COAG Energy Council
Response to the Australian Energy Market
Commission’s Review of the National
Framework for Distribution Reliability and
Review of the National Framework for
Transmission Reliability
December 2014
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Contents
1
Purpose .............................................................................................................................. 1
2
Summary of Energy Council response ............................................................................... 1
3
Background ........................................................................................................................ 1
4
5
3.1
COAG 2012 agreement in principle ........................................................................................ 2
3.2
SCER 2013 direction to AEMC ................................................................................................. 3
3.3
Relevant work from 2007 to 2013 .......................................................................................... 4
3.4
MCE Response 2011: National Transmission Reliability Standards ........................................ 4
Energy Council response .................................................................................................... 4
4.1
National Electricity Network Reliability Principles .................................................................. 5
4.2
Minimum requirements for setting reliability targets ............................................................ 5
4.3
Jurisdictional approaches........................................................................................................ 6
Next steps .......................................................................................................................... 7
1 Purpose
This document presents the response of the Council of Australian Governments (COAG)
Energy Council (the Energy Council) to the Australian Energy Market Commission’s (AEMC)
recommendations on a National Electricity Network Reliability Framework.
The AEMC’s advice was set out in its final reports of the Review of the National Framework
for Distribution Reliability and the Review of the National Framework for Transmission
Reliability, published on 27 September and 1 November 2013 respectively.
2 Summary of Energy Council response
The Energy Council notes the AEMC’s advice on a proposed National Electricity Network
Reliability Framework for electricity distribution and transmission networks. The Energy
Council acknowledges this advice builds on the work the AEMC has undertaken on reliability
standards since 2007.
The Energy Council agrees that reliability requirements for both electricity transmission and
distribution should be determined with reference to the value that consumers place on
reliability.
The Energy Council also notes that the institutional and regulatory structures for electricity
transmission and distribution differ across National Electricity Market jurisdictions and that
approaches to the management of electricity transmission and distribution reliability also
differ across jurisdictions.
The Energy Council therefore believes that it is more appropriate to adopt a set of high level
principles to guide a high level national approach to reliability rather than endorse a detailed
a national framework in the National Electricity Rules (NER). These principles will be
implemented on a jurisdictional basis and jurisdictions will report back to the Energy Council
on their application of these principles in their reliability setting processes in mid-2015.
Further details regarding the Energy Council’s response to the AEMC’s advice is set out in
section 4 of this document.
3 Background
Rising electricity prices have been and continue to be a major focus for customers and policy
makers in the National Electricity Market (NEM). A fundamental driver has been the costs of
electricity distribution and transmission network infrastructure, which account for a
substantial proportion of customer electricity bills. A variety of factors have contributed to
the escalating network costs.
An important parameter affecting network costs are the standards to which network
infrastructure must be planned, designed, built and maintained. These standards, referred
to broadly as “reliability standards”, are intended to limit the impacts on customers of supply
interruptions. Simply put, reliability standards, however they are set or expressed, are the
determinant of the amounts of capital and operating expenditure a network business must
undertake to avoid or manage outages.
Consumers of electricity, whether large or small, place a high value on being confident of a
reliable supply of electricity, that is, experiencing a minimal number and length of blackouts.
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To maintain or improve the level of reliability requires investment in powerlines and other
network infrastructure, in order to meet growing demand (particularly during peak times) and
for the replacement of ageing assets. The costs associated with this investment get passed
on to consumers through their electricity bills. Consequently, whether explicitly or implicitly,
reliability standards involve a trade-off between the cost and inconvenience of supply
interruptions and the cost of electricity supply.
In most NEM jurisdictions the regulation of reliability is currently the responsibility of the
relevant government which sets explicit reliability or redundancy targets. In Victoria,
however, reliability levels are not determined in advance, but as an outworking of an
economic assessment process for each project that compares the expected cost of each
project against the value placed on reliability by customers.
