BESS opportunities in the Australian National Energy Market

BESS opportunities in the Australian National Energy Market

The entrance of battery energy storage systems (BESS) to the Australian National Energy Market (NEM) is operating ahead of any significant changes to the regulatory framework to address the role that BESS can play in the market. Whilst this is not an uncommon situation for new or alternative technologies entering an established regulatory framework, these regulatory limitations come at a cost for investors and consumers alike.  But there still exists an opportunity for investment and commercial development in the market which, as we’ve seen with the uptake of renewable generation in the NEM, will drive regulatory change.

A recap on the Australian national electricity market

The Australian National Energy Market commenced operation in 1998 and operates across, and connects, the more densely populated areas of the eastern and southern states and territories of Australia. Only the Northern Territory and Western Australia do not participate in the NEM. The NEM operates to facilitate the exchange of electricity through generation, transmission, distribution, retail and the end user.  Notwithstanding the participation in the NEM by each of the southern and eastern states, there remains subtle differences in the regulatory framework for each of the jurisdictions. This is because the respective states have either not adopted all or have modified some of the rules contemplated by the National Energy Rules (NER), or there are legacy laws and regulations retained by these respective jurisdictions.  It is also worth noting that in the lead up to the adoption of the NEM, each of these jurisdictions had their own established administration and regulatory framework for the delivery and consumption of electricity. The infrastructure in each jurisdiction was either publically held by the respective jurisdictions (not at a national level), in the process of being privatised, or only recently privatised.  In addition to this, with the exception of Tasmania, electricity needs of each of the participating jurisdictions were largely dependent on coal-fired power stations. The dominant source of renewable energy was hydro-electric power across these jurisdictions (and that was largely limited to Tasmania).  Wind and solar generation were considered, at best, test cases and battery storage was not on the radar. 

In that context, the NEM has the following historical and geographical legacies that proponents of BESS technology and investment have to deal with:

• The NEM covers a huge land mass for a relatively small (low density) population base that consumes a proportionately large amount of power. 
• Whilst there is a national overlay, each of the participating jurisdictions has nuanced rules and laws or participation guidelines. Meaning that, for matters like connection to the grid, there is often a complex path to traverse which will differ from state to state and sometimes project to project. 
• The infrastructure and regulatory framework was largely designed around large baseload coal-fired power stations (which are now coming to the end of their life), single source generation (that flows in one direction) and on the basis that electricity could not be stored. 
• Whilst the NEM has seen significant development and investment in the generation space, the transmission and distribution networks haven’t benefited from the same level of new investment.  
• The regulatory framework of the NEM does not contemplate two way flow of electricity and its tariff structure is anchored on this foundation (of generation, transmission, distribution and consumption). 
• The sale of electricity in the NEM is facilitated by way of a gross market pool, which again operates on a unilateral basis and doesn’t allow market participants to trade energy bilaterally. 

Why batteries are an opportunity to rethink/redevelop the design of the Australian electricity network

A frequently heard complaint about the operation of the NEM is the bottleneck experienced by new generation facilities trying to connect to the grid due to the aging (and lagging investment in the) transmission network.  BESS can offer a work around.  Technically, BESS can be built in conjunction with generation systems or simply store power from the grid for use when it’s needed most – whether it be at grid-scale or at the household level. Noting that there are limitations, batteries can:

• Supply household power as well as grid-stabilisation services; 
• Efficiently store electricity;
• Ramp up quickly, have near zero start-up time and provide a strong frequency response; 
• If placed at strategic locations, inject bursts of power to fill gaps in dispatchable supply, meaning that the current investment in renewable generation can be used more efficiently and serve greater demand; and
• Complement the investment in rooftop solar and empower end users to control their cost and use of electricity. 

The barriers to entry (for BESS to the NEM)

Whilst the regulatory framework does not prohibit the connection and participation of BESS in the NEM, it does not enable or incentivise BESS connection or participation.  In 2019 the Australian Energy Market Operator (AEMO) submitted a rule change request seeking to address this by proposing the addition of a new type of market participant category, which recognises that some participants may be both generators/exporters of power and customers/importers of power. However, AEMO’s proposal only goes part of the way to lifting the barriers to entry for BESS (and other new or emerging technologies), in that its focus is largely on connection. It doesn’t address: (i) the provision of alternative (or participation in existing ancillary) services that new entrants to the NEM can offer; or (ii) consider the limitations of the existing tariff structure.

