Constrained Network Progress update 1 Allocation of Capacity - PowerPoint PPT Presentation

Capacity Credit allocation in a Constrained Network Progress update 1 Allocation of Capacity Credits in a Constrained Network - Design Proposal

Agenda Purpose of today 1 2 Recap 3 Key issues 4 Questions Presentation Title

Recap Presentation Title 3

Capacity Credit allocation Recap Taskforce provided in-principle support for the proposal subject to: • Further consultation with industry on the proposal. • Identify any ‘fatal flaws’ in the proposed approach. The proposal was presented to the TDOWG in October. • We called it ‘Capacity Credit Rights’. • We think a better term is ‘Network Access Quantity’ (NAQ). ETIU conducted 1:1’s with stakeholders over November. • No fatal flaws. • General support for the proposal. • Key issues requiring Taskforce decision in January 2020 identified. 4 Allocation of Capacity Credits in a Constrained Network - Design Proposal

Capacity Credit allocation Issues in a constrained network Purpose of the Reserve Capacity Mechanism • Ensure reliability by incentivising investment in generation capacity when needed by the system by: ‒ Providing an expected stream of revenues that provides investment certainty; and ‒ Rewarding capacity for being available when needed by the system. Issues in a constrained network • Network constraints will be a more prominent factor when allocating Capacity Credits. • Network capability may be affected by congestion which is influenced by many complex factors, including new market entry. ‒ Accounting for constraints may expose capacity revenues to volatility and result in uncertainty. ‒ May result in capacity resources locating in areas of the grid where their capacity does not contribute to overall reliability. 5 Allocation of Capacity Credits in a Constrained Network - Design Proposal

Capacity Credit allocation Proposed solution Provide a mechanism that protects existing facilities from having their Capacity Credits displaced by new entrant facilities. This provides investment certainty and signals the value of capacity across the grid. Capacity Credits are allocated to new entrants based on maximising residual network capacity . This ensures that Capacity Credits are allocated to facilities based on their contribution to system reliability ; and that Capacity Credits are not over-allocated . The mechanism to protect Capacity Credits is performance-based and subject to a ‘use it or lose it’ principle. This ensures that capacity resources are remunerated for being available and penalises facilities that fail to provide their capacity into the market. 6 Allocation of Capacity Credits in a Constrained Network - Design Proposal

Capacity Credit allocation Taskforce decision points Taskforce endorsement will be sought in January 2020 for: • The high-level design of the RCM Capacity Credit allocation process (the design proposal in the October paper), including: ‒ A mechanism, Network Access Quantity, that is intended to optimise the location of new investment and protect a facility’s Capacity Credits from the impact of new entry. ‒ Network Access Quantity will be a performance-based mechanism and will endure so long as a capacity resource is performing and available. ‒ The process for allocating Network Access Quantity to facilities. • Endorse the key issues outlined in this presentation. Taskforce to note: • There are many matters of detailed design to work through with industry over the first half of 2020. • Detailed design will be presented to Taskforce by mid-2020. 7 Allocation of Capacity Credits in a Constrained Network - Design Proposal

Key issues for Taskforce decision Transition (and initial allocation) • New systems and processes will not be ready for the 2020 Capacity Cycle. • Transitional arrangements are therefore required Availability and performance of capacity resources • Minor improvements to the availability, refunds and testing regime for certified capacity in the context of NAQs. Adjustments to Network Access Quantity • Circumstances when NAQ will be adjusted. Transfers • No market mechanism to facilitate transfers as part of these reforms. 8 Presentation Title

Transitioning to new arrangements Presentation Title 9

Transitioning to new arrangements Proposal: Run the 2020 Capacity Cycle and provide for Network Access Quantities to apply to Capacity Credits. Market participants have more certainty if the 2020 Capacity Cycle is not deferred. Network Access Quantities provide certainty as to the quantity of Capacity Credits for future years. No delays in publishing the Reserve Capacity Price. Presentation Title 10

