

Despite an active lobbying effort on the part of dozens of investors into Australia’s energy projects, the Australian Energy Market Commission decided on 27 February to retain marginal loss factors, the system used to determine transmission loss values in the country’s national electricity market.
The AEMC, which sets the rules of Australia’s National Electricity Market, made the ruling 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.
The AEMC instead created what it said was a “more preferable final rule”, thus giving the Australian Energy Market Operator greater flexibility in how it calculates MLFs.
The amendment allows the AEMO to consult with stakeholders on a greater range of alternative calculation details for MLFs. It also removes the requirement that MLF values must be based on a 30-minute interval, thereby allowing longer periods to be used as the basis for calculations.
The AEMC said this “should enable better informed decision-making by prospective investors, developers and owners of generators”.
Competitors become comrades
Early in 2019, a group of 20 investors in Australian renewable energy assets – the number would later grow to at least 25 – took an almost unprecedented step. Despite being competitors in many respects, they banded together to pursue a common cause: lobbying for changes to MLFs.
After warning of potential project defaults if the current framework persisted – and cautioning that several existing generators were “likely to be suffering a degree of financial distress” due to the volatility in MLFs – the Clean Energy Investor Group warned in mid-November of “serious implications” for power reliability should a stand-off over transmission loss values continue.
At a public hearing in Sydney hosted by the AEMC in early December, investors made their consternation clear. One argued that the system felt like a “lottery” and was “failing”. Among the main arguments put forward by the AEMC in defence of the current framework was its ability to provide strong locational signals to the market about the best places to build new generation.
To understand why investors were so up in arms, one need only look to John Laing. In mid-January, Infrastructure Investor learned that the firm – a prominent member of the CEIG – was exploring the sale of its Australian renewable energy asset portfolio. This followed its decision in August to put all new renewables investment in the country on hold after booking a £66 million ($86 million; €77 million) writedown on three of its projects due to changes in MLFs.
At the time, John Laing’s Australia renewables portfolio comprised stakes of varying sizes in six assets: Cherry Tree Wind Farm and Kiata Wind Farm in Victoria; Granville Harbour Wind Farm in Tasmania; Finley Solar Farm and Sunraysia Solar Farm in New South Wales; and Hornsdale Wind Farm in South Australia.
John Laing did not specify which three assets had suffered, but AEMO figures showed that three of the firm’s operating assets had had MLF downgrades. Kiata Wind Farm’s MLF fell from 0.9911 in 2018-19 to 0.9066 for 2019-20, while Finley Solar Farm’s dropped from 1.441 to 0.9895 over the same period. All three stages of Hornsdale Wind Farm were also downgraded slightly from 0.9744 to 0.9698.
An ineffectual amendment?
CEIG spokesman Rob Grant told Infrastructure Investor the amendment approved by the AEMC was unlikely to have much practical effect, and that it seemed to have narrow parameters.
On the ruling more broadly, he said: “We’re disappointed but not surprised, given the draft determination. Overall, this is a confected justification for a pre-determined outcome.”
The 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 CEIG, 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.
The AEMC ultimately rejected the proposed move to ALFs. It said that although 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 concerns
The CEIG and the Clean Energy Council had both expressed concerns in written submissions and public hearings that the AEMC was not carrying out adequate quantitative analysis to back up its draft determination on retaining MLFs, amid criticism of the commission’s process.
In its final ruling, the AEMC said 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 provided the most efficient locational and dispatch signals to the market and that aggregate customer payments were likely to be higher under ALFs. The commission provided details of its modelling in the final determination.
Market sources tell Infrastructure Investor they feel the final determination showed the 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. Its conclusion was that customer payments would be lower under that system. The AEMC dismissed this conclusion as “incorrect”, noting that Baringa had only considered the impact on cashflows in a single year of switching to a set of higher-generation loss factors.
“This is a completely disingenuous argument,” says Grant. “The 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.”
Intra-regional settlement residues are payments that market participants can access through an auction process to help them hedge spot market exposure.
“Sadly, they blame the volatility of MLFs on the transformation currently underway from thermal to renewable energy,” say Grant. “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.”
The Clean Energy Council chief executive Kane Thornton said in a statement: “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 [the] industry welcomes debate and analysis of alternative reforms, simply retaining the current regime is deeply problematic and undermines the energy transition underway in Australia.”