Active trading models create potential for Active trading models create potential for exercise of market powerexercise of market power

• Economies of scale, easements etc may Economies of scale, easements etc may limit scope for competitive limit scope for competitive interconnectorsinterconnectors

• Cross ownership potentialCross ownership potential• Hence we have considered control to Hence we have considered control to

maximum of 35% of either interconnected maximum of 35% of either interconnected areas as limit for safe harbour areas as limit for safe harbour

83


• Concentration of control could be Concentration of control could be limited by divesting rights to the limited by divesting rights to the revenue stream, if operational revenue stream, if operational control ring-fencedcontrol ring-fenced

• Cross-ownership with regulated Cross-ownership with regulated interconnector should be OK, interconnector should be OK, provided ring-fencing in placeprovided ring-fencing in place

84


• However ……… this proposal is arbitraryHowever ……… this proposal is arbitrary• It excludes, for example, Delta and It excludes, for example, Delta and

Macgen immediatelyMacgen immediately• There is a serious question whether the There is a serious question whether the

market rules should endeavour to market rules should endeavour to anticipate and constrain market poweranticipate and constrain market power

• Perhaps safe harbour provisions should Perhaps safe harbour provisions should not be specific - let ACCC decide case-by-not be specific - let ACCC decide case-by-case?case?

85

EXPOSURE TO COMPETITIONEXPOSURE TO COMPETITION

• No restriction on entry of competing No restriction on entry of competing regulated and non-regulated regulated and non-regulated interconnectorsinterconnectors

• Providing they meet the criteria at the timeProviding they meet the criteria at the time• This assumes level playing field through This assumes level playing field through

the rules governing approval of regulated the rules governing approval of regulated interconnectorsinterconnectors

23/02/98 86

Entrepreneurial Entrepreneurial InterconnectorsInterconnectors

Hugh Gleeson (United Energy)Hugh Gleeson (United Energy)

&&

Ken Brunette (Integral Energy)Ken Brunette (Integral Energy)

23/02/98 87

Exposure to competitionExposure to competition• No restrictions on the entry of competing inter-No restrictions on the entry of competing inter-

connectors (regulated or unregulated)connectors (regulated or unregulated)• Aim to achieve a ‘level playing field’ to ensure comfort of Aim to achieve a ‘level playing field’ to ensure comfort of

consistency in regulationconsistency in regulation• Various viewsVarious views

– (Generators) desire to force regulated augmentations to be (Generators) desire to force regulated augmentations to be based on the same investment criteria as unregulated.based on the same investment criteria as unregulated.

– (Retailers) preference to see a ‘stable playing field’, not restrict (Retailers) preference to see a ‘stable playing field’, not restrict regulated decision making.regulated decision making.

– (Customers) desire to see most efficient (lowest cost) generation (Customers) desire to see most efficient (lowest cost) generation used first irrespective of geographic location in NEM.used first irrespective of geographic location in NEM.

23/02/98 88

Sunset clauseSunset clause• Initial approval to operate as a non-regulated inter-Initial approval to operate as a non-regulated inter-connector and actively participate in the market connector and actively participate in the market may be limited to a specific intervalmay be limited to a specific interval– safeguard against undesirable unforeseen outcomes.safeguard against undesirable unforeseen outcomes.– proposed right to apply to convert to regulated status and proposed right to apply to convert to regulated status and

receive regulated revenue assessed on the deprival value receive regulated revenue assessed on the deprival value upon reaching the ‘sunset date’.upon reaching the ‘sunset date’.

– fifteen year minimum approval proposed (by some of fifteen year minimum approval proposed (by some of group) as ‘appropriate’ to match level of investment.group) as ‘appropriate’ to match level of investment.

– May in practice be shorter horizon as the ACCC Code May in practice be shorter horizon as the ACCC Code authorisation expires in 2010.authorisation expires in 2010.

– No protection from effect of Code changes intended by No protection from effect of Code changes intended by this clause this clause

23/02/98 89

Ring fencingRing fencing

• Isolation from the operations of any co-owned Isolation from the operations of any co-owned regulated network businessregulated network business

– Ensure the operation is not influenced by Ensure the operation is not influenced by consequential profit or loss from the non-consequential profit or loss from the non-regulated business.regulated business.