In December 2012 COAG endorsed a package of energy market reforms aimed at ensuring
that consumers do not pay more than necessary. These reforms included a commitment to
develop a national reliability standard framework for both transmission and distribution
networks. The then Standing Council on Energy and Resources tasked the AEMC to
develop national frameworks and a methodology for determining transmission and
distribution reliability standards.
3.1
COAG 2012 agreement in principle
On 23 November 2012, the Standing Council on Energy and Resources (SCER; now the
COAG Energy Council), considered reliability standards as part of its wider package of
reforms aimed at ensuring consumers were paying no more than necessary for a secure and
reliable supply of electricity. On reliability standards, SCER recognised the value of adopting
a national approach to determining these settings and the need for full consideration of
impacts on consumers in terms of both reliability requirements and the costs in setting
requirements.
In light of these considerations, SCER agreed to task the AEMC with the development of a
national framework and methodologies taking into account different geographical locations
and that incorporates customer values of reliability, which jurisdictions may apply, for
distribution and transmission reliability, including incentive and penalty arrangements where
appropriate. In addition, SCER agreed to amend the Australian Energy Market Agreement
(AEMA) to make explicit the opportunity for jurisdictions to transfer the setting of reliability
standards under the framework to the Australian Energy Regulator (AER).
At its 7 December 2012 meeting where it endorsed the reform package agreed by SCER,
COAG noted:
“…the strong call by business for urgent and concrete action on energy market reform to
help moderate the impact of high electricity prices on consumers and business … [and]
endorsed the most comprehensive package of energy market reforms for jurisdictions in the
National Electricity Market in a decade … developed and agreed by the Standing Council on
Energy and Resources … with advice from the B[usiness] A[dvisory] F[orum] Taskforce.”
(COAG Communique, 7 December 2012, page 4)
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In addition, COAG agreed in principle to:
“… adopt the new best-practice framework for reliability standards (to be developed by the
Australian Energy Market Commission and which give primacy to affordability for consumers
at agreed levels of reliability and take account of regional considerations) and to transfer
responsibility for applying the framework to the Australian Energy Regulator … with a final
decision by the end of 2013.”
(COAG Communique, 7 December 2012, page 4)
3.2
SCER 2013 direction to AEMC
Pursuant to COAG’s 7 December 2012 agreement in principle, on 8 February 2013, the
AEMC received terms of reference from SCER, in which it directed the AEMC, under section
41 of the National Electricity Law (NEL), to undertake a review to:
“● develop a nationally consistent framework and methodology for developing, describing
and reporting on electricity network reliability and associated standards in the N[ational]
E[lectricity] M[arket] that can be adopted by a relevant jurisdiction and/or be applied by
the Australian Energy Regulator (AER); and
“● develop a national framework and methodology that:
-
will apply an appropriate measure of the value customers place on the reliability of
electricity supply;
-
considers options for taking into account local circumstances which may require
different levels of reliability, for example for public health and safety reasons;
-
building on the National Transmission Reliability Framework previously agreed by the
Ministerial Council on Energy (MCE) in November 2011;
-
provides a methodology for establishing distribution reliability requirements that
recognises variable network characteristics of relevance (whether physical,
geographical or relating to the customer base) and the difference between
jurisdictions; and
-
provides indicative costs of implementation, the indicative scope of appropriate
legislative changes, and the costs and benefits of application.
In undertaking this work, the AEMC will ensure that the approach taken to setting reliability
requirements reflects economically efficient outcomes in the long term interests of
consumers, based on the value customers place on the reliability of electricity supply.
Recognising there are differences between transmission and distribution networks, the
AEMC is requested to ensure the framework provides for consistency between transmission
and distribution to the greatest extent possible. Where this is not feasible, the AEMC should
take into account the differences in the nature of transmission and distribution networks in
developing different approaches.”
(SCER Terms of Reference - National Electricity Network Reliability Framework and
Methodology, 8 February 2013, page 1)
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The terms of reference set out further detail regarding SCER’s direction to the AEMC. The
AEMC accordingly carried out the Review of the National Framework for Distribution
Reliability and the Review of the National Framework for Transmission Reliability during
2013.
The terms of reference also requested the AEMC to have regard for the work that had
previously been done on reliability, including the Ministerial Council on Energy’s (MCE)
policy position on a national transmission reliability framework published in 2011.
3.3
Relevant work from 2007 to 2013
The AEMC’s 2013 reviews complemented its earlier work on reliability standards that began
in 2007, and the Australian Energy Market Operator’s (AEMO) current work on Value of
Customer Reliability (VCR), namely:
3.4

