AEMC sticks with marginal loss factors in Australian energy market

The Australian Energy Market Commission rejected calls from investors to move to average loss factors in a ruling that 'undermines the energy transition underway'.

The Australian Energy Market Commission has decided to retain marginal loss factors in a ruling that was described as “disappointing, but not surprising” by the Clean Energy Investor Group.

AEMC, the body that sets the rules of Australia’s National Electricity Market, made the ruling today in its final determination on a proposal to change the transmission loss factors framework. It had previously signalled in a draft determination in November 2019 that it would keep MLFs.

In today’s final ruling, AEMC retained MLFs and created what it said was a “more preferable final rule” giving the Australian Energy Market Operator greater flexibility in how it calculates MLFs.

This amendment allows AEMO to consult with stakeholders on a greater range of alternative calculation details for MLFs and removes the requirement that MLF values must be based on a 30-minute interval, allowing greater time periods to be used as the basis for calculating them.

AEMC said that this “should enable better informed decision-making by prospective investors, developers and owners of generators.”

CEIG spokesman Rob Grant told Infrastructure Investor that this amendment is unlikely to have much practical effect and seemed to have narrow parameters.

On the ruling more broadly, Grant said: “We’re disappointed but not surprised given the draft determination. Overall, this is a confected justification for a pre-determined outcome.”

AEMC said the existing MLF framework would remain in place so that “important signals are retained as to the best place to build, and consumers are not shouldered with any additional cost or risk”.

Investors, including a collection of renewables investors under the banner of the Clean Energy Investor Group, had called for a different system known as average loss factors to replace MLFs. QIC argued in January that the current framework was “having a material and adverse impact on new renewables” investment.

AEMC ultimately rejected the proposed move to ALFs, saying that while an ALF methodology might reduce the volatility of transmission loss factors, it would also dampen locational signals for new generation which would be “undesirable in the current climate”.

Quantitative analysis

The CEIG and the Clean Energy Council had both expressed concerns in written submissions and public hearings that AEMC was not carrying out adequate quantitative analysis to back up its draft determination on retaining MLFs, amid criticism of the AEMC process.

In its final ruling, AEMC said that it had undertaken additional quantitative analysis to determine the effects of moving from MLFs to ALFs in response to the feedback. This found that MLFs provide the most efficient locational and dispatch signals to the market and that aggregate customer payments would likely be higher under ALFs, with AEMC detailing its modelling in the final determination.

Market sources told Infrastructure Investor they felt the final determination showed AEMC’s assumptions in its modelling without displaying the full analysis.

The Clean Energy Council last year commissioned consultant Baringa Partners to carry out quantitative analysis on a shift to ALFs that concluded customer payments would be lower under that system. AEMC dismissed this conclusion as “incorrect”, noting that only the impact on cash flows in a single year of switching to a set of higher generation loss factors was considered by Baringa.

“This is a completely disingenuous argument given that AEMC and AEMO are the only entities and the network service providers that have the load data to be able to model intra-regional settlement residues outcomes and we specifically said in our submission that we wanted them to do that work because we could not,” Grant said. IRSRs are payments that market participants can access through an auction process to help them hedge spot market exposure.

“Finally, and sadly, they blame the volatility of MLFs on the transformation currently underway from thermal to renewable energy. The decision seems to be all about maintaining the status quo to slow or stop the transformation rather than embracing the transformation and doing everything in their power to ensure it is achieved at lowest cost to consumers.

“Unfortunately, as our prediction of a collapse in investment because of uncertainty caused by MLFs has come true, so too will our prediction that the slowing of investment – and new investment will have a higher hurdle rate – will see wholesale price declines halted and probably head back up.”

According to the Clean Energy Council, “the lack of investor confidence has already seen new investment in large-scale renewable energy collapse by more than 50 percent” in the past year.

“While industry welcomes debate and analysis of alternative reforms, simply retaining the current regime is deeply problematic and undermines the energy transition underway in Australia,” the council’s chief executive Kane Thornton said in a statement.