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ENERGY SECURITY BOARD CONVERTING THE INTEGRATED

SYSTEM PLAN INTO ACTION

Consultation paper May 2019

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Contents

Executive Summary .................................................................................................... 3 1. Introduction ........................................................................................................ 3 2. Regulatory governance framework .................................................................. 5

2.1 Overview ....................................................................................................... 5 2.2 Proposed functions of regulatory instruments .......................................... 6

3. Key issues for consultation ............................................................................ 11 3.1 Extent to which ISP deadlines are prescribed in the Rules .................... 11 3.2 Governance of ISP ..................................................................................... 11 3.3 Scope for further subordinate documents ............................................... 12 3.4 AER revenue approval ............................................................................... 12 3.5 Dispute resolution ..................................................................................... 13 3.6 Safety net.................................................................................................... 14

4. Summary of issues for consultation and way forward ................................. 15 4.1 Making a submission ................................................................................. 15 4.2 Way forward ............................................................................................... 16

Appendix A - Status of Actionable ISP Recommendations ................................... 17 Appendix B - The system-wide planning model ..................................................... 21

Overview ........................................................................................................... 21 Objectives, principles and scope ................................................................... 21 Process for developing the ISP ...................................................................... 23 Process for implementing and delivering the ISP ......................................... 25

Appendix C Summary of roles and responsibilities ............................................... 27 Appendix D Abbreviations and Technical Terms ................................................... 28

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Executive Summary

• The COAG Energy Council requested the Energy Security Board (ESB) to develop a plan to make the Integrated System Plan (ISP) actionable. The ISP Action Plan was delivered to the COAG Energy Council by the ESB in December 2018. It made 12 recommendations.

• Progress against these recommendations is set out in Attachment A.

• This consultation paper seeks stakeholder input on governance of the ISP process, the AER’s revenue approval process, dispute resolution procedures and how the ISP and (RIT-T) interface with and fit together with the rest of the planning and economic regulatory framework.

• This consultation paper also proposes a high-level structure for a regulatory framework to give effect to the reforms. The objectives, principles and high-level process would be set out in the National Electricity Law and Rules, with the detail to be set out in guidelines to be made by the AER, including:

o Cost Benefit Analysis (CBA) Application Guidelines, which would reflect the current RIT-T application guidelines, amended and expanded to enable the ISP analysis to be used and be an input into the TNSP's investment test. A proposed guideline is included for your comment.

o Forecasting Best Practice Guidelines, which would set out the principles and process to be used by AEMO as it develops the ISP. A proposed guideline is included.

1. Introduction

AEMO published its first ISP in July 2018, providing a 20-year outlook for the transmission needs of the NEM. This ISP fulfilled a key recommendation from the Finkel Review and is an important part of the orderly transition needed in the NEM. The ISP identifies and prioritises an optimised least cost portfolio of integrated system investments to maintain the reliability and affordability of the energy system as it transitions to lower emissions and more distributed generation.

In December 2018, the ESB added an ISP Action Plan. It set out twelve recommendations on:

• how Group 1 projects in the ISP can be delivered as soon as practicable;

• how Group 2 and 3 projects should be progressed; and

• how the ISP would be converted into an actionable strategic plan.

Also in December 2018, the AEMC published its final report for its Coordination of Generation and Transmission Investment (COGATI) review as per its standing terms of reference from the COAG Energy Council. This report also made a series of recommendations for a staged reform to the transmission frameworks, which complement the ESB’s recommendations and provide further detail on how to implement them.

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The ESB and market bodies have made progress in delivering on several key recommendations from the ISP Action Plan provided to COAG Energy Council in December 2018.

­ The AEMC has completed the assessment of rule change requests submitted by the Chair of the ESB and implemented rule changes that are consistent with recommendations 5 and 6 of the Actionable ISP report. Recommendations 5 and 6 sought to assist in fast-tracking the regulatory approval processes once the cost-benefit assessment (known as the RIT-T) has been completed for a range of critical ISP projects.

­ AEMO has begun its consultation on the 2019-20 Integrated System Plan. This includes feedback from the ESB consultation in 2018 and from the AEMC consultation on its 2018 Coordination of Generation and Transmission Investment review.

­ The ESB has prepared a paper addressing an Underwriting Fund that removes the risk of regulatory approval for time critical Group 1 ISP Projects away from the TNSPs and to other parties. This enables delivery (substantial construction and equipment ordering etc) to begin earlier and means that the required delivery time for these projects can be met. A second paper concerning the financing of the connection of transmission assets to priority Renewable Energy Zones (as noted in the ISP) is also drafted. These papers are expected to be presented to COAG Energy Council in July 2019 or earlier if possible.

