Bills

National Electricity (South Australia) (Orderly Exit Management Framework) Amendment Bill

Introduction and First Reading

The Hon. A. KOUTSANTONIS (West Torrens—Minister for Infrastructure and Transport, Minister for Energy and Mining) (15:39): Obtained leave and introduced a bill for an act to amend the National Electricity (South Australia) Act 1996. Read a first time.

Second Reading

The Hon. A. KOUTSANTONIS (West Torrens—Minister for Infrastructure and Transport, Minister for Energy and Mining) (15:39): I move:

That this bill be now read a second time.

I seek leave to insert the second reading explanation in Hansard without my reading it.

Leave granted.

As Australia responds to climate change, the National Electricity Market is transitioning from a centralised energy system that relies on thermal generation, to a modern energy system containing widely dispersed renewable generation.

The pace and scale of this transition brings new opportunities to Australia for cheaper and cleaner forms of energy; however, this transition also brings key challenges to the National Electricity Market.

Thermal generators face long-term difficulties from challenging market conditions and an ageing fleet. To maintain system reliability and security, it is essential that, as thermal generators retire there is adequate renewable generation and supporting network infrastructure in place.

Governments are doing much to support the transition, including through support for new generation, such as the Australian Government supported Capacity Investment Scheme, and through support for new network investment, including through the Australian Government's Rewiring the Nation program.

South Australia is fully committed to a national approach, becoming, in July 2024, the first state to sign a final Renewable Energy Transformation Agreement. This agreement includes Australian Government underwriting support for a minimum 1,000 megawatts of new wind and solar projects in the state and 400 megawatts of new storage capacity in the state.

But there are practical limits as to how much infrastructure can be put in place in a given timeframe, leading to the possibility of timing mismatches associated with the exit of coal or gas fired generation, and risks of reliability or system security shortfalls. As well, key projects may be subject to delays.

In this context, existing mechanisms in the National Electricity Law and Rules, such as market pricing and settings, including the Market Price Cap, and the Retailer Reliability Obligation, may not be sufficient to address all potential risks associated with the early closure of a thermal generator.

As a result, there is a need for a mechanism to ensure the potential early exit of thermal generation does not adversely impact on reliability and system security needs.

The National Electricity (South Australia) (Orderly Exit Management Framework) Amendment Bill 2024 I present today serves to meet this need by establishing an Orderly Exit Management Framework.

On 17 September 2024, Energy Ministers approved this Bill and, with South Australia the lead legislator for the national energy laws, I am introducing it here today.

The Framework establishes a transparent process that enables jurisdictions to:

Firstly, identify whether the early retirement of a thermal generator creates system reliability or security risks.

Secondly, investigate alternatives to replace the outgoing capacity, undertake voluntary negotiations with the generator.

Thirdly, as a last resort, direct the generator to continue to operate until the risk of its retirement is managed.

It is important to note that the Framework will only apply in a jurisdiction if that jurisdiction opts-in by making the necessary regulations in their respective Application Act. The cost of the Framework will be met by consumers in the jurisdiction in which the generator is located.

The intention of the Framework is that any reliability or system security issue arising from the proposed early closure of a generator should first be addressed by identifying an alternative solution or seeking a voluntary agreement with the retiring generator. Only once these stages have been fully explored can the Minister then take the step of directing a generator, via a Mandatory Operation Direction, to provide system services for the period required to avoid a system needs shortfall.

The first stage, or gateway stage, of the Orderly Exit Management Framework is where a generator submits, or has submitted, an early closure proposal for a generating unit. This stage aims to identify whether a generator bringing forward the closure date of a generating unit, will create a shortfall in reliability or systems security.

As part of this gateway stage, the Minister can elect to obtain a System Needs Assessment from the Australian Energy Market Operator. This advice assesses the impacts of the proposed closure of the generating unit on the reliability and security of the electricity system.

If the Minister believes there is likely to be a system needs shortfall, the Minister can decide whether to trigger the next phase of the Framework.

As part of this next stage, the Minister issues a direction to the Market Operator to perform a search for alternative solutions to address the system needs shortfall.

Additional actions, such as market sounding activities, may also be undertaken at the discretion of the Minister.

The Minister must decide whether to engage in negotiations to establish a voluntary agreement with the generator to extend its operation. This can be done either following, or in parallel, to the search for alternative solutions.

