Briefing Note | February 2021


Key Points

Generation (power stations) and transmission (large volume, large distance transport) in electricity systems are closely linked. Power stations need transmission to move their electricity to where their customers are (cities, towns, industrial facilities). 
Transmission can also link entire systems (like state or national grids) to each other, enabling trading of electricity between states or countries and increasing options for additional supply at times of peak demand. 
An active question in electricity market design is what is the most efficient balance of transmission and generation? How much generation should be locally supplied and how much imported? Who should pay for the construction and upgrade of transmission lines? What is the efficient utilisation of such large, long-life assets?
Increased renewable generation has increased the amount of electricity being supplied from more remote parts of the grid. This is resulting in a re-rating of the Marginal Loss Factors (MLFs) for some of these generators. 
In 2019 the Australian Energy Market Commission (AEMC) released two discussion papers on its proposed reforms to the co-ordination of generation and transmission investment (COGATI). 
The first paper addressed problems faced by generators faced with constrained transmission capacity linking them to load centres. It set out a proposal to introduce a new hedging instrument for generators and storage units to manage the risk of being prevented from dispatching due to congestion on the network. A Financial Transmission Right (FTR) will pay out to the owner when the transmission route they have bought FTRs over is congested. FTRs will be sold by AEMO and the revenue used to offset the transmission charges that customers pay. 
The second paper discusses Renewable Energy Zones (REZ) – these are areas where the Australian Energy Market Operator (AEMO) has identified good wind or solar resources making them a good place to build new generation. The AEMC thinks most of the co-ordination issues faced when multiple generators in a REZ are looking to connect to the shared network can be dealt with under the current rules.  
The AEMC has abandoned plans to link these reforms more directly to transmission project decision-making and funding through the Regulatory Impact Test for transmission (RIT-T). The COGATI reforms were deferred by the COAG Energy Council in March 2020 to be considered as part of broader market reforms being considered by the Energy Security Board.

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