­ The AEMC has begun consultation through the 2019 Coordination of Generation and Transmission Investment review on phased network congestion and access reforms. Rule changes are expected to be proposed to COAG Energy Council in late 2019.

For further details on the status of the ISP Action Plan recommendations see Appendix A.

This consultation paper seeks to progress Recommendations 8, 9 and 10 of the ISP Action Plan. These three recommendations are:

• Recommendation 8: Rule changes should be prepared and lodged by AEMO with the AEMC to have the NTNDP replaced by the ISP. Rule changes should also be lodged that require the ISP to be developed every 2 years with updates in between plans if there is a defined material event. AEMO should issue guidelines to stakeholders on how and when an update to the ISP would be done.

• Recommendation 9: The ESB should work with AEMO to ensure that refinements to the inaugural ISP suggested in the ISP Action Plan are included in future ISPs.

• Recommendation 10: The ESB should bring back to COAG Energy Council any rule changes, if required, to enable the ISP to identify the need and set of credible options to meet that need and replace the current Project Specification Consultation Report in the RIT-T.

This consultation paper sets out a proposed governance framework. Appendix B gives detail on the system-wide planning model behind the ISP Action Plan presented to COAG Energy Council in December 2018 and the AEMC’s COGATI Final Report.

As part of the consultation interested parties are encouraged to lodge a submission to the ESB as it develops a regulatory framework to convert the ISP into an actionable strategic plan by 21 June 2019. As part of the Consultation interested parties should examine the draft Guidelines relevant to Forecasting and Cost benefit Analysis. Your comments on these drafts are welcome.

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2. Regulatory governance framework

2.1 Overview

The regulatory framework for putting the integrated system plan into action should ensure that there are clear statutory powers available, and establish clear roles, processes and accountabilities in the Rules. There should be a balance between the requirements for accountability and transparency of decision making, and the necessary flexibility to respond to new information effectively. The regulatory design presented in this section outlines the allocations of roles across the relevant legal instruments and proposes arrangements for the process of the ISP in order to give effect to the policy framework outlined in Appendix B. Figure 1 High level regulatory framework

Project Assessment Conclusions Report (TNSP)

Includes confirmation from AEMO that the preferred option is consistent with the ISP

Project Assessment Draft Report (TNSP)

Streamlined to incorporate ISP parameters (assumptions, scenarios etc)

Annual ISP process (AEMO)

Includes Planning & Forecasting Consultation Document, Inputs & Assumptions Final Report, draft and final ISP

Option: ISP Methodology (AEMO)

Sets out how AEMO develops the ISP in line with the Rules & AER guidelines (see section 4.3)

CBA application guidelines (AER)

Sets out the mechanics of CBAs. Related to current RIT-T application guidelines.

National Electricity Rules

Sets out objectives, principles and high level process

National Electricity Law

Forecasting Best Practice Guidelines (AER)

Describes the process principles to be followed by AEMO

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2.2 Proposed functions of regulatory instruments

The proposed roles for each of the regulatory instruments described in Figure 1 are:

National Electricity Law If required, the regulatory framework will include changes to the National Electricity Law (NEL) to support the Integrated System Plan regime. The ESB is considering whether NEL changes are required to enable AEMO to carry out a whole of system approach as required for integrated system planning.

National Electricity Rules The implementation of an actionable ISP requires changes to the current Rules relating to transmission planning and investment. Changes are needed in relation to the National Transmission Network Development Plan (NTNDP) regime and a range of consequential changes to ensure consistency in the matters that relate to the ISP, including the provisions relating to the TAPRs and RIT-Ts.

To achieve an appropriate balance between transparency and flexibility, the proposed regulatory design presented for consultation identifies those areas that are considered appropriate for the Rules and those where Guidelines or Procedures provide the necessary flexibility to deal with an environment of greater operational uncertainty.

The Rules should establish the key requirements for the implementation of the ISP including the streamlined RIT-T process, dispute resolution, AER revenue approval, and the safety net provisions. The ESB proposes that the Rules would also set out requirements for the AER to make the following guidelines in accordance with the Rules Consultation Procedures:

• Cost Benefit Analysis Application Guidelines.

• Forecasting Best Practice Guidelines.

ISP, RIT-Ts, annual planning reports, joint planning and LRPP documents would be prepared in accordance with the regulatory framework set out in the Law, Rules and various subordinate instruments.

AER Cost Benefit Analysis Application Guidelines

The proposed ‘Cost Benefit Analysis Application Guidelines’ are intended to be an expanded version of the existing RIT-T application guidelines; amended to create the linkages with the ISP to provide a foundation for the TNSP's investment test. It is important to recognize in this approach that the ISP is a system wide least cost optimisation while the current basic approach to RIT-T tests has an individual project focus.

