New Energy Insights: Dedicated Connection Assets – if you build it, you can stop them coming…

This article is part of our New Energy Insights series from our Energy, Infrastructure and Resources team. Stay tuned for regular updates and commentary on topical issues across the sector.

Is this the beginning of the end of the open access regime?

Land banking around strong points of interconnection is 101 in a renewable developer’s play book. AEMC may have just added another (more expensive) way to lock out competing generators – build your own network!

In AEMC’s own words “the party that made the investment and funded the asset, is responsible for administering third-party access to its designated network assets (DNAs). This will provide appropriate protections for the DNA owner and incumbent connected parties.”

It will also allow them to lock out other generators and create a market for granting access to DNAs – essentially allowing those with deep enough pockets to build network assets and lock up transmission capacity. By limiting the new framework to radial transmission assets AEMC has effectively acknowledged this potential outcome.

While the changes will only apply to new power lines of 30km or more, those investing in shorter connections can choose to be regulated under the new rules. And why wouldn’t you? If a generator can choose to charge others to access transmission assets it is going to build why would it not choose to do so?

AEMC suggests the new provisions are aimed at protecting parties investing in and providing clearer arrangements for the sharing of transmission assets built to connect generation to the transmission network.

While the existing arrangements under the Direct Connection Access (DCA) framework allow connection assets to be shared, they require all users to connect at the same point. Under the new rules, the connection assets will be treated as part of the network, allowing the creation of multiple connection points so multiple generators can connect using their individual settings.

Which is undeniably a good thing, however in order to get access a generator must have reached an agreement with those parties who build the DNA. AEMC describe this as a “slight reduction in contestability”. I guess “slight” is a matter of perspective.

This “unavoidable consequence” (AEMC’s words, not ours) is justified on the basis that existing arrangements for settlement, metering, calculation of loss factors, transmission use of system charges, system strength and performance standards, can be applied to connection points within the DNA with only minor modifications to the existing rules. And that “the greatest benefits from allowing for competition in the provision of transmission services are likely to arise during construction, which remains contestable”.

But is this really true? Surely any owner of a DNA will structure the cost of access to their DNA like any other tolling arrangement. They will clip the ticket of every MW exported from the DNA by a generator. The cost of building the transmission asset is only one part of the costs (and arguably a small part) when considered in light of the value of electricity produced by a renewable generator over its life. And the cost of the DNA is not even paid for by the Primary Transmission Network Service Provider (TNSP).

The new rules come at a time when a large number of new generators are looking to connect and AEMC expects that “investment in transmission infrastructure will become more attractive to developers and investors as the new rule enables sharing of transmission assets as well as connection costs”.

Which makes AEMC’s conclusion that “the new approach is also likely to support additional generators joining the network, typically those using renewable energy, who will find the shared costs and greater flexibility appealing” even more confusing.

Soooo… AEMC wants new generators to build transmission assets for them? Isn’t that the TNSP’s job? The regulatory investment test for transmission1 (RIT-T) may be broken, but if promoting new generation at the lowest cost is the ultimate goal then how does closed transmission infrastructure promote this?

If the issue is that RIT-T, is not facilitating the construction of transmission capacity at sufficient scale and pace to keep up with the now unstoppable transition to a decentralised generation system then the solution is to fix the RIT-T – not paper over the cracks with yet another special set of rules to address a particular outcome or problem – and another NER version…

In defence of the RIT-T it was never intended for a decentralised generation system – it was designed to build transmission infrastructure to deliver electricity generated by centrally located (coal) generators to electricity consumers. As such it anticipates a one-way transmission system and has load at its core.

A decentralised generation system by definition requires a bi-directional transmission network – and increases the complexity of the system 100 fold (just ask AEMO). A decentralised generation system, therefore, requires transmission to be built considering both load and generation. After all, without generation it does not matter where the load is located.

There is only consensus in relation to RIT-T in two regards: 1) it needs to change; and 2) changing it is complicated, very complicated. Change will result in winners and losers. Vested interests will always seek to influence outcomes however if AEMO wants to get to 100% renewables by 2025 then potentially restricting access to new transmission capacity seems an odd way to do it.

Renewable energy generators will either have to build their own DNAs or pay to access other generators’ DNAs, placing yet another project cost on owners of generators. Either way, it is hard to reconcile how this will encourage more renewable energy generators into the market and AEMO’s goal of 100 per cent renewable energy penetration by 2025. Which makes the fact that it was AEMO that requested this rule change even more puzzling and is another legacy issue Daniel Westerman will need to navigate.

The Hamilton Locke team advises across the energy project life cycle – from project development, grid connection, financing, and construction, including the buying and selling of development and operating projects. For more information, please contact Matt Baumgurtel.

1The public economic cost benefit test administered by the Australian Energy Regulator. The purpose of the RIT-T was to identify the transmission investment option which maximises net economic benefits and meets the relevant reliability standards.