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The Australian Energy Market Commission (AEMC) has published a draft rule to give the market operator, AEMO, more flexibility in its methodology for calculating loss factors.

When electricity is transported across a network of poles and wires, some of it is lost as heat. Transmission loss factors are calculated so generators get paid based on the power that actually arrives, not the power they dispatch.

Loss factors aim to reflect physical losses so the true cost of transporting power is clear to investors and developers of new generators when considering to connect at the end of a long, weak line far away from consumers.

They are calculated each year by AEMO in line with principles set out in the National Electricity Rules and in consultation with stakeholders.

This draft rule would support AEMO in providing more transparency about the likely physical losses of new generation projects. Specifically, the draft rule makes three amendments to how AEMO may apply the methodology in its calculations:

  • It removes the requirement that the inter-regional loss factors must be calculated using a regression analysis, enabling AEMO and stakeholders to consider and test the performance of alternative calculation techniques
  • It removes the requirement that marginal loss factor values must be based on a period of 30 minutes, to allow greater time periods to be used as the basis for calculating marginal loss factor values
  • It removes the requirement that market network service providers be treated as invariant in the calculation of marginal loss factors so AEMO can forecast variable behaviour in its modelling

The commission’s draft determination is to not make the changes requested by the rule change proponent, Adani Renewables, to redistribute the allocation of the intra-regional settlement residue between generators and networks users equally; and to change the loss factor calculation methodology from marginal to average.

The commission acknowledges that some investors are seeking relief from the impact of declining and volatile loss factor values. However, reallocating intra-regional settlement residues would shift more costs onto consumers.

In addition, the proposed changes would not address the underlying challenge of better coordination of investment in generation and transmission across the NEM. This is being addressed through the proposed reforms to transmission access, which are currently being developed in consultation with AEMO and other stakeholders.

The AEMC’s analysis also found that moving from a marginal to average loss factor methodology would dampen the signal for new generators to locate where they can operate most efficiently. It could also affect the merit order for dispatching generators, which may result in more expensive power being dispatched first.

The draft rule therefore keeps the benefits of the existing marginal loss factor framework. It continues to provide strong locational signals while giving AEMO greater flexibility to apply different calculation techniques consistent with the long-term interest of consumers.

The commission also notes the steps AEMO is already undertaking to improve the methodology and information about loss factors including more frequent publication of marginal loss factor values, and consulting with stakeholders to refine aspects of the methodology.

Submissions to the draft determination are due by 7 November 2019.

Charlotte Pordage is Editor of Utility magazine, a position she has held since November 2018. She joined the team as an Associate Editor in October 2017, after sharpening her writing and editing skills across a range of print and digital publications. Charlotte graduated from Royal Holloway, University of London, in 2011 with joint honours in English and Latin. When she's not putting together Australia's only dedicated utility magazine, she can usually be found riding her horse or curled up with a good book.

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