22 Dec 2009

MCE gives green light to developing network connections for wind and geothermal generation clusters

by Naveena Rajaretnam, Graeme Dennis

The MCE's decision to create a framework to foster network development for remote generation clusters should facilitate the connection of wind farms and geothermal generating units to the national electricity grid.

The Ministerial Council on Energy (MCE) recently approved the Australian Energy Market Commission's recommendation to facilitate efficient network investment to allow for future generation connection. In its communiqué of 4 December 2009, the MCE recognised the need to continually refine and further strengthen existing energy frameworks and agreed that the MCE would request the Australian Energy Market Commission (AEMC) to initiate rule change processes to introduce a new legal framework for the more efficient connection of clusters of generation known as Scale Efficient Network Extensions (SENEs).

As part of its Review of Energy Market Frameworks in light of Climate Change Policies, the AEMC recommended to the MCE that a new framework be introduced into the National Electricity Rules that provided for the efficient connection of generation to distribution and transmission networks where clusters of generators in the same locations are expected to seek connection over a period of time. The AEMC's analysis revealed that due to the characteristics of the fuel resources for renewable energy generation particularly wind, solar and geothermal, the entry of such generators is likely to be clustered in the same geographic areas which are generally remote from the shared network.

The AEMC has developed a detailed framework for facilitating the construction of SENEs which the MCE has approved. The key features of the framework are:

  • Identification of scale efficient generation zones by AEMO: The Australian Energy Market Operator (AEMO) will be required to identify (in the National Transmission Network Development Plan) any geographic areas which are "scale efficient generation zones" and the the NSP(s) who should be responsible for preparing options for the development of SENEs to such zones. The matters AEMO must have regard to in identifying scale efficient generation zones include:
    • the likelihood of substantial scale efficiencies emerging from the development of SENEs to the relevant area;
    • the viability of future electricity generation projects and the possible location of fuel sources for future generation capacity; and
    • the costs of transporting the fuel source being considered as an alternative to constructing a SENE.
  • Identification of credible options: The NSP identified by AEMO as the entity responsible for the development of the required SENE must assess and publish credible options in its next Annual Planning Report (in the case of Transmission NSPs) or on its website (in the case of Distribution NSPs). A credible option will be one that has a reasonable prospect of development. For each credible option identified, the NSP must consider the location of the connection points of the SENE to the present network and to the scale efficient generation zone as well as the capacity, timetable for development, and estimated economic life, of the SENE.

  • Connection process: The connection process will be consistent where possible with the connection application process for any other connection under Chapter 5 of the National Electricity Rules but there will be some deviations:
    • only Generators (who are persons who already have generating units registered with AEMO) can seek information on proposed SENEs from NSPs. This is a clear difference from the rest of the Chapter 5 process which contemplates that Connection Applicants (which incorporates intending participants not just persons registered with AEMO) can apply for connection;
    • the relevant NSP will be required to prepare a report which sets out its analysis regarding the development of the proposed SENE which will be subject to consultation;
    • the relevant NSP will be required to prepare a SENE connection offer which must contain the proposed terms and conditions for a Generator's connection to the SENE. Generators will be able to negotiate different terms to certain aspects of the connection offer.
  • Regulator guidance: The Australian Energy Regulator (AER) will be responsible for providing guidance on the SENE planning procedure including the methodologies to be adopted by the NSP for determining the aggregate power transfer capability of the SENE and the optimal location of the SENE. The AER will also have the discretion to approve a SENE connection offer. If the AER does not approve or reject a connection offer, it will be taken to be approved. AEMO will also review the aggregate power transfer capability forecast by the NSP for the SENE.

  • Funding of cost of SENEs: The cost of SENEs will be funded initially by Generators connecting to the relevant SENE where shortfalls will be funded by Customers and surpluses will be paid to Customers. The charges to be paid by Generators will be calculated as follows:
    • the present value of the aggregate costs of planning, development, constructing, operating and maintaining the SENE over its economic life and any other relevant costs permitted under the National Electricity Rules; and
    • the annual $/MW charge for connection generation capacity that fully recovers the costs of Generators connecting to the SENE over its economic life. The $/MW charge is to be calculated using a return of capital consistent with the economic regulatory framework applicable to the relevant NSP under the National Electricity Rules.

The AEMC has also proposed provisions for calculating how shortfalls and surpluses will be recovered and paid to Customers.

  • Constraint payment: Generators who connect in excess of their contracted installed capacity to SENEs will be liable to pay constraint payments for exceeding their power transfer capability which results in other Generators connected to the SENE being constrained off.

The MCE's approval of the AEMC's recommendation and draft Rule will involve a Rule change request made to the AEMC most likely in early 2010) which can be fast-tracked (as it has been previously been the subject of a MCE directed review) under the AEMC's Rule change process in accordance with the National Electricity Law. Subject to any delays in the AEMC's Rule change process, the development and planning of SENEs could begin as early as the second half of 2010.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.