The Energy Security Board (ESB) has opened up discussion in the market on broader reforms to the NEM regulatory framework under the premise of a ‘two-sided market system’ which focuses on services that can be provided at a connection point to the grid (rather than categorising market participants). But it too does not consider in any detail the limitations of the existing tariff structure.  The argument is that the AEMO proposed rule change will be a stepping stone to the broader changes currently being discussed and raised by the ESB.  For BESS to have an impact (and to encourage confidence in investing in new and emerging technology) in the NEM, the ESB’s broader perspective needs to be actioned rather than tinkering around the edges and creating additional categories of market participants. 

In addition to the connection and participation barriers, not all registered NEM market participants can operate BESS in the NEM.  The current NEM regulatory framework prohibits distribution network service providers (DNSPs) from participating in ‘contestable works’ because of the ‘ring-fencing rules’.  For a DNSP to own and operate a BESS they would need to obtain a waiver from the current ring fencing rules or navigate the rules by implementing alternative legal structures to facilitate the ownership and operation of BESS within the respective network.  Allowing DNSPs the opportunity to invest in and operate BESS as an alternative to line or substation upgrades would assist with unlocking the benefits of BESS across the NEM (not just at grid–scale generation).  Noting the long-standing concerns with the monopoly power bestowed on transmission and distribution network service providers in the NEM, there is an argument that the current framework prohibiting DNSPs from participating in contestable works slows down or prohibits the investment in beneficial technology that can deliver real benefits for the stability and security of electricity supply to the NEM.  This aspect of the NEM’s regulatory framework needs to be continually challenged and tested in the context of delivering the best outcomes for end users and the reliability of supply to the market.

Evolving use case

Notwithstanding the regulatory limitations discussed above, we are seeing a rapid increase in the development of, and investment in, battery storage assets. When we first started to talk about battery opportunities in the Australian market, the focus was largely on the potential for co-located batteries, particularly in the private sector, to firm up or smooth generation from adjacent wind or solar intermittent renewable sources. Or for use in remote locations (e.g. mining projects) to solve the issue of how to use intermittent renewable energy sources as a replacement for diesel/coal generators without still needing back up generation. However, as developments have evolved we have seen a variety of different usage models, particularly for large scale developments. 

A forecast by AEMO (the NEM market operator) in 2016 suggested Australia might have 4MW of large scale batteries by 2020. By late 2020, over 280MW were already in operation or committed to construction and more than 2GW of new BESS projects have been announced since then. 

One of the early movers, and to this day still our most globally prominent project, was the 100MW “big battery” developed by NEOEN at is Hornsdale wind farm site, pursuant to a contract entered into with the South Australian Government. The project was developed largely to provide market contingency and frequency controlled ancillary services (FCAS) to the South Australian grid and had an almost immediate impact on that network – significantly reducing FCAS costs and reducing the occurrences of the SA grid islanding from the rest of the NEM. Such was its success, an expansion of a further 50MW was undertaken in 2020. 

After a competitive process, NEOEN was also recently awarded a contract from the Victorian network operator to build a 300MW battery – intended largely to add capacity in peak summer months to the transmission line connecting Victoria and New South Wales, and really intended to act as a transmission asset. This battery was procured under a system integrity contract guaranteeing instantaneous power if the transmission network had unexpected outages, and is intended to help peak movement of up to 250MW of peak capacity between Australia’s largest 2 states. Outside of these peak periods, it will operate as a merchant battery.

In New South Wales, various developers, including Origin and CEP, have announced plans for large batteries at the sites of older coal fired power stations, making use of existing infrastructure to access the grid. In Canberra, a recent Australian Capital Territory market sounding resulted in more than 42 parties submitting proposals to develop a distributed network of 250MW of batteries.

There are also a range of smaller projects under development, a number of which are based on a model whereby they arbitrage pool price movements – looking to import at times of low prices, store, then export when prices are higher. The Clean Energy Council also released a report in April 2021 examining the benefits of using BESS to replace traditional gas fired peaking plants in the NEM to supply peak spikes in required generation capacity.

Where to from here?

It wasn’t so long ago that wind and solar generation faced similar barriers to entry to the NEM that BESS is now facing.  And like the investment in wind and solar generation before it, BESS technology is continually being tested and proven in the market, both in Australia and elsewhere, at a rapid pace despite the limitations of the regulatory framework of the NEM and the Australian political environment.  Based on the history of change in the NEM, changes to the NEM’s regulatory framework (and arguably political attitudes) will have to be driven by BESS investment.  Now is as good a time as any.

Focus on energy storage

To read previous issues of the Energy storage updater, click here.