AER Developing New Guidance for DER Integration
Fast Facts.
The regulatory framework for distributed energy resources (DER), such as solar PV, batteries and electric vehicles, is rapidly evolving.
The Energy Security Board is progressing a DER Implementation Plan following approval of its Post-2025 market design advice by National Cabinet on 29 October 2021. The plan is intended to reward customers for their generation and flexible demand, enable new value pools, and manage network and system security.
As part of this plan, on 12 August 2021, the Australian Energy Market Commission (AEMC) made its final rule determination on access, pricing and incentive arrangements for DER. The rule places new obligations on distribution businesses around provision of export services, strengthens customer protections, and requires regulatory oversight by the Australian Energy Regulator (AER).
The AER is progressing new guidance to industry, including:
Draft DER integration expenditure guidance note – published in July 2021, the guidance note sets out the AER’s expectations for distribution network service providers’ (DNSPs) DER integration strategy and business case(s) as part of their regulatory proposal;
Export tariff guidelines consultation paper – released in September 2021, the paper focuses on how DNSPs will need to justify future proposals for two-way pricing; and
Customer export curtailment value methodology issues paper – released in October 2021, the paper consults on the methodology to measure the extent to which network investments to enable more DER exports are valued by customers.
The guidelines are intended to guide efficient levels of DER export investment and appropriate two-way price signals. At the same time, they will require DNSPs to have a cohesive strategic, operational, regulatory and consumer-focused approach to DER integration.
Background
Why do we need new regulatory arrangements for DER?
There has been a rapid proliferation of DER in Australia over the last decade – approximately 2.8 million (or 30%) of Australian households have installed solar PV, which is expected to more than double over the next decade. The uptake of home batteries is also growing fast, and the use of electric vehicles (EVs) is expected to accelerate from 2023-24. DER will contribute more than 45% of energy supply by 2050.
This significant uptake of DER means that energy flow, which was traditionally one-way, is now two-way as households export to the grid. This is causing a range of challenges, such as minimum operational demand, system disturbances, network voltage issues, and negative price events. There has also been an increase in customer complaints related to export curtailment, particularly in congested or capacity constrained areas of the network.
The regulatory arrangements are therefore changing to address these challenges, enable more DER to be exported to the grid, and create new services and markets.
What are the new access and pricing rules for distributors?
The AEMC’s final rule recognises that DNSPs have clear obligations in supporting more DER to connect and export to the grid. New obligations require that:
Export services are now part of the core services to be provided by DNSPs – two-way pricing will enable DNSPs to signal to customers when it is better to consume their solar rooftop generation, and when it is better to export it;
DNSPs’ need to ensure efficient DER integration expenditure to provide export services – distributors will need to consider both network and non-network solutions to improve network capacity to connect more DER. The AER will apply existing controls to ensure expenditure (e.g., network augmentation) is efficient;
Export services must be integrated into DNSPs’ planning and regulatory proposals –DNSPs will need to explain how DER integration is managed through the various sections of its regulatory proposal (i.e., expenditure, connections, pricing,), and consumer expectations have been addressed;
DNSPs’ use of export tariffs is subject to several requirements:
DNSPs cannot apply static zero export limits to customers; rather they must specify a basic export level for a 10-year period i.e., the amount of electricity a customer can export to the grid at no cost;
DNSPs are not required to use export tariffs immediately; although they must submit an export tariff transition strategy as part of their Tariff Structure Statement (TSS) proposals;
Existing customers will not face export tariffs until 1 July 2025 at the earliest; and export tariffs must be approved by the AER.
Key Issues
Assessing DER integration expenditure
Published in July 2021, the AER’s Draft DER integration expenditure guidance note sets out the AER’s expectations for DNSPs’ DER integration strategy and business case as part of their regulatory proposals.