The Bill enables the Minister to issue a Mandatory Operation Direction as a last resort. Such a direction requires the generator to operate if the Minister is satisfied that giving such a direction is necessary to maintain power system security or system reliability, or for reasons of public safety.

Before issuing a Mandatory Operation Direction the Minister must be satisfied there are no reasonably practicable alternatives to issuing the direction, must obtain advice from Market Operator on alternative solutions, and must ensure good faith negotiations with the generator. The generator may be required to provide prescribed information, which will help facilitate informed negotiations.

A Mandatory Operation Direction to a generator will set out, amongst other things, the capacity to be supplied, the way in which the generating unit may be operated, the period for which the generating unit must be operated and the circumstances in which the Minister must consider amending the direction. The generator, and affiliates that provides services to the relevant generating units, are required to comply with the terms of the Mandatory Operation Direction.

A generator that is subject to a Mandatory Operation Direction will be compensated for its continued operation. The Bill provides for a jurisdiction to establish a financial vehicle to make payments to a generator under a payment order issued by the Minister, with the amounts to be received by the generator under the payment order being determined by the Australian Energy Regulator.

The payment order may include the payments the generator is to receive for the reasonable costs of operating and maintaining the generating unit, a risk management margin, a fair margin, and other costs to be prescribed by the Rules.

The Bill provides for a mechanism to recover the costs of a voluntary agreement, a Mandatory Operation Direction, and administrative costs.

The Orderly Exit Management Framework process will be highly transparent, support good governance, and provide confidence of the process to consumers through the release of key advice from market bodies.

The Bill allows for the South Australian Minister to make initial Rules. The initial Rules are in the process of being finalised and are expected to be progressed to Energy Ministers in December 2024. If adopted, in my role as Minister for Energy and Mining, I will make the initial Rules pursuant as provided for in the National Electricity Law.

I will now step through some of the key provisions of the Bill in more detail.

Division One includes key definitions and establishes that, as I mentioned before, the Orderly Exit Management Framework will only apply if a jurisdiction decides to opt in.

Jurisdictions can, by regulation, also specify the extent to which the part applies, potentially including the application of limiting criteria on the generators to which the Orderly Exit Management Framework will apply.

A jurisdiction may also prescribe in regulation that an existing agreement with a generator be a voluntary agreement within the Orderly Exit Management Framework. The main reason for doing this would be to engage the provisions of the Orderly Exit Management Framework that provide for cost recovery from electricity consumers.

The gateway for the Framework will be where a registered generator, submits, or has submitted, an early closure proposal for a scheduled thermal generating unit. This is a prerequisite for the issue of a Mandatory Operation Direction and, in practice acts as a trigger for subsequent processes under the Framework.

When a generator submits an early closure proposal, it is required to provide prescribed information intended to help inform assessments by energy market bodies and, if required, support balanced negotiations between the generator and jurisdiction.

Division Two describes the Mandatory Operation Direction. In practice, the requirements for the issue of the Mandatory Operation Direction largely establish the sequencing of processes under the Framework. These processes establish a solid information base for the Minister to make an informed decision on the best way to address a system need arising from the early closure of a generator.

The Minister is required to obtain advice from Australian Energy Market Operator on the impact of the proposed closure of the generating unit on the reliability and security of the electricity system before issuing a Mandatory Operation Direction.

The Minister is also required to obtain advice from Australian Energy Market Operator on alternatives and be satisfied that there are no reasonably practicable alternatives before issuing a Mandatory Operation Direction.

These measures will help ensure that the Minister can only issue a Mandatory Operation Direction as a last resort to support system needs.

The bottom line is that the Minister will have access to the necessary information to make decisions.

The Minister must engage in good faith voluntary negotiations with the generator for its continued operation before issuing a Mandatory Operation Direction. However, the Bill is not prescriptive of the terms of a voluntary agreement in order to allow flexibility in the negotiations.

Beyond those described above, Division Two specifies the requirements that must be satisfied before the Minister may issue a Mandatory Operation Direction and what this direction must include.

Note that, to provide greater certainty to markets, there are limits to the period that a Mandatory Operation Direction can require the continued operation of a generating unit.

Division Two also sets out the processes for amending and terminating a Mandatory Operation Direction.

Division Three includes provision for the information and reporting requirements. The detail of the prescribed information requirements for generators will be set out in the Rules but is anticipated to cover information on the technical condition of the plant and also financial information with respect to the generator, including information on the generator's costs.

Division Four covers financial matters, including the payments to be made to and from the generator, and the structures for determining and making those payments.