The Cost Benefit Analysis guidelines set out the mechanics of the cost benefit analysis to be undertaken by AEMO and TNSPs, including scenario development, the categories of benefits to consider, discount rates, and the application of the value of customer reliability.

To support effective system-wide planning, the cost benefit guidelines must recognise and accommodate the fundamentally different roles of the ISP and the RIT-T. The ISP is a system-wide plan over a 20 year outlook period, whereas the RIT-T is a cost benefit analysis assessment and consultation process for an individual project. It will be important to ensure that the regulatory

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framework contains enough flexibility to enable AEMO’s approach to be accommodated within the regulatory framework and to ensure that risk and uncertainty in the preparation of the ISP is managed.

For instance, AEMO could require additional flexibility to:

• Manage uncertainty given the broader scope of the ISP

• Have regard to the resilience of the power system (for instance if there is a high impact low probability event) in accordance with an agreed risk framework that considers the level of resilience that should be paid for by consumers

• Meet identified system needs arising as a result of public policies as instructed by NEM Participating Jurisdictions, and potentially consider broader interactions with other systems (such as the gas system, transport system, distribution system etc)

• Report on the range of benefits and contemplate allowing multiple objective decision making to demonstrate risks and assess the utility of various candidate plans.

A draft of the proposed Cost Benefit Analysis Application Guidelines is set out below in italics.

Cost Benefit Analysis Guidelines:Draft

Purpose To set out an approach to identify the optimal network development pathway in the ISP. This pathway is the series of network investments over the next 20 years to maximise the expected net economic benefit on a system-wide basis across the NEM under a range of scenarios, whilst meeting NEM obligations (such as system security and reliability requirements) and public policy objectives. Key Elements of Guideline The intention is for the Cost Benefit Analysis Guidelines to be similar to RIT-T Application Guidelines in that it will support a cost benefit analysis that meets the following principles:

• The analysis applies to meeting an identified need in the NEM under the range of scenarios that the ISP identifies.

• All technically and economically feasible investments to meet the identified need are weighed up against a base case and against each other without bias to technology or ownership.

• Inputs, assumptions and forecasts are developed in accordance with the Forecasting Best Practice Guideline.

• All relevant and material expected costs and benefits are taken into account using a consulted upon methodology that appropriately manages uncertainty.

Investments are identified to maximise the present value of the net economic benefit across the NEM whilst meeting NEM obligations, where NEM obligations are broader than at present (see below)In contrast to the existing RIT-T Application Guidelines, the Cost Benefit Analysis Guidelines will take a system-wide approach and:

• Support a cost benefit analysis being performed on meeting the broad identified need of maximising the expected net economic benefit across the NEM, whilst meeting NEM

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obligations. This broad identified need recognises the ISP’s role in performing a constrained system-wide optimisation. More specific needs may be identified out of the ISP’s optimised solution, which may form the basis for additional identified needs in RIT-Ts.

• Take a broader definition of ‘NEM obligations’ than the current RIT-T Application Guidelines and give AEMO greater flexibility to manage uncertainty, have sufficient regard to power system resilience, public policies, broader interactions with other systems, and report on a range of benefits.

• Support a cost benefit analysis that identifies a package of optimal investments as an integrated solution to meeting the broad identified need, known as the optimal network development pathway. Individual investments in this integrated solution will form credible options for further exploration in the RIT-T. The remainder of the optimal network development pathway will be part of the base case for any subsequent RIT-T.

• Focus on the technical requirements of performing a cost benefit analysis, rather than also setting out the administrative processes required under the RIT-T.

AER Forecasting Best Practice Guidelines The purpose of these binding guidelines would be to set out the principles and process to be used by AEMO as it develops the ISP. The guidelines could include:

• Consultation – the mechanisms which AEMO should use to consult with stakeholders and when these mechanisms may be appropriate, including a two-stage public consultation process, including use of industry reference groups, expert reference groups and consumer groups..

• Methodology - to facilitate stakeholder examination, AEMO should use a component-based methodology when forecasting, with the components developed through consultation. The analytical approach AEMO uses to identify the ISP development path should also be subject to some consultative scrutiny.

• Key parameters – AEMO should publish sample output of key non-confidential parameters so that the drivers of the combined components can be more readily evident. For example, customer demand forecasts are likely to be made up of inputs relating to GDP, residential solar, DER, battery uptake and battery dispatch.

• Scenarios – AEMO should publish information on the construction of scenarios and sensitivities and how the scenarios feed into the ISP development path.

• Confidential data – In the event that it is necessary for AEMO to use confidential data as an input to the ISP, AEMO should release indicative data in such a way that does not compromise confidentiality. (For example by aggregating the the publicly released dataset.)

