Australian renewables sit at the crossroads once again

The debate over marginal loss factors may see some short-term resolution next week – but the wider conversation about reform to Australia’s National Electricity Market still has some way to run.

Not for the first time in recent memory, next week is shaping up to be a pivotal one for investors in Australian renewables.

We’ve written extensively about the debate over marginal loss factors, the method used by the Australian Energy Market Operator to calculate the loss of electricity during transmission and how it should affect the price that each generator in the country’s National Electricity Market receives.

It’s all set to come to a head next week, when the Australian Energy Market Commission, a separate body responsible for setting the rules of the NEM, will rule on a request to change the MLF system.

Broadly, private infrastructure investors in the renewable energy space (with one or two notable exceptions) have made submissions in favour of a change, generally towards a system known as average loss factors. Meanwhile, regulators, public bodies and some legacy generators, such as AGL and Snowy Hydro, have made submissions in favour of retaining MLFs, even if they don’t all love the system.

The AEMC already published a draft determination in November 2019 that supported MLFs. It was pretty dismissive of the request for a switch to ALFs or another system, and the prevailing concern among the investors we have spoken to is that the final determination will be along similar lines.

The AEMC’s process around the rule change was heavily criticised this month. One attendee at a recent investor forum, which was closed to the media, said the commission did not provide enough time for a Q&A and was shutting down meaningful lines of inquiry at the meeting.

The attendee told us this showed that the AEMC was “more interested in preserving the past than addressing and embracing the energy transformation that is upon us”.

The AEMC defended its processes and said that “every staff member … is very much focused on the future of our transitioning energy market”.

We’ve since heard that this closed meeting was one of a series of quarterly investor seminars established to allow the AEMC’s commissioners to touch base with market participants and get a better sense of the effects that rule changes and policy decisions are having on the ground.

It’s clear that frustration with the AEMC among private investors is building. More than one expressed pretty grave concerns to us about the prospects of deploying further capital in Australian renewables should nothing change, never mind the status of their existing projects.

Some, however, do have differing views. One superannuation fund portfolio manager told us it was not MLFs that had been putting them off investing in Australian renewables – in fact, some distress in portfolios might lead to opportunities when looking to acquire assets, such as those that John Laing has put up for sale. The manager said the next set of reforms after this debate had been settled was more concerning.

The AEMC is also undertaking a review into the Co-ordination of Generation and Transmission Investment, a bigger piece of work designed to assist with the energy transition.

The rub here, though, is that one of the current reforms being seriously considered would see a shift away from the current system to dynamic MLF pricing that updates every five minutes, as opposed to once a year as it does now.

This would amount to “MLFs on steroids”, according to a source close to the AEMC, and cause serious concerns for those investors that are already exposed to MLF volatility.

So we are once again at a potential inflection point in the Australian renewables market following years of policy uncertainty.

The AEMC’s final determination on MLFs is due to be published by 27 February.

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