Investors criticise AEMC hearings on MLF rule changes – exclusive

Survey results show that marginal loss factor volatility is increasing the cost of capital, says one investor, who also criticised the Australian regulator for being 'more interested in preserving the past'.

Investors have strongly criticised the Australian Energy Market Commission for its level of engagement during deliberations over whether to change the rules surrounding transmission loss factors in the country’s National Electricity Market.

The AEMC presented the results of an investor survey on 3 February in a closed meeting in Sydney that showed investors were being forced to add a significant risk premium to projects.

An investor source who attended the meeting told Infrastructure Investor that survey respondents said this was because of the risks associated with volatility in marginal loss factors and the uncertainty surrounding the AEMC’s Co-ordination of Generation and Transmission Investment (COGATI) review, which is considering widespread reforms to the NEM.

Media were not permitted to attend the meeting and the survey results have not been made public, with an AEMC spokeswoman saying: “We can’t comment on any feedback received until we release the final determination.”

The investor told Infrastructure Investor that the survey showed the cost of equity had increased by 100-150 basis points for each of the MLFs and COGATI issues, and they are additive, which is likely to lead to significant additional cost to consumers and end-users of electricity as new generation is added to the system over the next decade.

The format and style of the investor meeting was also criticised for a lack of meaningful engagement with attendees.

“The content provided by the AEMC is really important and needs discussion between it and investors in great detail. However, not enough time is allocated to Q&A and when legitimate probing questions are asked of it, it shuts down the conversation by saying to the questioner that the issue should be taken ‘offline’,” the investor said.

“This happened on Monday to one of Australia’s largest institutional investors and continues to show that AEMC is more interested in preserving the past than addressing and embracing the energy transformation that is upon us.”

“There are a couple of people inside the AEMC that want to tackle the real-world intersection of investment reality, economic efficiency and the physics of transporting electricity. However, they are in the minority” Investor

Another investor who has seen the survey results said the current environment was “challenging” and that the survey supported suggestions from the Clean Energy Investor Group and others in recent weeks that the AEMC should adopt an average loss factor framework to replace MLFs until a more permanent solution can be found.

“If you haven’t got diversity in your portfolio, whether by geography or fuel type, you’re going to be quite challenged by the MLF situation and the tightness in the market. It is very frustrating and it will probably lead to distress in some portfolios. John Laing’s sale and the writedown they’ve taken are evidence of some of the challenges we’ve seen on the policy front,” the investor said.

John Laing is exploring a sale of its renewable energy generation portfolio in Australia after booking a £66 million ($86 million; €78 million) writedown on the assets in 2019 due to MLF downgrades.

The investor who attended the meeting also expressed concerns over the AEMC’s approach to potential system reforms.

“In fairness, there are a couple of people inside the AEMC that want to tackle the real-world intersection of investment reality, economic efficiency and the physics of transporting electricity. However, they are in the minority,” this person said.

“A good example of this is how the AEMC proudly profess to be able to do sophisticated quantitative analysis of the energy market and scenario analysis for the COGATI reform, which is really just generator access, but do not bother using any of it to justify their draft determination on the MLF decision – even though their own survey shows a higher cost of equity is resulting from MLF volatility.”

The second investor said they did have “some sympathy” for the AEMC while expressing frustration.

“It’s not an easy cross to bear, to be honest. They’re juggling political settings as well as the realities of the market and a flurry of investment activity that’s occurred. And we’ve had an extraordinary summer season with a whole lot of other challenges like the bushfires,” the person said.

“But that reinforces the need for long-term planning – you need redundancy and a margin of safety. We’ve got gas resources, a perfect market for solar, and land that can take a plethora of wind resource – it doesn’t say a lot for the policy settings that we find ourselves in a position where we’re constrained and economically uncompetitive.

“You can’t be so tightly wound that we have people going off providing supply.”

AEMC responds

Asked to comment on investors’ criticism of the process, the AEMC told Infrastructure Investor in an e-mailed statement: “We have held an extensive eight-month consultation process with all interested stakeholders on the issue of transmission loss factors, including a public hearing, two rounds of submissions and a series of bilateral meetings with key stakeholders.

“The investor survey discussed at this forum was a discussion starter and views were provided on the basis they would not be publicly released for commercial-in-confidence basis.

“It was not conducted specifically as part of the transmission loss factors rule change process.”

As for the claim that only a minority of AEMC staff is interested in addressing the issues related to the transformation of the energy sector, the spokeswoman said: “Every staff member at the AEMC is very much focused on the future of our transitioning energy market. Our extensive work programme is built around moving the national electricity market towards its new future in a way that protects consumers and keeps the lights on.”

The regulator’s draft determination, published in November 2019, said that it intended to retain the current system of marginal loss factors. Submissions to the AEMC have been split but private equity investors and infrastructure investors have generally come down in favour of changing the MLF framework.

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