One option is to extend the coverage of the guidelines that are currently being developed by the ESB in the context of the Retailer Reliability Objective (RRO) to AEMO’s ISP process. Using the RRO Forecasting Best Practice Guidelines (or potentially the Forecasting and Planning Best Practice Guidelines) would help to avoid a proliferation of guidelines and promote consistency. A draft of the Forecasting Best Practice Guidelines is set out below in italics.

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Forecasting Best Practice Guidelines Purpose To set out the expected process AEMO should follow to develop a robust set of forecasts and provide for stakeholders to have the best opportunity to engage in forecast development. Forecasts developed in accordance the Guidelines would be used in the ISP (and potentially other documents such as the Electricity Supply Statement of Opportunities). Key Elements of Guideline

• Consultation o There should be an appropriate level of consultation so that all stakeholders have

an opportunity to be heard and have their views considered. Consultation should be robust and transparent in the way stakeholder feedback is documented, explaining whether or not it has been taken into account, and if not, the reasons why.

o AEMO should use a two stage consultation process, including publication of a draft Inputs and Assumptions document and draft ISP, inviting submissions.

o While engagement with all of industry is important, the approach to consultation should ensure that there is adequate engagement with consumer groups.

• Information o The inputs and information on which the ISP is based should be as up-to-date and

comprehensive so far as practicable considering publication timeframes. o AEMO should publish a guideline indicating the types of changes to inputs that

would be considered material and hence trigger the need to remodel and, depending on the results of the remodelling, issue an updated ISP.

o This information should be applied in an unbiased way to develop the ISP.

• Methodology o To allow for stakeholders to be able to fully engage, AEMO’s methodology should

be open, transparent and consulted upon. o Input components should be able to evolve over time, building on evidence to

support more accurate forecasts. Examples could include: Demand side - population, connections, gross state product, electricity

prices, household disposable income, resource costs, uptake and profile of distributed energy resources, energy efficiency settings.

Supply side input - entry, exit and cost of different types of generation and storage, reliability settings, network capacity, and availability and profile of variable renewable energy resources.

o AEMO should publish sample output of key non-confidential parameters so the impact of the combined inputs can be discerned.

o Inputs, assumptions, scenarios and modelling methodology to be used for the forecasts should be clearly documented and published.

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• Scenarios o AEMO should consider a range of different scenarios, and should publish

information on the construction of the scenarios (with sensitivities) so that it is clear how the scenarios feed into the ISP outcomes. Examples of the types of information to be published include load traces and/or daily profiles.

• Confidential data o It may be necessary for AEMO to use confidential information in developing the

ISP. o Where it does this it should protect the confidential data, while at the same time to

the extent possible releasing indicative data that does not compromise confidentiality. One way it might do this is by aggregating data.

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3. Key issues for consultation

At the ESB Actionable ISP stakeholder forums in November 2018 there was broad alignment among most industry stakeholders about the high-level process for developing and implementing the ISP. As the detailed elements of this framework are developed further a number of issues have arisen where further stakeholder input would be helpful.

3.1 Extent to which ISP deadlines are prescribed in the Rules

The ESB is considering what level of prescription in the Rules is appropriate for the ISP process.

The ESB considers that defining the process for developing the ISP in the Rules will provide clarity, and help parties who wish to participate in the ISP consultation process to plan their involvement. However this approach also introduces rigidity that could undermine AEMO’s ability to respond to changing circumstances and to thoroughly engage with issues raised during the consultation process.

The current Rules relating to the NTNDP provide an example of a Rules framework that provides certainty, with deadlines and timeframes specified for each stage in the process. A less prescriptive Rules framework, that provides AEMO with more flexibility to respond to issues emerging during the ISP development process, could include:

• AEMO to publish an ISP at least every two years,

• AEMO to prepare the ISP using a process that meets, as a minimum, the standard required by the Forecasting Best Practice Guideline.

One factor to consider is that the ISP and RIT-Ts are an integral part of the planning framework, and there are a number of linkages and interdependencies with other elements of the planning framework, including TNSPs’ annual planning reports and the last resort planning power. These processes currently have a timetable specified in the Rules. The process that gives effect to an actionable ISP will need to have regard to these interactions.

Issue for consultation

The ESB invites stakeholders to provide comments on whether the timing deadlines associated with the ISP process should be specified in the Rules.

3.2 Governance of ISP

The ESB is considering what level of oversight is appropriate for the methodology adopted by AEMO in preparing the ISP.

At present, the calculations performed by TNSPs as part of their investment decisions are governed by the Rules, the RIT-T and the RIT-T application guidelines. The Rules relating to the predecessor of the ISP, the National Transmission Network Development Plan, are significantly less prescriptive. In practice, AEMO adopts the RIT-T methodology to develop the ISP so far as possible, although there are some differences. These are discussed below.

