Transmission access reform – the white whale of energy policy

Transmission access reform is the Moby Dick of NEM regulatory reform. It is a major reform that has eluded policymakers for over a decade. Stretching the analogy, John Pierce is the Captain Ahab of this scenario, as it is his AEMC that has steadfastly pursued this goal in the teeth of a storm of stakeholder opposition. The first push was the Optional Firm Access process which progressed as far as detailed design before running aground on its own complexity.

John may have retired from the AEMC but his legacy lives on as the Commission pushes forward with its more recent attempt. Growing out of the co-ordination of generation and transmission investment (COGATI) the latest proposal is for locational marginal pricing (LMP), a more granular set of pricing signals than the current Regional Reference Price (RRP) that aims to encourage generators to locate in less congested parts of the network so they can earn a higher price. The drawback of this approach (which is used in several other electricity markets around the world) is the difficulty of effectively hedging dozens of different LMPs, especially when the counterparties (retailers on behalf of users, large users on their own account) will still be paying a blended regional price.

This is where financial transmission rights come in. These are aimed at providing a hedge against congestion, which will be reflected in LMPs diverging from prices in other nearby zones.

In its latest paper, the AEMC sets out its current thinking on design options, and presents the results of a cost-benefit analysis of the reforms. This estimates the net benefit at between $6.2 billion and $8.2 billion over fifteen years. This compares with AEMO’s estimate of $11 billion in net benefits for implementation of its Integrated System Plan (ISP) over 20 years.

The difference is that the ISP requires a massive investment in transmission – in excess of $16bn – that must be paid for by consumers. By contrast the costs of implementing access reform is much lower because it is based on software costs to allow AEMO and market participants to adjust their systems to the new pricing arrangements. AEMC has commissioned an estimate of this at $62-105 million, split between AEMO and market participants.

The AEMC will have to drag most of these market participants kicking and screaming along with this reform, which has had little support from either existing or new generators. Existing generators argue that there is no value in their being exposed to location pricing signals as they cannot respond (generators not being so mobile) so there is no economic benefit. Accordingly, they argue for a maximal approach to grandfathering, which in this case would entail an allocation of “free” FTRs for as long as possible. Future generators (developers) argue that they should not be exposed to LMP and having to purchase their own FTRs because they need to be on a level playing field with existing generators. Another cluse to their opposition could be that a large chunk of the net benefits (around $3 billion) is forecast to come from a wealth transfer from generators to consumers.

There are key links between this project and the post-2025 market design project being carried out by the Energy Security Board. It’s the centrepiece of section G of the market design project, alongside actioning the ISP (largely in place) and arrangements for renewable energy zones, which the ESB is consulting on.

There is still a long way to go to implementation of LMP and FTRs. Spoiler alert – in the book, the whale won…