National Electricity (South Australia) (Retailer Reliability Obligation) Amendment Bill

Second Reading

The Hon. R.I. LUCAS (Treasurer) (12:18): I move:

That this bill be now read a second time.

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

Leave granted.

The Government is delivering an important national reform, the Retailer Reliability Obligation, which is a mechanism designed to ensure the electricity system operates to reliably meet electricity demand at the lowest cost.

The Retailer Reliability Obligation is designed to incentivise retailers and other market customers to support the reliability of the National Electricity Market through building on their contracting and investment strategies that underwrite investment in dispatchable capacity by encouraging earlier and longer term contracting.

If a forecast supply shortfall is identified, this would trigger an obligation on electricity retailers to demonstrate their contracting can meet their share of peak demand one year in advance.

The status quo is not an option. A number of factors have complicated long-term investment decisions in the National Electricity Market. This initiative will ensure the reliability of the system is maintained at the lowest cost.

The Retailer Reliability Obligation is designed to give confidence to all stakeholders that sufficient dispatchable power will be available when required as the National Electricity Market transitions.

Ensuring that competition is not undermined has been a key consideration in the development of the Retailer Reliability Obligation.

The National Electricity (South Australia) (Retailer Reliability Obligation) Amendment Bill 2019 seeks to implement the framework for the Retailer Reliability Obligation through amendments to the National Electricity Law, set out in the schedule to the National Electricity (South Australia) Act 1996.

The Amendment Bill provides for further regulatory requirements related to the Retailer Reliability Obligation to be set out in the National Electricity Rules. To ensure the complete regulatory package can be commenced at one time, the Amendment Bill provides for the South Australian Minister to make the initial set of National Electricity Rules relating to the Retailer Reliability Obligation. Once the initial set of National Electricity Rules has been made, the Minister will have no power to make any further Rules or Code.

The Amendment Bill provides that a person who is a Registered participant in relation to the activity of purchasing electricity directly through a wholesale exchange is a liable entity for the reliability obligation.

It is intended that an initial set of National Electricity Rules will prescribe where a person who is a Registered participant is not a liable entity as well as prescribe where a person exempted from the requirement to be a Registered participant is a liable entity.

Large electricity customers are not liable entities for the purposes of the Bill, however, flexibility is provided for large electricity customers of a prescribed size to opt-in to managing some or all of their reliability exposure. The initial set of National Electricity Rules will prescribe the annual consumption threshold above which the customer will be eligible to opt-in. It is also intended that the initial set of National Electricity Rules will set out a process for a non-liable person to opt-in to the reliability obligation, including the timeframes, form and process.

A key component of the Retailer Reliability Obligation framework is the determination of whether there are forecast reliability gaps in the future. The Bill requires that each year the Australian Energy Market Operator undertakes forecasting on reliability gaps for future years. It is intended that this function, including the manner, form and timeframes for forecasting information, will be set out in the initial set of National Electricity Rules.

A forecast reliability gap is linked to the National Electricity Market reliability standard. A reliability gap would occur where the forecast reliability in a region in a given financial year would result in the National Electricity Market reliability standard not being met to a material extent.

It is intended that the initial set of National Electricity Rules will establish how the materiality of a gap between the Australian Energy Market Operator's forecast for a region and what is required to meet the National Electricity Market reliability standard is determined.

Australian Energy Market Operator forecasts are over a ten year outlook period, which provides the market with the opportunity to invest to address identified reliability gaps. The Amendment Bill provides for the triggering of the Retailer Reliability Obligation if the Australian Energy Market Operator continues to forecast a material reliability gap three years from the period in which it is forecast to occur. To trigger the Retailer Reliability Obligation, the Australian Energy Market Operator requests a reliability instrument be made by the Australian Energy Regulator.

Importantly, the request to the Australian Energy Regulator will provide information about the forecast reliability gap such as the region in which it is forecast to occur and the gap period. The purpose of triggering the Retailer Reliability Obligation is to put liable entities on notice of the period for which they may be required to hold net contract positions that are sufficient to meet their share of the one-in-two year peak demand forecast for the forecast reliability gap period. The Australian Energy Market Operator request to the Australian Energy Regulator is therefore required to outline the relevant trading intervals during the forecast reliability gap period.