– Concern regarding potential to influence timing of Concern regarding potential to influence timing of outages (by related regulated network business) for outages (by related regulated network business) for unreasonable financial advantage. unreasonable financial advantage.

23/02/98 90

Submission of an access Submission of an access undertakingundertaking

• Access undertaking to be in the form Access undertaking to be in the form specified in the Codespecified in the Code – Must be available in accordance with the Code.Must be available in accordance with the Code.– Applicable Code provisions will likely differ Applicable Code provisions will likely differ

from standard (as exist for regulated assets).from standard (as exist for regulated assets).• Right to trade (as determined)Right to trade (as determined) in the spot marketin the spot market• No right to receive regulated revenues (Chapter 6)No right to receive regulated revenues (Chapter 6)

– ACCC acceptance of access undertaking to ACCC acceptance of access undertaking to protect the asset from declaration under the protect the asset from declaration under the Trade Practices Act.Trade Practices Act.

Beyond the Safe-HarbourBeyond the Safe-Harbour

Rod Ward - Delta ElectricityRod Ward - Delta Electricity

92

Beyond the Safe Harbour - Beyond the Safe Harbour - OverviewOverview

• Purpose of Safe Harbour ProvisionsPurpose of Safe Harbour Provisions• Key Limitations of the Safe Harbour Key Limitations of the Safe Harbour

Provisions? Provisions? • Trading non-controlled interconnectorsTrading non-controlled interconnectors• The Way Forward?The Way Forward?

93

Purpose of Safe HarbourPurpose of Safe Harbour

• Conformance to ‘safe harbour’ Conformance to ‘safe harbour’ provisions should guarantee provisions should guarantee approval. approval.

• There is There is no implicationno implication that non- that non-conforming applications would conforming applications would necessarily be rejectednecessarily be rejected

94

Beyond the Safe HarbourBeyond the Safe Harbour

• Further work required to:Further work required to:– explore the scope for further explore the scope for further

extensions and variationsextensions and variations– define the degree of discretion for define the degree of discretion for

other applications (within and beyond other applications (within and beyond safe harbour)safe harbour)

95

Key Limitations of the Safe Harbour Key Limitations of the Safe Harbour Provisions - case examplesProvisions - case examples

The provisions do not cover:The provisions do not cover:• intra-regional interconnectorsintra-regional interconnectors• non-transmission interconnector capacity non-transmission interconnector capacity

upgrade upgrade • free flowing AC links - loop and parallel flowsfree flowing AC links - loop and parallel flows• participant or an interconnector controlling participant or an interconnector controlling

more than 35% of the capacity in either of the more than 35% of the capacity in either of the supply regionssupply regions

• hybrid of regulated and non regulated hybrid of regulated and non regulated interconnectioninterconnection

96






definition of capacity and access to the market(if controllable or switchable could be considered)

97






Impact on the capacity of incumbents and competitive trading solutions

98

Interconnector Trading Interconnector Trading

• energy supplied to a region does not energy supplied to a region does not have to be delivered by that have to be delivered by that interconnector - “inter-regional capacity interconnector - “inter-regional capacity can be shared”can be shared”

• an interconnector flow does not have to an interconnector flow does not have to be controlled - “inter-regional transfers be controlled - “inter-regional transfers is controlled by generator loading in is controlled by generator loading in merit order”merit order”

99

Concept of “Notional Capacity”Concept of “Notional Capacity”

• Parallel interconnectors treated as a Parallel interconnectors treated as a single notional interconnector single notional interconnector

• revenues are split according to relative revenues are split according to relative capabilities and bids (notional dispatch)capabilities and bids (notional dispatch)

• However, complexities arise when the However, complexities arise when the capacity of an incumbent is affected or capacity of an incumbent is affected or loop flows occur. loop flows occur.