If the ISP results flow through into the RIT-Ts and thereby TNSP investment decisions, the mechanics of the calculations used to develop the ISP should be transparent and robust. The ESB therefore proposes that the AER prepares Cost Benefit Analysis Application Guidelines that

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enable consistent interaction between the ISP and RIT-T (see section 3.2.3). These guidelines should recognise and accommodate the fundamental differences between the purposes of the ISP versus RIT-Ts, including in particular the need to give AEMO flexibility to manage uncertainty, risk, and to incorporate public policy. In addition, the AER Forecasting Best Practice Guidelines would outline the process to be followed by AEMO in developing the ISP.

Issue for consultation

The ESB invites stakeholders to provide comments on the governance framework that applies to the ISP.

3.3 Scope for further subordinate documents

The ESB is considering whether there is any merit in further subordinate documents. The need for additional subordinate guidelines depends on the level of prescription in the Rules.

For instance, the Rules could require AEMO to prepare an ISP methodology that sets out how AEMO has applied the framework set out in the Rules, Forecasting Best Practice Guidelines and CBA Application Guidelines in order to develop the ISP. The ISP methodology would address, for instance, how AEMO develops its inputs and assumptions, determines the ISP development path, identifies system needs, determines applicable system limits and identifies and assesses Renewable Energy Zones.

This document could be a formal Rules requirement, prepared and updated in accordance with the Rules Consultation Procedure. Alternatively, this requirement could be given effect via the Forecasting Best Practice Guidelines, or the document could be published in conjunction with ISP as part of the ISP database (as occurs now).

Issue for consultation

The ESB invites stakeholders to provide comments on the proposed guidelines in Box 1 and 2 above (in Italics) and whether further subordinate guidelines are required and if so for what.

3.4 AER revenue approval

The COGATI final report recommended the removal of the preferred option assessment that the AER undertakes after the completion of a RIT-T to streamline and remove duplication from the regulatory process for all transmission projects.1

The ESB is considering if the TNSP’s preferred option is consistent with the ISP whether or not this would be sufficient to meet the conditions precedent for a contingent project, irrespective of whether the project was identified in the TNSP’s current revenue determination. Once a TNSP has made a decision to proceed with a preferred option (and the preferred option is confirmed to be consistent with the ISP), the TNSP would apply to the AER to amend their revenue determination in accordance with a modified version of the contingent project mechanism as set on in Chapter 6A of the Rules.

As per the current framework, the AER would assess the efficient level of costs associated with the TNSP’s preferred option. However, the current contingent project mechanism includes strict

1 AEMC, Coordination of generation and transmission investment review, final report, 21 December 2019, p.36.

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timeframes for the AER to undertake its assessment and the removal of the preferred option assessment reduces the AER’s opportunities to examine the project. There is a question as to whether the deadlines associated with the current contingent project framework remain appropriate in the context of the large, complicated projects contemplated by the ISP. This is particularly the case if the preferred option assessment under clause 5.16.6 is removed.

Issue for consultation

The ESB invites stakeholders to provide comments on whether the contingent project mechanism should be amended to provide more time for the AER to undertake its assessment.

3.5 Dispute resolution

Under the ESB’s proposed model, stakeholders may raise disputes in relation to RIT-Ts as per the current arrangements.

The Rules permit parties to dispute conclusions made by a RIT-T proponent in relation to:

a) the application of the RIT-T; b) the basis on which the RIT-T proponent has classified the preferred option as being for

reliability corrective action; or c) the RIT-T proponent's assessment regarding whether the preferred option will have a

material inter-network impact.2 Under these dispute criteria, parties would not be able to dispute a RIT-T insofar as it is consistent with the ISP, unless there are demonstrable reasons why circumstances have changed since the ISP was published such that the ISP parameter is no longer appropriate. This is because the TNSP would have correctly applied the RIT-T.

The ESB is also considering the advantages and disadvantages of providing a formal mechanism for stakeholders to raise concerns regarding the ISP. Given the inter-dependencies associated with system planning, it is preferable that any concerns relating to individual elements of the ISP are resolved as part of the process rather than separately. The ISP process set out in Appendix B involves a series of decisions that get locked down (except where circumstances change) as the ISP is developed. For instance, AEMO consults on a set of scenarios, inputs and assumptions prior to assessing the optimal development path.

The ESB is considering a mechanism that permits stakeholders to raise issues in relation to the ISP following each key decision point. In the first instance, AEMO would address issues internally in accordance with its internal dispute resolution procedure. However, there would also be scope for the matter to be referred to the AER for formal dispute resolution.

