The Australian Energy Market Commission is farther along the path to determining new regulations for stand-along power systems, write Claire Rozyn, Sherine Al-Shallah and Alan Rai.

The falling costs of renewable generation and battery storage are making stand-alone power systems (SAPS) increasingly viable, especially for supplying electricity to customers for whom the costs of providing and maintaining a grid connection may be high. These customers may be located in remote or “fringe of grid” areas where distribution network costs tend to increase as customer density decreases. They also include customers located in areas susceptible to bushfires, with poor access and where vegetation management costs may be high.

Further, customers in high cost-to-serve areas often experience poor reliability outcomes relative to customers in lower cost-to-serve areas of a distribution network.

These developments are prompting distribution businesses to consider the case for using SAPS solutions – in particular, individual power systems – as an efficient alternative to investment in traditional poles and wires.

In the trials of stand-alone power systems to date, and the currently planned deployments, stand-alone power systems generally comprise solar PV panels, lithium-ion batteries, an inverter and a backup diesel generator. As battery costs continue to fall, the economics of such systems are likely to improve. Further, declining battery costs may, in time, obviate the need for diesel backup generators, further reducing the total costs of a standalone power system solution.

Facilitating the use of the most efficient technological solutions to supply some customers can have benefits for the entire community by reducing the distribution network charges paid by all customers. Customers transitioned to stand-alone power system supply may also benefit directly through, for example, improved reliability outcomes and reduced bushfire risk. To realise these benefits, the regulatory frameworks must adequately support the use of stand-alone power systems and the transition of grid-connected customers to stand-alone solutions.

Regulatory review

In August 2018, the Council of Australian Governments (COAG) Energy Council requested that the Australian Energy Market Commission undertake a review of the regulatory arrangements for stand-alone power systems under the national energy laws and rules. The AEMC’s review is a core part of its work to promote efficient investment in the grid of the future, and builds on previous work undertaken by the AEMC, addressing recommendations made by Dr Alan Finkel and separately by the ACCC in their reviews of the national electricity market.

While stand-alone power systems could potentially be used in a range of situations in the future, the first priority for this review is to make sure that the regulatory frameworks:

  • support distribution businesses in the use of stand-alone power systems as an economically efficient alternative to standard grid supply, and
  • preserve consumer protections such that customers transitioned to stand-alone power system supply are no worse off in respect of service quality, reliability and price.

In line with the terms of reference for the review, the AEMC is undertaking the review in two stages: The first stage (Priority 1) focuses on the development of a national framework to support the use of stand-alone power systems by the local distribution business as an efficient alternative to investment in traditional poles and wires. The second stage (Priority 2) focuses on the development of a national framework to support the supply of electricity from stand-alone power systems provided by parties other than the local distribution business.

Stage 1 commenced in September 2018 with the publication of an issues paper. Informed by stakeholder submissions to that paper and its own analysis, the AEMC published a draft report in December.

The draft report set out the commission’s emerging thinking and draft recommendations on mechanisms for transitioning customers to off-grid supply, the regulatory and commercial arrangements that would then apply on an ongoing basis, and the consumer protections that should be put in place.

The AEMC received 27 submissions to the draft report from a range of stakeholders. Overall, stakeholders were broadly supportive of the approach taken by the AEMC to develop a national framework for the provision of stand-alone power system supply by distribution businesses as an efficient alternative to investment in traditional poles and wires.

The AEMC’s consultation has included three field trips to existing trial stand-alone power systems in NSW (the Bulahdelah area near the mid-north coast), Queensland (Mount Isa and surrounding areas) and Western Australia (the Ravensthorpe area).

We have spoken to numerous SAPS-connected customers. In addition, we are surveying customers who have moved off grid and installed their own SAPS to understand their experiences. Stakeholder consultation and engagement are a critical and highly-valued part of the AEMC’s work, and we have benefitted from the opportunity to be out in the field seeing what happens in practice to better inform our decision making.

The AEMC’s draft recommendations covered the following three specific areas: transition to SAPS supply; service classification and delivery, and; consumer protections.

Transition to SAPS supply

The provision of information by DNSPs is critical to achieving efficient planning and investment outcomes. To supplement the existing distribution network planning and expansion arrangements, the AEMC proposed two new measures to increase transparency around distribution businesses planning and investment decisions in respect of stand-alone power systems.

For projects not subject to the regulatory cost-benefit test for distribution network investment (known as the regulatory investment test for distribution), the AEMC proposed the development of a set of minimum project evaluation requirements which would support the competitive testing of potential SAPS solutions by distribution businesses. The proposed requirements would, if implemented, seek to ensure that all SAPS solutions which are credible options and available in the competitive market, are identified and considered by distribution businesses.

In addition, an obligation on distribution businesses to undertake a comprehensive program of information provision and engagement with parties that would be affected by a stand-alone power system solution would support the efficient planning of, and decisions on, investment in respect of a distribution system.

Classification and delivery

The AEMC recommended that the national electricity law and rules be amended to remove existing barriers to local distribution businesses providing stand-alone power systems as a regulated service. These amendments would, if implemented, provide the AER with discretion to classify (and therefore economically regulate) the activities and services associated with stand-alone power systems consistent with existing frameworks.

To facilitate further discussion and illustrate how the ongoing supply of electricity to customers could work, the draft report presented two illustrative options for stand-alone power system service delivery. The SAPS service delivery arrangements govern the relationship between the distribution service provided by the local distribution business and all the other activities required to provide an electricity service to end consumers.

The two options use different combinations of “competition for the market” and “competition in the market” to allocate the provision of the retail and generation services associated with stand-alone power system supply. The options were included in the draft report to stimulate further discussion around the trade-offs involved in providing for customers transitioned to stand-alone power system supply to continue to access the benefits of the competitive retail market now and into the future.

Consumer protections

In the draft report, the AEMC set out its view that customers should not be disadvantaged as a result of being transitioned to a stand-alone power system. If the model of SAPS service delivery does not enable customers to access retail competition, the AEMC noted that new retail price protections would be required to make sure the price paid by SAPS customers is as close as possible to what the customer would have been able to access under retail competition.

The commission also considered that SAPS customers should continue to receive other existing national energy specific consumer protections (to the extent these remain relevant) as well as reliability protections equivalent to grid-connected customers. On the basis that network reliability standards are a jurisdictional responsibility, the commission noted that jurisdictions may need to review legislative instruments for reliability standards and guaranteed service level schemes, and make any changes required to cater for stand-alone power systems provided by distribution businesses.

Next steps and upcoming work

The AEMC is progressing work to finalise the high-level regulatory framework to support the efficient delivery of stand-alone power systems by distributors while preserving consumer protections. A final report for Priority 1 will be published by the end of May 2019.

Given the breadth of issues across the review as a whole, a separate consultation process is being undertaken for Priority 2 – that is, the provision of stand-alone power systems by parties other than the local distribution business.

More information about the AEMC’s Priority 1 work, including the draft report and related stakeholder submissions, can be obtained from https://www.aemc.gov.au/market-reviews-advice/review-regulatory-frameworks-stand-alone-power-systems