100

Concept of “Notional Capacity”Concept of “Notional Capacity”BiddingBidding

• Similar to generatorsSimilar to generators• 10 prices for each direction (monotonically 10 prices for each direction (monotonically

increasing) increasing) • for each price MW’s of capacity offered in each half for each price MW’s of capacity offered in each half

hour (total capacity equal to the link)hour (total capacity equal to the link)• Any regulated capacity bid at zeroAny regulated capacity bid at zero• dispatch algorithm will dispatch lowest merit order dispatch algorithm will dispatch lowest merit order

bids up to the “notional capacity” of all bids up to the “notional capacity” of all interconnection capacityinterconnection capacity

• However, residual capacity could be “constrained However, residual capacity could be “constrained off” off”

101

Concept of “Notional Capacity”Concept of “Notional Capacity”Case Study - Capacity rights affectedCase Study - Capacity rights affected

Examples:Examples:• New interconnector impacts the capacity of another remote New interconnector impacts the capacity of another remote

interconnector e.g the capacity of SA/NSW interconnector is interconnector e.g the capacity of SA/NSW interconnector is limited by flows on the NSW/VIC interconnector. limited by flows on the NSW/VIC interconnector.

• Total capacity of two parallel interconnectors less than sum Total capacity of two parallel interconnectors less than sum of individual capacity. of individual capacity.

Issues:Issues:• Prior capacity rights - incremental capacity only recognised? Prior capacity rights - incremental capacity only recognised? • No prior capacity rights - full competitive bidding and No prior capacity rights - full competitive bidding and

residual capacity effectively constrained off?residual capacity effectively constrained off?• Technical prerequisites?Technical prerequisites?• Firm access to network?Firm access to network?

102

Loop FlowsLoop Flows

Example:Example:• Additional complexity on parallel interconnectors Additional complexity on parallel interconnectors

where a connection to a region at two remote points where a connection to a region at two remote points create loop flows.create loop flows.

Issues:Issues:• current regional model inadequate - more regions current regional model inadequate - more regions

or progression to nodal model approachor progression to nodal model approach##

• prior rights to capacity become increasing complexprior rights to capacity become increasing complex• complexities of notional capacity allocations would complexities of notional capacity allocations would

have to be modelled, continuous assessed and have to be modelled, continuous assessed and resolved in dispatch resolved in dispatch

# loop flows could resolve to parallel flows

103






anti-competitive conduct, control, timing of problem

104

Market PowerMarket Power• Why is an interconnector different to generation?Why is an interconnector different to generation?• When is it likely to be material?When is it likely to be material?• Is it ownership, control or cross-subsidy between Is it ownership, control or cross-subsidy between

competitive businesses?competitive businesses?• Does it safe harbour anti-competitive behaviour of a Does it safe harbour anti-competitive behaviour of a

substantial interconnector - ACCC issuesubstantial interconnector - ACCC issue

Possible Solutions:Possible Solutions:• provisions of the TPA appropriate to apply to all owners of provisions of the TPA appropriate to apply to all owners of

interconnectors interconnectors • Transition requirement:Transition requirement:

– assets ring-fenced with separate reporting requirementsassets ring-fenced with separate reporting requirements– defined reasonable level of capacity contracts in the defined reasonable level of capacity contracts in the

marketmarket• Alternative - safe harbour applies to small interconnectors Alternative - safe harbour applies to small interconnectors

only, regardless of ownershiponly, regardless of ownership

105

The Way ForwardThe Way Forward

• Determine the principles to define capacity Determine the principles to define capacity and the market trading mechanisms for non-and the market trading mechanisms for non-controlled interconnectorscontrolled interconnectors

• Understand the application and merit of Understand the application and merit of capacity rights and develop firm access capacity rights and develop firm access where one interconnector affects the where one interconnector affects the operation of anotheroperation of another

• Better appreciate the market power Better appreciate the market power implications of interconnectors without implications of interconnectors without unnecessarily restricting their developmentunnecessarily restricting their development

106






David Roberts Presentation to follow

Hybrid InterconnectorsHybrid Interconnectors

David RobertsDavid Roberts

Basslink Development BoardBasslink Development Board

108

PurposePurpose

• Endorsement for the Concept Endorsement for the Concept • Highlight Issues to be ResolvedHighlight Issues to be Resolved• Commitment to ProgressCommitment to Progress

109

OutlineOutline

• Reasons for Hybrid InterconnectorsReasons for Hybrid Interconnectors• Relevant Situations Relevant Situations • ExamplesExamples• PrinciplesPrinciples• Issues to ResolveIssues to Resolve• The Way ForwardThe Way Forward• Summary Summary

110

Reasons for Reasons for

• Economies of ScaleEconomies of Scale• Increase in Load Demand does not Increase in Load Demand does not

Automatically Increase ValueAutomatically Increase Value• Beneficiaries not Necessarily Beneficiaries not Necessarily

