Blackout insurance: A proposed shift in the electricity network to smooth the transition to renewables

Maintaining system strength in the Australian electricity network in the face of a steep increase in renewable generation is an increasingly significant issue faced by network owners and generators alike. System strength relates how quickly the system can recover following a fault or disturbance on the power system. As an example, if a large generator trips, insufficient system strength can lead to cascading outages and at the extreme, lead to system outages and blackouts.

In the past, system strength was a by-product of Australia’s grid generation mix made up of coal, gas, and hydroelectric generators. Renewable generation however does not inherently provide this service to the network. The fast rate of large-scale renewable and rooftop solar installations has led to questions around how we manage the strength of our network and provide cheaper renewable electricity to consumers while keeping the lights on.

The pace of change is challenging the ‘just in time’ approach to system strength

In response to the last major blackout in South Australia in 2017, maintaining system strength has largely been the responsibility of newly connected generators. Under a ‘do no harm’ framework, new renewable generators connecting into the grid must remediate any loss in system strength they cause to the surrounding network.

While these reforms helped in the interim, the pace of installation for renewables has continued to skyrocket and stress the existing framework. Generators have been required to spend large sums of money installing new pieces of equipment to remediate their system strength impact, but the size and cost of this equipment can be hard to forecast until right before connection. As an example, a generator may seek to connect into a strong area of the network, but by the time they connect, other generators have already come online, the system has become unstable, and further remediation is required.

Consumers are the ones who ultimately pay for this ‘just in time’ approach, either through higher electricity prices passed on from generators, delays in connections, or through the market operator stepping in to fix immediate issues. With renewable installations showing no sign of slowing down and impeding closures of coal generators which currently provide system strength to the network, there is a need for change.

Preparing the network through a forward looking approach

In April 2021, the Australian Energy Market Commission (AEMC) released a Draft Determination aimed at preparing the network for the large growth in renewables with a proactive approach to system strength.

The new framework proposed by the AEMC covers three main areas:

  1. Proactive procurement – Putting the onus on the network owners to procure system strength (through large centralised pieces of equipment) ahead of time to keep the network stable.
  2. Additional standards – Requiring renewable generators to meet additional access standards when they connect in order to reduce their impact on system strength.
  3. New charging regime – Allowing generators to either pay to access system strength services offered by the network owner or provide their own solution.

Centralised system strength services provided by the network owner ahead of time should provide scale-efficient cost reductions and greater certainty to generators compared to the current framework. Generators would also only be charged according to their needs, incentivising them to install innovative technologies which put less strain on our networks. These savings will ultimately flow through to consumers and help to keep the system operating smoothly as more renewables connect.

Gold-plating the network, or an insurance policy in the face of uncertain changes?

The proposed framework represents a shift in thinking for the energy market. Proactive investment in the network has often faced a perceived risk of ‘gold-plating’, where consumers pay for assets which the market does not need.

In this case, since network owners will be building system strength ahead of time, it is essential the forecasts that underpin these investments are robust – just as consumers receive the benefits, consumers will also bear the risk and ultimately pay for system strength which is built but not used by generators.

However, the scale and speed of the energy transition means our existing regulatory mechanisms cannot respond fast enough and consumers are bearing larger and more costly risks of system outages. In essence, by building assets ahead of time, the intention is to insure ourselves against incurring those larger costs.

For some regions it is uncertain whether implementation will be rapid enough to solve immediate issues. With these changes being transitionally implemented between 2022 and 2025, keeping our network strong and enabling lower costs for consumers in the face of a rapidly changing energy mix will continue, in the meantime, to be a pressing issue.


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