Transmission Connection Contestability: It’s Finally Here

The transition to renewables is now in full force. Recent generator closures such as the Northern Power Station in South Australia and Hazelwood in Victoria have reinforced that the horse has well and truly bolted. 

However, for entities looking to replace this supply with new renewable generation connecting to the National Electricity Market (NEM) transmission grid, the experience has not necessarily been user friendly. 

In Victoria, proponents have enjoyed a fully contestable market for some 20 years, where any appropriately licensed entity can own and operate connection assets, such as transmission lines and terminal stations. 

Generators have choice, and if you look at the Victorian landscape, players such as AusNet Services, Transgrid, TOA, Murray Link and Basslink all own and operate small parts of the grid. They are able to offer contestable transmission connection services to generators for new connections should they wish. 

This competitive arena has driven lower connection costs and brought a better balance to commercial risk positions from the transmission companies. However, no market is perfect. For many generators, the three way Victorian negotiations between AEMO, the generator and the Transmission Network Service Provider (TNSP) are perceived as time consuming and potentially costly to the connection process.

However, outside Victoria, the rules to date have blocked competition in construction and ownership of the all-important terminal station. Many generators have shared a view that this enables incumbent transmission businesses to use their market position to force connecting parties into "gold plated" solutions, as well as presenting less than balanced commercial terms. 

On multiple occasions, I have been asked if AusNet Services would like to compete outside of Victoria for the ownership and operation of generator connection assets. Until now, I’ve had to explain that the network-end terminal station is not contestable per the NEM rules. This has left some proponents frustrated that a competitive environment is largely unavailable to them. 

The terminal station is a critical piece of the puzzle, costing between $10m to over $40m depending on the voltage level, the switching arrangements and the amount of transformers required. 

This lack of competition outside of Victoria has caused endless frustration in the market. 

However, the AEMC recently published its final determination in regards to new Transmission Connections and Planning Arrangements. 

From 1 July 2018, terminal station ownership will be contestable across the NEM. 

This is no doubt a positive step for power users as it should result in faster and cheaper connections across NEM connected states, leading to lower electricity prices. 

Unfortunately, the AEMC ignored a near unanimous industry position that operations and maintenance (O&M) of these terminal stations should also be contestable. While acknowledging that the fully contestable system, including O&M, works well in Victoria, the AEMC has nonetheless decided to not apply the same approach to other states. 

The result? 

Outside of Victoria, incumbent transmission businesses must perform the O&M functions within the terminal station. 

Although a small component in terms of overall cost, this decision could temper any benefits to the market as a result of the rule change. 

For instance, a non-incumbent transmission provider will be able to compete to build a new connection terminal station in NSW, QLD, SA or TAS. However, to provide a complete offer to a generator, the provider would need to share the terminal station layout and equipment list to the local transmission business early in the process. This is required in order to lock in a non-contestable price for the requisite O&M services. 

The problem lies in that incumbent will also be competing to build and own this terminal station, and through this process is likely to receive critical commercial information from a competitor. 

Given the challenge outlined above, the question remains whether the new rules will truly incentivise non-incumbent transmission businesses to compete. This question does not exist in Victoria. 

So what can we expect?

For transmission connection providers such as AusNet Services, these rule changes are a positive step and should result in greater competition across the NEM. However, it is unclear at this stage how the O&M obstacle can be resolved in a way that competitive forces are not stifled or slows down the connection process. That said, I’m confident that the market will find suitable solutions so that generators derive the maximum possible benefit from this change.

For incumbents, the new rules will force them to operate and maintain assets that they neither engineered, built nor own. This will present its own risks and challenges. 

Despite the imperfections found within this new rule change, it can only be viewed as positive news for the industry. We should remain optimistic that generators will receive positive outcomes as the market works its way through this updated landscape. 

This will lead to lower energy prices, which ultimately can only benefit the transition to renewables.

Dennis Freedman is the Infrastructure Investment Manager at AusNet Services, with over 10 years experience in the contestable transmission industry.