The Retailer Reliability Obligation is triggered if the Australian Energy Regulator decides to make a reliability instrument. One of the key objectives of such a reliability instrument is for the market to have the right signals to contract and invest to minimise the likelihood of the reliability gap occurring.

The Amendment Bill also provides for supplementary provisions related to the triggering of the Retailer Reliability Obligation which are only to apply in South Australia and are made through amendments to the National Electricity (South Australia) Act 1996.

In recent years, South Australia has experienced electricity supply events which have not been forecast by the Australian Energy Market Operator three years ahead of their occurrence. The Amendment Bill therefore provides for the South Australian Minister to make a reliability instrument if it appears on reasonable grounds, that there is a real risk that the supply of electricity to all or part of South Australia may be disrupted to a significant degree on one or more occasions during a period.

Generally, the Amendment Bill requires the South Australian Minister to make a reliability instrument three years ahead of the real risk of a disruption. This timeframe would only allow the Retailer Reliability Obligation to contribute to reliability three years after the commencement of the provisions in the Amendment Bill.

This is an unsatisfactory outcome for South Australian consumers which have already experienced electricity supply events in recent years. To address this concern, the Amendment Bill provides for a reliability instrument to be made 15 months ahead of the real risk of a disruption in the transitional years. It is the intention of the South Australian Minister to assess whether there is a real risk of disruption to a significant degree as soon as the provisions in the Amendment Bill are commenced.

If the South Australian Minister intends to make a reliability instrument, the Amendment Bill requires the South Australian Minister to consult with the Australian Energy Market Operator and the Australian Energy Regulator in relation to the instrument the Minister proposes to make.

The intention of this South Australian derogation is to better manage the risk that a reliability gap could emerge at any time across the 10 year forecast period that may not have been forecast by the Australian Energy Market Operator. It will also help manage any risks to maintaining reliability during the transition to the new reliability obligation framework.

Reporting by liable entities associated with the Retailer Reliability Obligation is not triggered unless a material reliability gap continues to be forecast one year out from when it is expected to occur.

The Amendment Bill provides for the Australian Energy Market Operator to request a reliability instrument be made by the Australian Energy Regulator if it continues to forecast a material reliability gap one year from the period in which it is forecast to occur.

If the Australian Energy Regulator makes a reliability instrument, liable entities must ensure that their net contract position for the trading intervals prescribed in the instrument is no less than its share of the one-in-two year peak demand forecast for the forecast reliability gap period. The reliability instrument made by the Australian Energy Regulator will prescribe the date by which liable entities must report their net contract position.

The Amendment Bill defines that qualifying contracts for the reliability obligation are directly related to the purchase or sale of electricity through the wholesale exchange and entered into in order to manage exposure to spot price volatility.

It is intended that the initial set of National Electricity Rules will describe other types of contracts which are qualifying contracts. The intent is to provide flexibility, in the future, to accommodate contracts which meet the policy intent. It is intended the Rules will also prescribe the types of contracts which are not qualifying contracts and establish how a liable entity's net contract position is to be determined.

The compliance regime associated with the Retailer Reliability Obligation is not triggered unless peak demand during a trading interval in the reliability gap period is more than the one-in two year peak demand forecast for the reliability gap period.

The Bill provides for new civil penalty provisions in respect of the Retailer Reliability Obligation with amounts not exceeding (for either a natural person or body corporate) $1 million for a breach relating to a reliability gap period and $10 million for a breach that relates to a second or subsequent reliability gap period.

The Amendment Bill also provides for the Australian Energy Market Operator to be the safety-net procurer of last resort for a region. If the material reliability gap remains one year from the forecast gap, the Australian Energy Market Operator may enter into contracts to secure electricity reserves for the reliability gap period prescribed in the reliability instrument. The National Electricity Rules will provide greater detail about this function.

It is intended that the initial National Electricity Rules will establish a cost-recovery scheme for the Australian Energy Market Operator's procurer of last resort function. The intention of the scheme is to enable the Australian Energy Market Operator to recover the costs incurred in performing its procurer of last resort function from liable entities which have failed to contract sufficiently to cover their share of the one-in-two year peak demand forecast for the reliability gap period.

The Bill caps the procurer of last resort costs which can be recovered from a liable entity at $100 million.