In this case, the governance framework would establish criteria that must be met for a dispute to be escalated to the AER. These criteria would be designed to limit disputes to circumstances where a stakeholder has a substantive concern relating to the accuracy of the information or the methodology used to prepare the ISP, and the discrepancy is likely to have a significant effect on ISP outcomes. In order to ensure that the dispute resolution process does not undermine the quality of contributions to the preceding consultation process, stakeholders would only be able to raise disputes in relation to matters that they have previously identified in a submission to AEMO.

2 NER clause 5.16.5(a).

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Issue for consultation

The ESB invites stakeholders to provide comments on the proposed dispute resolution framework.

3.6 Safety net

If a TNSP is not undertaking a RIT-T in a timely fashion, the Last Resort Planner (LRP) may issue a notice specifying the detailed option(s) to be considered by the TNSP.

The ESB notes that in practice, the other aspects of the regulatory framework, such as the consultative manner in which the ISP is developed in collaboration between AEMO and TNSPs, and the fact that TNSPs will be required in the NER to undertake a RIT-T on an ISP identified need, should prevent this scenario from arising.

Issue for consultation

The ESB invites stakeholders to provide comments on whether the Last Resort Planning function provides an appropriate safety net.

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4. Summary of issues for consultation and way forward

4.1 Making a submission

Stakeholders are invited to make submissions on the issues raised in this consultation paper. In particular, the ESB invites stakeholders to provide comments on:

• whether the timing deadlines associated with the ISP process should be specified in the Rules

• the governance framework that applies to the ISP

• whether the draft guidelines in Box 1 (for Cost Benefit) and Box 2 (for Forecasting) are reasonable and adequate

• whether further subordinate guidelines are required and if so what

• whether the contingent project mechanism should be amended to provide more time for the AER to undertake its assessment.

• the dispute resolution framework

• the safety net mechanism

• any other matter relating to how to make the ISP an actionable strategic plan.

Detailed information on making a submission

Submission close date 21 June 2019 Lodgement details Email to: info@esb.org.au Naming of submission document

[Company name] Response to Consultation Paper on Actionable ISP

Form of submission Clearly indicate any confidentiality claims by noting “Confidential” in document name and in the body of the email.

Late submissions Late submissions will not be accepted. Publication Submissions will be published on the COAG Energy Council’s

website, following a review for claims of confidentiality.

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4.2 Way forward

The ESB intends to consult broadly in finalising its recommendations to COAG Energy Council. Stakeholders are invited to make submissions on this consultation paper by 21 June 2019.

Following consideration of submissions made to the consultation paper, the ESB will finalise the detailed policy design and present it to the COAG Energy Council for determination at its mid-2019 meeting. Thereafter, the ESB will consult on the NER (and potentially NEL) legal drafting with a view to implementing the revised framework by the end of the year.

Deliverable Indicative

timing Publish consultation paper 16 May 2019

Submissions due on consultation paper 21 June 2019

Proposed “actioning the ISP” regulatory framework provided to the COAG Energy Council for consideration and approval

September 2019

Consultation on draft NEL and NER change (as required) package to implement the “actioning the ISP” framework

October 2019

Final NEL and NER change (as required) package provided to the COAG Energy Council

Late 2019

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Appendix A - Status of Actionable ISP Recommendations

RECOMMENDATION ACTION

RECOMMENDATION 1 The ESB recommends that all Group 1 projects in future ISP’s be fast tracked if they are not already categorised as contingent projects. Rule changes that may be necessary should be brought to COAG Energy Council by June 2019.

All current Group 1 projects are being fast-tracked. The AEMC has completed three rule change requests that will assist in fast-tracking the approval processes post RIT-T assessment (see recommendations 5 and 6). For future Group 1 projects, regulatory frameworks to be updated during 2019 to embed ISP – NEL and NER changes, following feedback from this consultation, to be brought back to COAG Energy Council where necessary..

RECOMMENDATION 2 The ESB recommends that transmission companies consider whether Group 2 and 3 projects meet contingent project requirements and, if so, work with the AER to enable that status to be conferred.

Regulatory frameworks to be updated during 2019 to embed ISP – NEL and NER changes, following feedback from this consultation, to be brought back to COAG Energy Council where necessary.

RECOMMENDATION 3 The COAG Energy Council ask the ESB to explore setting up a Fund that could be used to ‘underwrite’ expenditures on Group 1 and 2 projects that are time critical. The issues to be further examined by the ESB include the size of the Fund; the source of the finance; criteria for the assessment of what proportion of expenditure to underwrite; and what undertakings should be required from the transmission company before any activation of the underwriting. A report on this initiative should be brought to COAG Energy Council by mid 2019.

Report prepared for COAG Energy Council that proposes a framework to move the regulatory risk from the TNSP to other parties so that delivery can commence before regulatory approval for time critical current Group1 projects.

RECOMMENDATION 4 That all governments in the NEM consider moving ISP projects to the highest priority planning approval status.