Importantly, DNSPs’ DER expenditure proposals must align with a longer-term DER integration strategy. This will require DNSPs to:
Understand the forecast penetration of DER on their networks, and identify the impacts of that penetration;
Gain a clear view of customers’ expectations and demand for export services;
Consider network and non-network solutions, including tariff reform and implementation of dynamic operating envelopes,
Identify the various elements of proposed DER expenditure (e.g., augmentation, ICT capex, opex, demand management innovation); and
Consider the impact of any jurisdictional obligations on DER expenditure.
In addition, DNSPs will need to present a business case(s) for proposed DER expenditure, identifying:
The base case scenario against which the proposed expenditure has been assessed; and
The benefits to be derived from the project, using the benefits framework and VaDER methodology for valuing an increase in hosting capacity set out in the guidance note.
The guidance note is expected to be finalised by mid-2022, along with the CECV methodology (refer below.)
Valuing customer export curtailment
Released in October 2022, the AER’s customer export curtailment value methodology issues paper consults on the proposed methodology to measure the extent to which network investments to enable more DER exports, are valued by customers.
Customer export curtailment values (CECVs) are intended to guide efficient levels of network expenditure for export services. That is, when reviewing DER integration investment proposals, the AER must be satisfied that the value of additional exports will occur as a result of the proposed investment. The paper seeks stakeholder feedback on several issues:
DER value streams to be captured with CECVs, and methods for quantifying these value streams;
Relationship between CECVs and export tariffs;
Estimating CECVs across different customer groups, geographic locations, timeframes and associated modelling issues.
The draft CECV methodology is expected to be released in early 2022 with the final methodology by July 2022. Under the NER, the AER is required to review the methodology every five years.
Our Insights
These changes form part of an evolution towards greater decentralisation of the energy system and make clear that DNSPs have a critical role to play to enabling new technologies and the value pools that they are creating for market participants.
These are step changes for DNSPs – particularly around the way in which they plan and invest in the low voltage system, and the way in which they interact with customers. The emerging regulatory arrangements will require a cohesive strategic, operational, regulatory and consumer-focused approach to DER integration. This means DNSPs will require effective coordination and integrated planning across strategy, operational, regulatory, and customer-facing areas of the business.
An overall DER integration strategy is more than a compliance exercise. It will require DNSPs to undertake scenario-based network forecasting and analysis to provide a data driven view of forecast DER penetration, export and consumption (by type, location and timeframes), and analysis of likely impacts – for example, areas of constraint or congestion, voltage or other system issues, and requirements for visibility of the low voltage network.
These are areas of developing capability for most DNSPs. Planning and operational teams will need to identify what data and modelling are needed to enhance network visibility, identify options to address network hosting capacity requirements, and set operating limits for DER, which will inform business cases for DER related capital and operating expenditure. As part of this process, DNSPs will need to consider the role that export pricing can play in enabling more DER to be integrated to the grid by signalling to consumers when it is best to consume or export energy.
There is no doubt that DBSPs will need to make investments to integrate DER and enable new markets. These guidelines therefore place significant weight on the extent to which DNSPs’ DER expenditure and pricing proposals have been informed by consumer preferences and stakeholder engagement, including measuring the extent to which network investments to enable more DER exports are valued by customers. DNSPs will need to demonstrate the breadth and depth of their consumer engagement, and how this has informed their overall DER integration strategy, business plans, export transition strategy and pricing proposals.
These foundational requirements are part of a broader DER implementation plan being progressed by the ESB and market bodies seeking to define distribution system operation (DSO) roles and responsibilities and enable new two-sided markets for customers. With the pace of the energy transition[1], DNSPs need to be on the front foot as the penetration of DER, including EVs accelerates, the DER ecosystem around the customer’s meter becomes more crowded, and regulatory arrangements and markets continue to evolve.
[1] AEMO’s Draft 2022 Integrated System Plan suggests that Step Change is the most likely scenario.
For more information, contact Simone Rennie at srennie@renniepartners.com.au
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