Note that the payment and cost recovery structures may be used to make payments to and from a generator that is subject to a Mandatory Operation Direction but also for a voluntary agreement with a generator or, in some cases, an alternative option.

The structures for making payments to the generator, and to market bodies for administrative costs, include the establishment of a financial vehicle and an orderly exit management fund. The financial vehicle will make payments to the generator and also market bodies, drawing money from the fund.

This Division also specifies what money must be paid into the fund, including that received by the financial vehicle from distribution network service providers under a contribution order or from a generator under a generator payment instrument.

The costs of the Framework will be recovered from consumers through distribution network service providers. The Australian Energy Regulator will determine the orderly exit management contribution to be paid by a distribution network service provider. The financial vehicle will direct a distribution network service provider to make the payments in accordance with the contribution determination to the orderly exit management fund through a contribution order.

Division Five covers miscellaneous items, including exemptions from some of the requirements for the issue of a Mandatory Operation Direction, mainly related to situations where there is less than thirty months to the proposed early closure date.

The division also protects the Minister from any claims relating to actions under the Framework, and a process for the Australian Energy Market Commission to periodically review whether the policy objective and terms of the Orderly Exit Management Framework remain appropriate.

I commend this Bill to Members.

Explanation of Clauses

Part 1—Preliminary

1—Short title

This clause is formal.

2—Commencement

This clause provides for the measure to commence on the day that it is assented to by, or on behalf of, the Crown.

3—Amendment provisions

This clause is formal.

Part 2—Amendment of National Electricity Law

4—Amendment of section 34—Rule making powers

Section 34 of the National Electricity Law as amended by this clause will authorise the AEMC to make rules for or with respect to any matter or thing related to, or necessary or expedient for, the purposes of orderly exit management under Part 8AA of the Law.

5—Insertion of section 90EG

This clause inserts a new section.

90EG—South Australian Minister to make initial Rules relating to orderly exit management

Proposed section 90EG authorises the South Australian Minister to make Rules for matters or things necessary or expedient for the following:

the making of mandatory operation directions under Part 8AA Division 2 of the Law;

the information that must be given to the AER, or otherwise disclosed, under Part 8AA Division 3 of the Law;

the functions of the financial vehicle under section 118AS of the Law;

the administration of the OEM fund under Part 8AA Division 4 Subdivision 2 of the Law;

payments to and by MOD generators under section 118AY of the Law;

the orderly exit management cost recovery mechanism under Part 8AA Division 4 Subdivision 4 of the Law.

6—Insertion of Part 8AA

The clause proposes the insertion of a new Part.

Part 8AA—Orderly exit management

Division 1—Preliminary

118AA—Definitions

This section provides definitions of terms used in Part 8AA.

118AB—Application of Part to jurisdiction

Under this section, Part 8AA does not apply in a participating jurisdiction unless a regulation made by the Governor of that jurisdiction, on the recommendation of the Minister, is in force specifying—

the date from which the Part applies; and

the extent to which the Part applies; and

the way the financial vehicle is to be established.

The section also provides that an agreement made between the Minister and a Registered participant before Part 8AA applies in the participating jurisdiction may be prescribed by a regulation as a voluntary agreement.

Division 2—Mandatory operation direction

118AC—Generating units that may be subject to mandatory operation direction

This section provides that the Minister may issue a mandatory operation direction for a relevant generating unit if the relevant Registered participant has submitted an early closure proposal for the unit.

118AD—Mandatory operation direction

This section makes provision for the Minister to issue mandatory operation directions requiring a Registered participant to operate 1 or more relevant generating units. Before issuing a direction, the Minister must be satisfied that giving the direction is necessary for the national electricity system or a region within the national electricity system to maintain power system security or system reliability, or for reasons of public safety.

118AE—Registered participant must comply with mandatory operation direction

If a Registered participant receives a mandatory operation direction, they must comply with the direction and also with the Rules obligations. This section also provides—

that a Registered participant does not incur liability for breach of contract, breach of confidence or another civil wrong by complying with a mandatory operation direction, including the Rules obligations; and

for the Rules to prescribe circumstances in which a Registered participant is not required to comply with a mandatory operation direction.

118AF—Minister to make information public

This section requires the Minister, when issuing a mandatory operation direction, to make the following information publicly available in accordance with the Rules:

the reasons the Minister is satisfied that giving the direction is necessary;

a list of the energy projects considered before making the direction.