AEMO and the ESB continue to monitor for delays on critical ISP projects

RECOMMENDATION 5 & RECOMMENDATION 6

That the ESB submit an expedited rule change to the AEMC, as set out in Appendix 1, to enable concurrent treatment of the preferred option assessment, any dispute, and a revenue recognition application following

Three expedited rule change requests were submitted to the AEMC by the Chair of the ESB that will assist in fast-tracking the approval processes post the cost-benefit assessment (known as the RIT-T):

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the RIT-T. Initially this rule change is to apply only to QNI and VNI. That the ESB consider what criteria would need to be met for the rule change in Appendix 1 to be applied to other ISP projects (beyond QNI and VNI) and to report back to COAG Energy Council on this issue by mid 2019.

• On 4 April 2019, the AEMC made a final rule to streamline the regulatory processes for three priority projects identified in the ISP (the group 1 projects of QLD-NSW upgrade; VIC-NSW upgrade; and the group 2 project of the new interconnector between SA and NSW). The final rule allows for the AER to concurrently consider regulatory processes that apply to the three projects after the completion of the RIT-T.

• On 26 April 2019, the AEMC made a final rule to remove barriers so that network businesses can speed up their investments in time-critical projects. The final rule removes the restriction on network businesses submitting a contingent project application to the AER in the last 90 business days of a regulatory year. The final rule allows transmission and distribution businesses to submit a contingent project application at any time during a regulatory control period up until the last 90 business days of the second last year of a regulatory control year.

RECOMMENDATION 7 If a Group 2 or 3 Project is considered by AEMO and the

ESB to be lagging behind its required timing, the AEMC should be requested to use its Last Resort Planning Power to direct a company to commence its RIT-T process.

AEMO and the ESB continue to monitor for delays on critical ISP projects

RECOMMENDATION 8 Rule changes should be prepared and lodged by AEMO with the AEMC to have the National Transmission Network Development Plan replaced by the ISP. Rule changes should also be lodged that require the ISP to be developed every 2 years with updates in between plans if there is a defined material event. AEMO should issue guidelines to stakeholders on how and when an update to the ISP would be done.

Regulatory frameworks to be updated during 2019 to embed ISP – NEL and NER changes, following feedback from this consultation, to be brought back to COAG Energy Council where necessary.

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RECOMMENDATION 9 The ESB should work with AEMO to ensure that refinements to the inaugural ISP suggested in this paper are included in future ISPs.

2019-20 Integrated System Plan Consultation underway http://www.aemo.com.au/Electricity/National-Electricity-Market-NEM/Planning-and-forecasting/Integrated-System-Plan Regulatory frameworks to be updated during 2019 to embed ISP – NEL and NER changes, following feedback from this consultation, to be brought back to COAG Energy Council where necessary.

RECOMMENDATION 10 The ESB should bring back to COAG Energy Council any rule changes, if required, to enable the ISP to identify the need and set of credible options to meet that need and replace the current Project Specification Consultation Report in the RIT-T.

Regulatory frameworks to be updated during 2019 to embed ISP – NEL and NER changes, following feedback from this consultation, to be brought back to COAG Energy Council where necessary.

RECOMMENDATION 11 The ESB should examine the possibility of a Fund to extend transmission assets to connect Renewable Energy Zones with the cost of this transmission progressively recovered from consumers, if and when, utilisation increases. The required size of the finance, the source of funds, and how funds should be recovered and managed should be further examined.

Report prepared for COAG Energy Council.

RECOMMENDATION 12 The ESB report back to COAG Energy Council in 2019 on the REZ connections, access and congestion - and options for addressing these issues.

In February 2019, the Commission commenced its Coordination of generation and transmission investment – access and charging review as per its terms of reference from the COAG Energy Council. This will consider reforms to the way generators access and use the transmission network, including REZ connection options; and a review of the charging arrangements, which enable transmission businesses to recover the costs of building and maintaining transmission infrastructure, both within and between regions. The Commission is collaborating with the ESB, AER and AEMO in progressing this recommendation. A timetable for how this work will be progressed can be found on the AEMC’s website: https://www.aemc.gov.au/market-reviews-

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advice/coordination-generation-and-transmission-investment-implementation-access-and ESB advice to be provided in December 2019 following AEMCs 2019 Coordination of generation and transmission investment market review

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Appendix B - The system-wide planning model

Overview

The system-wide planning model outlined below builds on the model described in the ESB’s ISP Action Plan presented to COAG Energy Council in December 2018 and the AEMC’s COGATI Final Report. It incorporates feedback from a series of ESB stakeholder workshops conducted in November 2018. Figure 1 provides an overview of the framework for system wide planning. Figure 2 Overview of the framework for system wide planning

This section describes the ESB’s objectives, principles and scope of system-wide planning. It also provides a step-by-step description of the process to be used to develop and implement the ISP. Attachment A provides a summary of the roles and responsibilities of various parties under the framework. Objectives, principles and scope

The ESB considers a clear set of objectives and principles should inform the design of the framework for developing and implementing the ISP. They should also guide AEMO (as system-wide planner) and TNSPs (as local planners) and the AER (as economic regulator) in the exercise of their functions under the new Rules framework. The planning objective and principles should apply to both developing and implementing the ISP. The ESB’s overarching objectives and principles for integrated system planning are set out below.