Transitioning to new arrangements 2020 Capacity Cycle The 2020 Capacity Cycle will be run as usual and AEMO will allocate Capacity Credits under existing processes and timelines. • EOIs open 31 Jan 2020 and applications for Certified Reserve Capacity close 1 July 2020. • New facilities seeking to access the network for the 2022 Capacity Year are treated as a Constrained Access Facility (under WEM Rules Appendix 11). ‒ Western Power will calculate the Constrained Access Entitlement for these facilities and provide this to AEMO. • AEMO allocates Capacity Credits as per the usual process (i.e. following trade declarations in September 2020). ETIU will introduce new WEM Rules in mid-2020 to provide for: • Network Access Quantities to be allocated to Capacity Credits allocated in the 2020 Capacity Cycle (the transitional arrangement). • The changes to the Capacity Credit allocation process to apply for the 2021 Capacity Cycle (the enduring arrangement). 11 Allocation of Capacity Credits in a Constrained Network - Design Proposal

Transitioning to new arrangements 2021 Capacity Cycle (and subsequent cycles) Presentation Title 12

Transitioning to new arrangements 2020 Capacity Cycle and 2021 Capacity Cycle 2020 Capacity Cycle (transition) 2021 Capacity Cycle (enduring) Scheduled Generators Existing facilities CRC (41 ℃ ) ⇒ CC ⇒ NAQ 2020 NAQ ⇒ CC * * Subject to AEMO’s assessment of the facility’s Intermittent Generators CRC and the facility’s trade declaration. CRC (RLM) ⇒ CC ⇒ NAQ New NAQ applications GIA Generators CRC ⇒ NAQ ⇒ CC * CRC (CAE) ⇒ CC ⇒ NAQ * NAQs for new applications will be determined using AEMO’s new systems/tools. New applications CRC (CAE) ⇒ CC ⇒ NAQ * * CAE for new applications will be determined under WEM Rules Appendix 11 Presentation Title 13

Transitioning to new arrangements Process 2020 Capacity Cycle EOIs and AEMO AEMO Trade NAQs CRC assigns allocates declarations allocated applications CRC CCs Early January to Late Gazetted August October July September September Transitional New Market arrangements apply Rules (Mid-2020) Enduring arrangements apply 2021 Capacity Cycle (and future cycles) EOIs and AEMO Confirm Trade Assign new CRC assigns existing declarations NAQs applications CRC NAQs Changes to the RCM Capacity Credit Allocation timeline are expected to accommodate new processes. This will be refined as part of the detailed design development phase in early 2020. Presentation Title 14

Availability and performance Presentation Title 15

Availability and performance • NAQs are linked with CRC. A facility cannot hold NAQ in excess of its CRC. • Capacity obligations and penalties need to be fit-for-purpose in the context of NAQ. If a facility is failing to provide its capacity, it should not retain its CRC and NAQ. • The rules appear to be mostly fit-for-purpose but there are some areas that could be improved. Existing framework: Consequences Testing Capacity Obligations Facilities failing to provide Generators must prove the Scheduled Generators must capacity face consequences capacity of their facilities offer their accredited (refunds and/or loss of twice a year. capacity in the STEM and CRC). Balancing Market. 16 Allocation of Capacity Credits in a Constrained Network - Design Proposal

Availability and performance A Scheduled generator must schedule An Intermittent generator pays refunds and log outages. Refunds apply for until its meets its required level. forced outages and for planned outages that exceed a threshold. Refunds are capped at total payments, but are based on the level of excess capacity. Refund rate is 6 x RCP when excess is <750MW and is scaled down when the excess exceeds 750MW. AEMO has discretion to reduce a facility’s CRC for high levels of outages and 👏 may disqualify a facility from CRC in future Capacity Cycles. Potential Issues: • Generators can meet their obligations without committing their facilities by bidding at high prices. • The rules do not specify criteria AEMO must consider when reducing CRC due to poor performance. 17 Allocation of Capacity Credits in a Constrained Network - Design Proposal