Power reform plan sparks fury

The electricity industry is in revolt against plans by one of the peak regulators to radically alter the way generators are paid.

The electricity industry is in revolt against plans by one of the peak regulators to radically alter the way generators are paid for supplying electricity, based on their location.

Developed as a response to demands for increased network transmission investment as the grid transitions to clean energy, the proposal from the Australian Energy Market Commission has been criticised by a range of big energy users, financiers and manufacturers concerned that the changes will heighten risk, push up prices and deter billions of dollars of spending. Power giant EnergyAustralia warned $155bn of investment required over the next two decades to transition the as ageing coal exits the system could be delayed by years if the reforms proceed.

“We do not consider that these reforms will make investment decisions easier by providing greater confidence in likely outcomes; rather the proposals are increasing uncertainty and the complexity of assessing investments and creating an additional barrier to investment,” EnergyAustralia said in a submission to the AEMC review.

“It may take many years before participants are able to invest with confidence into the new reforms. It could be up to a decade before the market has true confidence in the changes.”

The federal government-owned Snowy Hydro, which is planning a huge $5.1bn expansion, said the complexities and uncertainties of the proposals would crimp spending on generation and potentially hobble its own offtake deals.

“Generators may delay investments in order to understand how the proposed framework works so as to observe if there are aspects of the reform that do not work as expected,” Snowy said in its submission.

“This would all come at a time when there is significant amounts of investment required in the national electricity market.

“In addition, it would represent an additional barrier to Snowy Hydro signing up to further long-term renewable offtake agreements if these reforms were implemented, compared to the current market design.”

The blueprint by the rule maker for electricity and gas markets is aimed at resolving congestion and ensuring a smooth transition as 50 gigawatts of supply — equal to the current size of the national electricity market — connect to the grid in the next decade.

The AEMC rules propose a region-based model enabling large-scale suppliers to pocket higher returns if they build in more cost-effective locations, while new transmission rights would also allow generators to hedge against losses when it is expensive to deliver energy to the grid.

However, the scale, timeline and effectiveness of the market reset has raised the ire of some of the industry’s biggest players, who are worried the scale of reform will scare off investment and push up prices at a delicate time, given the amount of spending needed to replace ageing coal generation.

Origin Energy said it could not support the proposed model, which would add to already high risk and uncertainty in the market.

The energy operator criticised the complicated design of the changes, noting dynamic regional pricing would see market users managing investment decisions based on 600 nodes compared to five currently.

“In short, the proposed model would add additional risk and uncertainty in the system, above and beyond existing levels of risks and uncertainty. This would then manifest itself in higher system costs,” Origin said.

A major investor group, including Blackrock, the Future Fund and British developer John Laing, also said it opposed the use of locational pricing and financial hedges, saying their introduction did “not address long-term investment uncertainty and will ­increase the cost of capital for future generation and storage investment and reduce com­pet­ition through increased barriers to entry”.

Australia’s largest brick manufacturer, Brickworks, said the introduction of dynamic regional pricing would lead to retailers adding a price hike for large electricity consumers to reflect higher risk premiums and potentially hit customers reliant on power purchase agreements.

“It is unclear how PPAs, and other derivatives and complex agreements between parties, will financially settle should the existing regional reference price be effectively split into two separate prices,” Brickworks energy manager Melissa Perrow said.

“We believe that this could cause widespread disputes between parties, and even worse, may lead to a halt in day-to-day trading between market participants.”

Australia’s coal-dominated power system has struggled to handle huge slabs of intermittent renewable generation in the last few years, causing headaches for clean energy developers and creating fresh volatility for grid planners.

Adding to concerns are warnings from global financiers and green energy developers that Australia’s pipeline of renewable generation projects faced gridlock as concerns over transmission losses threaten to derail billions in investments.

Renewables spending has slowed dramatically this year, partly because sections of the nation’s stretched power grid are struggling to handle major new renewable generation sources in areas without sufficient transmission capacity.

The issue will be discussed at the Council of Australian Governments energy meeting on November 22, with the AEMC to publish a final report in December. Origin said the AEMC should only provide a progress report to the COAG meeting, given concerns over the model and its rushed process to date.