New Energy Insights: The Integrated Resource Provider is born…

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.

Almost 2 years after being proposed by AEMO, AEMC has released its much-anticipated draft determination to address current and anticipated impediments to the integration of energy storage and hybrid (generation + energy storage) in the electricity network. These reforms are arguably the most significant change to the market since the NEM was created.

Key to this is the creation of a new market participant category – the integrated resource provider (IRP). An IRP is intended to capture market participants with bi-directional energy flows, ie that both export (discharge) and import (charge) energy, can choose the when those flows occur (are dispatchable) and have the capacity to offer grid stability services (FCAS etc). This will include energy storage, hybrids (renewables + BESS) and virtual power plants (ie aggregators of small generation and storage units – usually rooftop solar on homes and businesses). These generation assets will have a new classification – the Integrated Resource Unit (IRU).

In this context the changes are a clear recognition of what is universally acknowledged – that the National Electricity Rules (NER) are no longer fit for purpose. The NER were written for a much simpler world, where a dozen or so centralised coal fired power stations ran day and night sending electricity into our homes and businesses. Those coal fired power stations and the entire electricity system (generation, transmission and retail) was government owned (not for long however) and the retail cost of electricity was essentially government subsidised from the coal mine to the light switch.  The NEM is a very different place now and will evolve to be unrecognisable from today’s market over the next decade.

In creating the IRP, AEMC is catching up to address the rapid deployment of BESS in the NEM. The changes also simplify how aggregators of small generation and storage units register and participate in the market and propose “net metering” when determining non-energy costs to be paid by grid scale energy storage systems. Broadly speaking, these are logical, sensible (and obvious) changes to fix the current limitations, inefficiencies and inappropriate outcomes in relation to energy storage and hybrid systems which result from the current rules. As such, they address the change that is already here – the significant growth in energy storage, hybrids and virtual power plants in the NEM.

As new (renewables) replaces old (coal) electricity generation, new and different market dynamics and opportunities have and will continue to arise. Industry has and will continue to respond to these new dynamics and the proposed rule changes will remove barriers and encourage more energy storage, hybrids and virtual power plants to enter the market to meet the resulting opportunities.

What about the ESB’s p2025?

The proposed rules changes are in line with the Energy Security Board’s (ESB) Post 2025 market design work, specifically the design of the NER to accommodate new business models, bi-directional energy flows and the increasing importance of distributed energy resource. The IRP category and IRU classification are further progress in a move away from defining specific technologies and assets towards a technology-neutral approach that attaches obligations to services and activities.

A key objective of the ESB’s work is to promote a two-sided market design in which both demand and generation participants respond to price based on their cost preferences and technical obligations are placed on services, not participant categories. A two-sided market promotes a “trader-service model” where all commercial participants are able to deliver services to customers irrespective of registration category.

AEMC suggests that the IRP category could become the universal category as outlined through the ESB’s two-sided market work. However, given the wholesale changes to the NER likely required to implement the ESB’s Post 2025 market design work it is almost certain the IRP category will need to be revisited in the not-too-distant future to implement the ESB’s work.

The ESB has delivered its final advice which has been widely leaked across media and industry stakeholders. Statements from the Federal Energy Minister suggest the broad market reforms required will be put aside in favour of the short-term propping up of old failing technology via a capacity payment mechanism. Such a mechanism ignores the inherent and ever-increasing unreliability of old coal-fire generators. It steals from the future by living in the past.

Electricity capacity markets are inherently inefficient and are being abandoned around the world. A capacity market would be a significant step backwards for the NEM, not the giant leap forward required to develop a NEM fit for the future.

Similarly, the proposed congestion management model (or COGATI 2.0) is an abstract economic modeling thinktank thought bubble experiment looking for a problem. The practical frailties and counterproductive signalling to investment of congestion taxing resulted in the first iteration being dismissed. Reviving the COGATI ghost under the guise of the promotion of Renewable Energy Zones denies reality that the future is a decentralized generation system.

We will be further considering the impact of the AEMC draft determination and the ESB’s final advice in upcoming New Energy Insights and the winter edition of New Energy Quarterly.

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.