ObviousObvious• Approval of RegulatedApproval of Regulated• Transition between Non Regulated Transition between Non Regulated

and Regulatedand Regulated

111

Relevant SituationsRelevant Situations

• Initial Trading may be LimitedInitial Trading may be Limited• Most Trading is One WayMost Trading is One Way• No Market History to Support Non No Market History to Support Non

RegulatedRegulated• Regulated Asset Owner unwilling to Regulated Asset Owner unwilling to

DevelopDevelop• Non Regulated applies to become Non Regulated applies to become

RegulatedRegulated

112

ExamplesExamples

• X% Regulated Y% Non RegulatedX% Regulated Y% Non Regulated• Enhancement to Existing Enhancement to Existing

InterconnectorsInterconnectors• Regulated One Way Non Regulated Regulated One Way Non Regulated

the Otherthe Other• Regulated at Certain Times Non Regulated at Certain Times Non

Regulated at OthersRegulated at Others• CombinationsCombinations

113

PrinciplesPrinciples

• Regulated Portion of an Interconnector Regulated Portion of an Interconnector can be Definedcan be Defined

• Regulated Portion Subject to Rules for Regulated Portion Subject to Rules for Regulated Interconnectors (Including Regulated Interconnectors (Including Approval, Availability, Dispatch, Approval, Availability, Dispatch, Network Pricing & Revenues, Network Pricing & Revenues, Settlements Residues & IRHs etc)Settlements Residues & IRHs etc)

• Remainder Subject to Rules for Non Remainder Subject to Rules for Non RegulatedRegulated

114

Issues to ResolveIssues to Resolve

Who Defines Regulated Portion and HowWho Defines Regulated Portion and How

Which takes PrecedenceWhich takes Precedence• Partial OutagePartial Outage• Dispatch at Zero Price Dispatch at Zero Price

Ring FencingRing Fencing• Required for Network Businesses Required for Network Businesses • Some Complexity with Hedge ContractsSome Complexity with Hedge Contracts

115


Non Linear AllocationsNon Linear Allocations• Adjustment of Settlements Residue for Adjustment of Settlements Residue for

Allocation of LossesAllocation of Losses• Required if Regulated and Non Required if Regulated and Non

Regulated contracts treated differentlyRegulated contracts treated differently

Network Charges/RevenuesNetwork Charges/Revenues• Regulated PortionRegulated Portion• Non Regulated Portion Non Regulated Portion

116


Approval CriteriaApproval Criteria• Look Ahead or Based on Market Look Ahead or Based on Market

ResultsResults• Who bears the Market RiskWho bears the Market Risk

Review of Regulated PortionReview of Regulated Portion• Discretion for Adjusting up or Discretion for Adjusting up or

DownDown

117

The Way ForwardThe Way Forward

• Depends on Arrangements for Depends on Arrangements for Regulated Interconnectors Regulated Interconnectors (Approval, Settlements Residue and (Approval, Settlements Residue and Hedging)Hedging)

• Also Dependent on the Rules for Also Dependent on the Rules for Non Regulated InterconnectorsNon Regulated Interconnectors

• Common Factors NeededCommon Factors Needed

118

SummarySummary

• Hybrid Interconnectors needed as a Hybrid Interconnectors needed as a Bridge between Regulated and Non Bridge between Regulated and Non Regulated InterconnectorsRegulated Interconnectors

• Simple Arrangements should be Simple Arrangements should be Possible which could be Adapted to Possible which could be Adapted to Different SituationsDifferent Situations

• Commitment to Progress Commitment to Progress ArrangementsArrangements

Next StepsNext Steps

Stephen KellyStephen Kelly

NECANECA

120

Next stepsNext steps

• working group supplementary working group supplementary commentscomments

• transmission and distribution transmission and distribution pricing reviewpricing review

121

Review timetableReview timetable

• publication of draft reportpublication of draft report Jan / Feb Jan / Feb 19991999

• consultation with key stakeholdersconsultation with key stakeholders Feb/March 1999Feb/March 1999

• publication of final reportpublication of final report end- end-March 1999March 1999

Non-regulated Interconnectors NECA Seminar Tuesday 8 December 1998.

Documents

Transcript of Non-regulated Interconnectors NECA Seminar Tuesday 8 December 1998.