AEMC 2010 Update to the 2008 Review of Transmission Reliability Standards and
the MCE response in 2011;

AEMC 2013 Review of Distribution Reliability Outcomes and Standards; and

AEMO work on VCR.
MCE Response 2011: National Transmission Reliability Standards
On 16 November 2011, the MCE considered the recommendations contained in the AEMC’s
2010 Updated Final Report, and its 2008 Final Report (where this formed the basis of the
recommendations in the Updated Final Report) and agreed to a policy response. In its
response, the MCE broadly accepted the recommendations as presented in the Updated
Final Report. The MCE acknowledged that the intent of the AEMC Review was to establish
a high-level framework, based on agreed principles, to which detail will be added in relation
to a number of the recommendations in the course of the implementation advice phase.
The MCE recognised the size and complexity of the implementation advice phase and
requested the AEMC to provide detailed implementation and transitional advice and
recommendations to the MCE on amendments which may be required to the NER, the NEL
and other jurisdictional legislation and legal instruments to support the proposed framework.
4 Energy Council response
Having considered the AEMC’s recommendations in its final reports, the Energy Council has
decided to endorse a set of principles for distribution and transmission reliability. In broad
terms, these principles focus on adherence to a robust, transparent and independent
process based on an economic justification of the reliability standards. In relation to
distribution in particular, the Energy Council has supported the AEMC’s recommendation of
output based standards which do not prescribe the way in which the required outcome is to
be achieved.
In considering the adoption of National Electricity Network Reliability Principles, the Energy
Council agreed to the AEMC recommendation for individual jurisdictions to determine how
reliability requirements will be set in their jurisdiction.
The Energy Council considers the adoption of these principles will lead to significant
improvements to the way reliability requirements are set, particularly with regards to the
transparency and economic robustness of the processes adopted by individual jurisdictions.
However, the Energy Council recognises the AEMC recommended a range of potential
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approaches to setting reliability requirements. If there is evidence of the need for further
national harmonisation, the Energy Council considers there may be benefit in exploring
whether there is net value in transitioning to a national framework approach in the future.
4.1
National Electricity Network Reliability Principles
The Energy Council endorses the following National Electricity Network Reliability Principles:

Reliability should be managed in a manner that delivers a level of reliability that is
consistent with consumers preferences assessed in terms of the value customers
place on reliability.

The process of managing reliability should be cost effective; that is, it should achieve
the desired outcomes through a process that imposes the least additional cost on
consumers.

The process for setting reliability requirements should be transparent and public with
the assessment and considerations used in setting reliability published.

The existing Service Target Performance Incentive Scheme (STPIS) should be
continued to encourage distribution businesses to efficiently perform to the level of
their reliability requirements and should be set reflecting consumer preferences in
terms of the value customers place on reliability.

The management of reliability outcomes should be effectively integrated with the
economic regulatory decision making processes of the AER (and, where a
jurisdiction adopts the Declared Transmission System planning functions – with the
planning processes of AEMO).
4.2
Minimum requirements for setting reliability targets
The Energy Council endorses the following minimum requirements for reliability to support
the National Electricity Network Reliability Principles:

Distribution reliability requirements should:
o
be in the form of output performance targets (i.e. limits) for outages;
o
be expressed, as a minimum, in terms of duration and frequency of
unplanned outages, and defined according to common definitions across the
NEM; and
o
reliability requirements should be set (or approved) by a party that is
independent of the network business.

