System costs – on the rise or a temporary blip

AEMO’s latest Quarterly Energy Dynamics highlights that system costs reached record levels of $310m or more than double the previous record, set in 2008. The authors of the paper define system costs as the following: Frequency control costs (FCAS); the costs of directing on generators to keep the system stable; emergency reserve costs to keep the lights on (RERT) and the (estimated) costs of directing variable renewable generators off (curtailment). this last category excludes self-curtailment that operators of wind and solar plants choose to do for economic reasons. The previous quarter’s figures were already the highest in over a decade. Is this an ongoing trend, where as energy costs come down due to renewables, system management costs inevitably go up?

A look at the underlying analysis shows that there may not be need for alarm just yet. For 18 days during January and February, South Australia had to run as an electricity island because storms knocked down a key transmission link with Victoria. The paper notes that three quarters of the system costs were due to this event, as renewables-heavy South Australia had to be fully self-reliant. If we strip the costs of this event out, the underlying trend is less evident – and in fact total system costs are simialr to recent Q1s.

Chart: Quarterly system costs by category (excluding separation event)

Source: AEMO Quarterly dynamics (adjusted)

A number of recent regulatory reforms are likely to put downward pressure on some of these costs. Most of the directions costs in recent years have been in order to maintain system strength in South Australia. the transmission provider for the state, Electranet is building four synchronous condensers that will reduce and may eliminate the need for directions (the costs of these will show up in transmission fees instead, but will be much lower than recent directions costs). In any case, the AEMC has recently ruled that compensation is no longer payable to generators affected by directions for system strength.

FCAS costs are likely to be somewhat reduced by a further rule change that requires generators who can to provide primary frequency control for free. This should result in AEMO having to purchase less on the market.

The RERT is about to be replaced by a new emergency reserve that AEMO will procure on a three year basis. While this could make each MW of emergency reserve cheaper, it is likely to lead to higher costs overall.

On the other hand the long-run drivers of higher system costs, i.e. the switch-out of large synchronous machines that run on coal or gas for variable renewables will continue. Customers won’t necessarily pay more overall, but may pay more for some services and less for others. It remains to be seen whether regulatory reform can keep a step ahead of the rapidly developing electricity system.