The Bill provides for expansion of the functions and powers of the Australian Energy Regulator in relation to the Retailer Reliability Obligation, including compliance audits by the AER. The Australian Energy Regulator will be required to make procedures and guidelines in respect of compliance with the Retailer Reliability Obligation.

I commend this Bill to Members.

Explanation of Clauses

Part 1—Preliminary

1—Short title

2—Commencement

3—Amendment provisions

These clauses are formal.

Part 2—Amendment of National Electricity (South Australia) Act 1996

4—Insertion of Part 7A

This clause inserts Part 7A into the National Electricity (South Australia) Act 1996 (as distinct from the National Electricity Law set out in the Schedule to the National Electricity (South Australia) Act 1996). New Part 7A proposes modifications of the application of the Retailer Reliability Obligation (set out in Part 2A of the National Electricity Law) within South Australia:

Part 7A—Retailer Reliability Obligation—South Australian modifications

19A—Modifications of Law in this jurisdiction—Retailer Reliability Obligation

Section 14I of the National Electricity Law is modified so that AEMO must request that the AER consider making a T-1 reliability instrument if the South Australian Minister has made a related T-3 reliability instrument under section 19B of the National Electricity (South Australia) Act 1996.

Section 14K of the National Electricity Law is modified so that the AER may make a T-1 reliability instrument if the South Australian Minister has made a related T-3 reliability instrument under section 19B of the National Electricity (South Australia) Act 1996.

The other modifications of the National Electricity Law set out in proposed section 19A are consequential on the above modifications.

19B—State Minister may make T-3 reliability instrument

The South Australian Minister may, by notice in the Gazette, make a related T-3 reliability instrument if it appears to the Minister, on reasonable grounds, that there is a real risk that the supply of electricity to all or part of South Australia may be disrupted to a significant degree on 1 or more occasions during a period specified in the instrument. The Minister must consult with AEMO and the AER in relation to the instrument.

The section also sets out the content that must be included in the instrument, procedural provisions and transitional provisions relating to the Minister making instruments in respect of the first 3 years after the Retailer Reliability Obligation commences.

19C—Regulations

Power to modify by regulation the National Electricity Rules insofar as they apply as part of the law of South Australia is provided for.

Part 3—Amendment of National Electricity Law

5—Amendment of section 2—Definitions

Definitions are amended for the purposes of the measure. In particular, the definition of civil penalty is amended to include a breach of a reliability obligation civil penalty provision.

6—Amendment of section 2AA—Meaning of civil penalty provision and conduct provision

Certain provisions of Part 2A are prescribed as civil penalty provisions and another provision is prescribed as a reliability obligation civil penalty provision.

7—Insertion of Part 2A

New Part 2A is inserted:

Part 2A—Retailer Reliability Obligation

Division 1—General

14C—Definitions

Definitions are inserted for the purposes of the Part.

14D—Meaning of liable entity for a region

Entities liable under the Part for a region are set out.

14E—Process for non-liable persons to opt in to reliability obligations

The process for a person who is not liable under the Part to opt in to the reliability obligations for a region is set out (so that the person can assume another person's responsibility for the reliability obligations for the region).

Division 2—Reliability forecasts and instruments

14F—Annual forecast for reliability gaps

AEMO must perform functions related to annual forecasts for reliability gaps.

14G—Meaning of forecast reliability gap, forecast reliability gap period, T-3 cut-off day and T-1 cut-off day

Certain definitions are set out for the purposes of the measure.

14H—Rules must provide timetable for reliability forecasts, requests and instruments

The National Electricity Rules must set out certain matters, including timetables for reliability forecasts, requests and instruments.

14I—AEMO must request reliability instrument

AEMO must request a reliability instrument in certain circumstances and if satisfied of certain matters (the provision applies to both a T-3 reliability instrument and a T-1 reliability instrument).

14J—AEMO may correct request for reliability instrument

This provision is technical.

14K—AER may make reliability instrument for a region

The AER may make reliability instrument for a region in certain circumstances and if satisfied of certain matters (the provision applies to both a T-3 reliability instrument and a T-1 reliability instrument).

14L—Reliability instrument has force of law

This provision is technical.

14M—Failure to comply with consultation obligation does not affect validity

This section provides that a failure by the AER to undertake consultation under the Rules does not invalidate or otherwise affect a reliability instrument.