Transmission reliability should be either managed by an independent planner or be
the responsibility of the relevant transmission business.

Where transmission planning is the responsibility of the transmission business, the
transmission reliability standards should:
o
be expressed in the form of input planning standards that are specified in
terms of network redundancy (N-x) and informed by an economic assessment
process;
o
be specified in a way that has clear and measurable application at connection
point level;
o
include, as a minimum, a level of network redundancy and a requirement
relating to when supply would need to be restored following an outage;
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o
be set on the basis of having the flexibility to include additional parameters,
including output performance targets (i.e. limits), in order to make the
standards more consistent with customer preferences; and
o
be determined by a body independent of the transmission business.

Network businesses should continue existing annual reporting on reliability
performance and commission five-yearly independent audits of planning, systems
and procedures to meet reliability standards.

The AER should report on businesses’ reliability performance annually in existing
benchmarking reports.
4.3
Jurisdictional approaches
There are a number of approaches that are currently applied in setting network reliability
requirements, including through an independent planner on a case-by-case basis, by
utilising the provisions set out in the National Electricity Rules, or through an ex ante
process, where the transmission planner is the transmission asset owner. In the latter case,
the Energy Council recognises jurisdictions may choose to adopt a similar approach to that
recommended by the AEMC. That is:

Jurisdictions may nominate parties to exercise one or more of three principal roles
and responsibilities as determined by the jurisdictional Energy Minister: 1) “Standard
Setter”; 2) “Economic Advisor”; and 3) “Compliance Monitor”.

The party performing the Standard Setter function should be independent of the
distribution network business.

It is for jurisdictional Energy Ministers to determine the appropriate parties to perform
the roles in the reliability requirement setting process.

Where jurisdictions decide to delegate the Standard Setter function to the AER,
jurisdictional Energy Ministers will need to negotiate the provision of this function with
the AER as this is a function outside of the national legislative frameworks.

Jurisdictional Energy Ministers will retain the power to specify additional reliability
requirements for areas of high load, or of economic or social importance in a way that
has regards to the National Electricity Network Reliability Principles to the greatest
extent possible.

Jurisdictionally set reliability targets should be limited to areas where demonstrable
shortcomings in general reliability outcomes are evident or predictable.
The Energy Council considers that it will be up to individual governments to assess the costs
and benefits in deciding to adopt any part of the approach in setting distribution and
transmission reliability standards in a way that is consistent with the National Electricity
Network Reliability Principles. The Energy Council also notes the potential for jurisdictionally
set reliability targets to be limited to areas where demonstrable shortcomings in general
reliability outcomes are evident or predictable. This approach has the potential to reduce the
regulatory burden associated with ongoing reviews of reliability obligations.
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5 Next steps
The high-level principles the Energy Council has endorsed will inform the jurisdictions’
approaches to setting network reliability requirements. Jurisdictions will report back to the
Energy Council on their compliance with these principles in their reliability setting processes
in mid-2015.
The Energy Council considers that there may be merit in going beyond an application of the
National Electricity Network Reliability Principles towards a consistently applied
methodology. In the absence of a national framework specified in the NER, the Energy
Council requests officials, in consultation with appropriate jurisdictional and national energy
institutions, to explore the feasibility of:

consistent reliability standard setting processes, including economic assessment and
customer consultation;

a national reference template for transmission reliability standards;

the process by which jurisdictions could transfer administration of their reliability
requirement setting processes to the AER in the future; and

compliance monitoring and enforcement arrangements.
In addition, the Energy Council notes that officials have already commenced work on the
interim measures recommended by the AEMC and agreed by ministers on 13 December
2013, specifically:

the AEMC’s development of common definitions for distribution reliability measures
which will be applied in the NER following a rule change process; and

the AER having responsibility for VCR estimates, which is being considered in light
of AEMO’s VCR work and the AER’s functions under the NEL.
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