118AG—AEMO to make information public

Advice given to the Minister by AEMO (as required under section 118AD) on the impact, or likely impact, of the closure of a generating unit must be made publicly available by AEMO within 60 days after the advice is given.

118AH—Voluntary agreement

Under this section, the Minister must, before issuing a mandatory operation direction, negotiate in good faith to seek agreement with the Registered participant for continued operation of the relevant generating units

118AI—Mandatory operation direction applies to affiliates

This section provides that a mandatory operation direction, including the Rules obligations, applies to an affiliate of a Registered participant in the same way as the direction applies to the Registered participant if the affiliate provides services for 1 or more relevant generating units subject to the mandatory operation direction.

118AJ—Amendment of mandatory operation direction

This section authorises the Minister to amend a mandatory operation direction by revoking the direction and issuing a new one under section 118AD.

118AK—Termination of mandatory operation direction

Under this section, the Minister may terminate a mandatory operation direction by giving the Registered participant subject to the direction and the AER written notice specifying that the direction is terminated. The notice must also specify the date, not less than 3 months after the date of the notice, on which the termination takes effect.

The section specifies circumstances in which a mandatory operation direction may be terminated by the Minister.

118AL—Closure of generating unit after mandatory operation period

Immediately after the mandatory operation period applying to a MOD generating unit ends or is terminated under section 118AK, the Registered participant that operates the generating unit must cease operating the generating unit. In addition, the Registered participant's registration under section 12 in relation to the generating unit ends.

118AM—Compliance with obligations after closure of generating unit

This section requires a Registered participant who is or was subject to a mandatory operation direction to keep in place arrangements to ensure the Registered participant can, on the closure of a MOD generating unit, comply with all of the Registered participant's obligations associated with the generating unit and meet all liabilities associated with the generating unit including liabilities arising from closing the unit.

Division 3—Information and reporting

118AN—AEMO and AER may disclose information

This section authorises the Minister to direct AEMO and the AER to provide information to the Minister or to each other.

118AO—Information must be given to AER

Information of a kind prescribed by the Rules must be given by a Registered participant to AER as required by this section.

118AP—AER may request other information

The AER may, under this section, request a Registered participant, in writing, to give the AER information the AER reasonably requires for its functions under Part 8AA or other information of a kind prescribed by the Rules. A Registered participant who receives a request under the section must comply with the request.

118AQ—Information disclosure

This section requires the Minister, if they issue a mandatory operation direction, to publish a notice that includes the following information:

the Registered participant to whom the direction was issued;

the relevant generating units to which the notice applies;

the way the relevant generating units must be operated;

the generating capacity that must be supplied by the relevant generating units;

the period for which the relevant generating units must be operated;

the circumstances in which the Minister must consider amending the direction;

information prescribed by the Rules.

Further, if the Minister enters into a voluntary agreement, they must publish a notice containing information prescribed by the Rules.

118AR—Annual performance report

Under this section, if a Registered participant is subject to a mandatory operation direction, they must, in accordance with the Rules, prepare an annual report setting out the following:

the Registered participant's compliance with the direction;

the technical condition of each relevant generating unit to which the direction applies;

the duration, scope and cost of forecast maintenance for each relevant generating unit to which the direction applies;

financial information prescribed by the Rules;

information, prescribed by the Rules, about the fuel used in each relevant generating unit;

other information prescribed by the Rules.

Division 4—Financial matters

Subdivision 1—Financial vehicle

118AS—Establishment and functions of financial vehicle

Under this section, the Minister must, within a reasonable time after a regulation is made under section 118AB, establish the financial vehicle in the way prescribed by the regulation. The functions of the financial vehicle are the functions set out in Part 8AA Division 4 in addition to the functions prescribed by the Rules. The financial vehicle is required to act in a commercially reasonable and prudent way.

Subdivision 2—Orderly exit management fund

118AT—Establishment of orderly exit management fund

The financial vehicle is required under this section to establish a fund called the orderly exit management fund. Money in the orderly exit management fund must be paid into an account kept with an authorised deposit-taking institution.

118AU—Payments into orderly exit management fund

It is a requirement under this section that the following money be paid into the orderly exit management fund:

all money received by the financial vehicle under a contribution order or a generator payment instrument;

interest paid on money in the fund;

all money appropriated by the Parliament of a participating jurisdiction, or advanced by the Treasurer of a participating jurisdiction, for payment into the fund;

all money borrowed by the financial vehicle;

other money required to be paid into the fund under the Regulations, the Rules or another law of a participating jurisdiction.