Division 3—Reliability obligations

14N—Application of Division

This section provides for how Division 3 applies in relation to a T-1 reliability instrument for a forecast reliability gap in a region that applies to liable entities.

14O—Meaning of qualifying contract and net contract position

The terms qualifying contract and net contract position are defined for the purposes of the Division.

14P—Obligation to report net contract position

Each liable entity is required to give the AER a report about the liable entity's net contract position.

14Q—Adjustment of net contract position after contract position day

Liable entities may adjust their net contract position after the contract position day.

14R—Obligation to have contracted sufficiently for one-in-two year peak demand forecast

A key Retailer Reliability Obligation is set out, namely that if the peak demand is more than the one-in-two year peak demand forecast for the reliability gap period during a stated trading interval in the reliability gap period, a liable entity's net contract position must not be less than the liable entity's share of the one-in-two year peak demand forecast for the trading interval determined in accordance with the Rules.

14S—Obligation to maintain net contract position

The National Electricity Rules may require a liable entity to maintain its net contract position for a certain period.

Division 4—AEMO as procurer of last resort

14T—AEMO may recover costs for procurer of last resort function

The National Electricity Rules may provide for a cost recovery scheme that allows AEMO to recover the costs AEMO incurs as the procurer of last resort for a region.

8—Amendment of section 15—Functions and powers of AER

The AER is given the function of implementing and administering the market liquidity obligation in accordance with the Rules.

9—Insertion of Part 3 Division 1C

New Division 1C is inserted into Part 3:

Division 1C—Retailer Reliability Obligation—AER compliance regime

18Z—Definitions

Definitions are inserted for the purposes of the Division.

18ZA—Obligation of AER to monitor compliance

The AER must monitor compliance of regulated entities with the Retailer Reliability Obligation.

18ZB—Obligation of regulated entities to establish arrangements to monitor compliance

A regulated entity must establish policies, systems and procedures to enable it to efficiently and effectively monitor its compliance with the Retailer Reliability Obligation.

18ZC—Obligation of regulated entities to keep records

A regulated entity must keep records for 5 years of its activities in accordance with the section.

18ZD—Obligation of regulated entities to provide information and data about compliance

A regulated entity must give the AER information and data relating to the regulated entity's compliance with the Retailer Reliability Obligation.

18ZE—Compliance audits by AER

The AER may carry out an audit of a regulated entity's activities to assess the regulated entity's compliance with the Retailer Reliability Obligation.

18ZF—Compliance audits by regulated entities

If required by the AER, a regulated entity must carry out an audit of specified aspects of the entity's activities relating to the entity's compliance with the Retailer Reliability Obligation.

18ZG—Carrying out compliance audit

A compliance audit must be carried out in accordance with the Reliability Compliance Procedures and Guidelines.

18ZH—Use of information

The AER may use any information or data given by a regulated entity under section 18ZD or 18ZF, or obtained under 18ZE, for the purposes of any of the functions and powers of the AER under section 15 of the National Electricity Law.

18ZI—Reliability Compliance Procedures and Guidelines

The AER must make procedures and guidelines in accordance with the consultation procedure provided for under the Rules.

10—Amendment of section 34—Rule making powers

The provisions in the Law relating to Rule making powers are extended to include any matter or thing related to, or necessary or expedient for, the purposes of the Retailer Reliability Obligation.

11—Insertion of section 67A

New section 67A is inserted:

67A—Conduct in breach of reliability obligation civil penalty provision

A technical provision relating to proceedings for multiple breaches of the reliability obligation civil penalty provision is provided for.

12—Amendment of section 72—Obligations under Rules to make payments

These amendments are consequential.

13—Insertion of section 90EA

New section 90EA is inserted:

90EA—South Australian Minister to make initial Rules relating to Retailer Reliability Obligation

The South Australian Minister may make National Electricity Rules relating to the Retailer Reliability Obligation amendments or on any other subject contemplated by, or consequential on, the Retailer Reliability Obligation amendments.

14—Amendment of Schedule 1—Subject matter for the National Electricity Rules

The list of subject matters for the National Electricity Rules is amended to reflect the measure.

15—Amendment of Schedule 2—Miscellaneous provisions relating to interpretation

A technical provision relating to reliability instruments is provided for.

Debate adjourned on motion of Hon. I.K. Hunter.