Lots to Ponder from Down Under

Immediately after the South Australia blackout in September 2016, which suspended the south Australia energy market for 13 days, the Coalition of Australian Governments (COAG) initiated a review of the National Electricity Market (NEM) by an independent panel with the mandate "to take stock of its current security and reliability and to provide advice to governments on a coordinated national reform blueprint".  The result of the panel’s work was a comprehensive report published in 2017 titled the Independent Review into the Future Security of the National Electricity Market – Blueprint for the future. 

Given the similarity of Australia’s NEM design to Alberta’s energy-only market design and the similar challenges Australia is facing with the retirement of baseload coal and an influx of renewables, I think the "Blueprint" provides some excellent recommendations for Alberta market and transmission planning reform, despite the fact that their generators only spin at 50 Hz :-).  I will summarize some of the key recommendations here, and I strongly encourage interested readers, and specifically Alberta policy makers, to read and learn from this report.

Overview

The Blueprint acknowledges the rapid evolution of Australia’s power system due to the energy transition and the challenges it is creating in its market-based industry structure:

“The NEM is being transformed from a 20th century grid dominated by large-scale, fossil fuel-fired synchronous generators into a 21st century grid. New and emerging generation, storage and demand management technologies are being connected into a system that was not designed for them. Older generators are reaching the end of their life, becoming less reliable and closing. These changes are placing pressure on the NEM, as demonstrated by the 28 September 2016 state-wide blackout in South Australia and the load shedding during the February 2017 heatwave in South Australia and New South Wales.

This broad-based transition presents a range of opportunities and challenges for the NEM and for the institutional and regulatory framework in which it operates. At present, there is no overarching strategic plan for addressing these challenges and capturing these opportunities. This creates significant difficulties for future investment decisions. Without urgent attention to the need for better planning and policy, the benefits to Australia delivered by the creation of the NEM will deteriorate.”

The Blueprint articulates Four Key Outcomes which are enabled by Three Key Pillars.  The Four Key Outcomes are:

Increased Security

• Obligations on new generators to provide essential security services
• More conservative operation in each region through maintaining system inertia and tighter frequency control
• A stronger risk management framework to protect against natural disasters and cyber security attacks

Future Reliability

• Obligations on new generators will ensure adequate dispatchable capacity in all regions
• New generators incentivised to enter the market
• Existing low-cost generators don’t close prematurely

Rewarding Consumers

• Large and small consumers rewarded for reducing their demand when needed
• System upgrades and new generation will be achieved at lowest cost
• Better access to information to support consumer choice

Lower Emissions

• A continuous emissions reduction trajectory delivering certainty
• Emissions reduced by 28% below 2005 levels by 2030, heading towards zero emissions in the second half of the century 

The Three Key Pillars that enable these outcomes are:

Orderly Transition – to provide certainty through an agreed emissions reduction trajectory:

• Clean Energy Target adopted to drive investment and reduce emissions
• All generators will be required to provide three years’ notice of closure

System Planning – to help make the transition to an innovative, low emissions electricity system:

• A system-wide grid plan informs network investment decisions
• Regional security and reliability assessments

Stronger Governance – to drive faster rule changes, overcome challenges and deliver better outcomes:

• A new Energy Security Board to deliver the blueprint and provide system-wide oversight
• Strengthened energy market bodies 

Summary of Recommendations

The Blueprint makes a total of 50 recommendations across seven categories as follows:

1. Preparing for next summer:  recommendations to prepare for the summer of 2017 to avoid another blackout.
2. Increased security:  12 recommendations to improve supply security
3. A reliable and low emissions future – the need for an orderly transition:  4 recommendations related to lowering emissions in a manner that does not adversely impact reliability
4. More efficient gas markets:  4 recommendations that acknowledge and address the natural gas dependency of the NEM
5. Improved system planning:  5 recommendations that expand the role of Australian Energy Market Operator (AEMO) from pure transmission planning to a more integrated planning approach
6. Rewarding consumers:  10 recommendations to improve the retail market
7. Stronger governance:  14 recommendations to improve electricity sector governance

My Top Three

While the Blueprint has many good and relevant recommendations, the three that stood out for me are:  Improved system planning, A reliable and low emissions future – the need for an orderly transition, and More efficient gas markets.

Improved system planning – I think there is some good advice for Alberta in this suite of recommendations.  The report recognizes that deregulation in Australia resulted in suboptimal system planning with the decisions on generation type, size, timing, and location driven purely by economics and decoupled from transmission planning decisions, stating that “Incremental planning and investment decision making based on the next marginal investment required is unlikely to produce the best outcomes for consumers or for the system as a whole over the long-term or support a smooth transition. Proactively planning key elements of the network now in order to create the flexibility to respond to changing technologies and preferences has the potential to reduce the cost of the system over the long-term.” Well said.

The report recommends improved coordination of generation and transmission planning and investment, a more strategic approach to transmission planning with an integrated grid plan and enhancing the planning authourity of the Australian Energy Market Operator.  These are all areas for consideration in Alberta.  I believe that expanding the planning authourity of the Alberta Electric System Operator is necessary to ensure the orderly transition of the Alberta power system to a reliable and operable lower carbon future.

A reliable and low emissions future – the need for an orderly transition - there are so many good recommendations here, but the ones that really stood out for me are the need for dispatchable capacity, generator reliability obligations, and the consideration of a day-ahead market. I particularly liked this statement: "There is a need to move the policy debate away from political ideology particularly as it relates to the diametrically opposed views on climate change, with renewed focus on the need for investment certainty in an industry where there are long lead times for the development of assets that last up to 40 years. Without timely investment the key objectives of reliability and security and consequently the delivery of cost effective energy cannot be realised."

More efficient gas markets – this is an area we need to start paying much more attention to in Alberta.  As the last of our coal-fired generators retire soon, we will be completely dependent on natural gas for reliability for the foreseeable future until nuclear is an option.  The reliability and availability of the natural gas system will therefore determine the reliability of our power system and we need to start considering this in our power system planning and operations.  There are many good observations and recommendations in the Blueprint that Alberta can learn from to better manage our dependence on natural gas for power system reliability.

Final Thoughts

Australia is far from perfect, and the implementation of the Blueprint has been challenging and is years from completion. However, the blackout Australia suffered in 2016 was a wake up call to policy makers that they needed to think differently to successfully manage Australia's energy transition, and I believe the Blueprint provides excellent insights and advice for an energy only electricity market like Alberta that is struggling to maintain reliability, affordability, and supply security as our energy transition progresses. 

I strongly encourage Alberta policy makers to read the Blueprint and take its many relevant recommendations into consideration as they contemplate electricity industry policy changes to guide the energy transition in Alberta. The Blueprint was motivated by a blackout, but we have the opportunity in Alberta to proactively learn lessons from Australia before we suffer a similar fate.