118AV—Payments from orderly exit management fund

This section specifies that the following payments may be made from the orderly exit management fund:

money required for the functions and obligations of the financial vehicle under Part 8AA;

money required for the functions and obligations of AEMO and the AER under Part 8AA;

money required to be paid from the fund by the Regulations, the Rules or another law of a participating jurisdiction.

118AW—Payments where mandatory operation direction not made

Under this section, if the Minister is satisfied there is a reasonably practicable alternative to issuing a mandatory operation direction, the Minister may direct the financial vehicle to make payments from the orderly exit management fund to meet reasonable costs associated with the reasonably practicable alternative.

118AX—Payments where voluntary agreement made

This section provides that if the Minister makes a voluntary agreement, the Minister may direct the financial vehicle to make payments from the orderly exit management fund in accordance with the agreement.

Subdivision 3—Payments to and by MOD generators

118AY—Ministerial order

Under this section, the Minister must, following the making of a mandatory operation direction, by 1 or more written orders made in accordance with the Rules, direct that the payments set out in the order be made by the financial vehicle to a MOD generator or be made—

by the financial vehicle to a MOD generator; and

by a MOD generator to the financial vehicle.

A payment order may specify the payments a MOD generator is to receive for the following:

the reasonable costs directly related to operating and maintaining the relevant MOD generating unit and, in accordance with the Rules, a fair margin on those costs;

a risk management margin, including risks associated with the relevant MOD generating unit being inoperable for 1 or more periods of time;

other costs prescribed by the Rules.

A person subject to a payment order is required to comply with the order.

118AZ—Excluded matter

This section provides that a generator payment instrument is declared, under the Corporations Act 2001 of the Commonwealth, to be an excluded matter for Chapter 7 of that Act.

Subdivision 4—Orderly exit management cost recovery mechanism

118AZA—Orderly exit management contributions

This section specifies how the amounts of orderly exit management contributions to be made by a distribution network are to be determined:

amounts determined by the AER for payments under a payment order;

amounts determined by the Minister for payments made—

to a Registered participant under a voluntary agreement; and

under section 118AW;

amounts determined by the Minister to meet—

costs incurred by AEMO and the AER for advice, assessments, determinations, information and reports and other functions under this Part; and

the financial vehicle's reasonable exercise of functions under this Part;

amounts provided for in the Rules.

118AZB—Public notice of orderly exit management contributions

This section requires the AER to determine the orderly exit management contribution to be paid by a distribution network service provider for a financial year and make the determination publicly available in the Gazette and in other ways determined by the AER or the Minister.

118AZC—Orderly exit management payments by distribution network service providers

Under this section, the financial vehicle may, by written order, direct a distribution network service provider to make payments to the orderly exit management fund in accordance with the contribution determination applying to the distribution network service provider.

118AZD—Cost recovery by distribution network service providers

This section provides that the Rules may make provision for a distribution network service provider to recover certain amounts from electricity consumers and refund an amount, or part of an amount, paid by electricity consumers.

Division 5—Miscellaneous

118AZE—Minister not required to take certain actions before making mandatory operation direction

This section provides that the Minister is not required to comply with certain provisions of Part 8AA before issuing a mandatory operation direction for a relevant generating unit if, on the application of the Part in the participating jurisdiction, there are less than 30 months before the expected early closure date of the generating unit.

Further, the Minister is not required to comply with section 118AH before issuing a mandatory operation direction for a relevant generating unit if—

there are less than 30 months before the expected early closure date of the generating unit; and

the Minister is of the opinion that the anticipated closure of the relevant generating unit represents an unacceptable risk to power system security or national electricity system reliability.

118AZF—No liability for enactment or operation of Part

This section provides that no action, claim or demand lies, or may be made or allowed by or in favour of a person, against the Crown, the Minister or another person exercising functions under Part 8AA for or in relation to any damage, loss or injury sustained or alleged to be sustained because of the enactment or operation of Part 8AA or because of anything done, or purporting to be done, or a rule made, under the Part.

118AZG—Review of Part

The AEMC is required under this section to periodically review Part 8AA to determine whether the policy objectives of the Part remain valid and whether the terms of the Part remain appropriate for securing those objectives.

118AZH—Consultation between NSW and ACT

The relevant Minister of New South Wales is required under this section to consult with the relevant Minister of the Australian Capital Territory in certain specified circumstances.

Debate adjourned on motion of Mr Cowdrey.