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Objectives • Transmission investment to support the efficient development of the power system in the long term interests of customers – i.e. to provide reliable and secure supply for consumers at an efficient cost.

• Information to support efficient decision making by market participants and policy makers.

Principles • NEM-wide system planning that co-optimises network, supply-side and demand-side solutions

• Rigorous stakeholder engagement in developing the plan, scenarios, inputs, assumptions and draft outcomes

• Unbiased consideration of network & non-network solutions aimed at providing long term efficient outcomes

• Transparent, comprehensive analysis to support recommendations • Flexibility to deal with a transforming market and uncertainty • Streamlined process with clear decision points and no duplication

The scope of the ISP will reflect that set out in the Integrated System Plan: Action Plan3 and the COGATI final report.4 The ISP is intended to be a system-wide plan that is closely integrated with TNSP’s local planning processes with no bright-line distinction between what projects are to be included in the ISP, and what are not. However, there are likely to be limits to the level of detail about individual components that the ISP can practically incorporate. TNSPs should therefore remain responsible for local jurisdictional planning and feed up information from this as an input into the ISP. TNSPs would retain the ability to initiate projects outside the ISP process in accordance with the existing regulatory framework, including, where relevant, applying the RITs as they currently exist.

The inputs, assumptions and scenarios developed by AEMO, which would be subject to input from stakeholders, along with information on system reliability and security needs that would be included in the modelling to identify system-wide needs, would determine which projects belong in the ISP and which do not. If the ISP process identifies that a particular system need exists, then that would belong in the ISP.

3 http://www.coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/isp%20action%20plan.pdf, pp 17-18 4 https://www.aemc.gov.au/sites/default/files/2018-12/Final%20report_0.pdf, pp 19-20

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Process for developing the ISP

Table 1 below outlines the process in detail for developing the ISP, building on the Integrated System Plan: Action Plan5, COGATI final report6 and the model proposed by AEMO in its submission to the COGATI options paper.7 Table 1 also includes further refinements which are designed to clarify how non-network options are identified and assessed. These refinements are discussed below.

Table 1 Stages in developing the ISP

Stage Description

1 ISP input, assumption and scenario development

• AEMO develops scenarios, inputs and assumptions, and consults publicly on this detail.

• NEM Participating Jurisdictions provide information to AEMO on which jurisdictional policies should be included in the ISP modelling, or AEMO provides draft information to NEM Participating Jurisdictions for their amendment/endorsement.

• AEMO develops and publishes an annual Input and Assumptions Report for consultation.

2 Identify system-wide needs

• AEMO undertakes NEM-wide modelling to determine system-wide needs, taking into account expert advice and input from TNSPs and other stakeholders.

• Stakeholders articulate their needs (eg market efficiency, reliability, security, resilience, public policy, etc) during AEMO’s consultation process. In particular:

­ NEM Participating Jurisdictions provide advice with respect to public policy needs

­ TNSPs provide advice regarding local needs via the Joint Planning Process.

• A draft ISP is published for public consultation that details system-wide needs and credible options identified by AEMO (see stage 3 below).

3 Identify credible options that address the system-wide needs

• AEMO identifies credible options for addressing system wide needs, with direct input from TNSPs.

• AEMO’s model will also identify potential non-network options. Credible options may include upgrades to existing or new network solutions as well as non-network solutions (e.g. generation, storage and demand side or distributed energy solutions). AEMO consults with TNSPs via joint planning process regarding effectiveness of proposed credible options.

4 Consult on and publish the ISP

• Using outputs of stages 1–3, AEMO will undertake a whole of system optimisation across multiple scenarios to determine the set of credible options that most efficiently meet identified needs using a methodology that can appropriately manage uncertainty.

• AEMO publishes a draft ISP for public consultation that details system-wide needs, credible options and the initial results of the whole of system optimisation.

• AEMO refines the ISP based on public consultation with industry and consumers and then publishes the final ISP. It provides a single recommended development pathway that outlines the priority projects

5 http://www.coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/isp%20action%20plan.pdf, pp 17-18 6 https://www.aemc.gov.au/sites/default/files/2018-12/Final%20report_0.pdf, Table 3.2, pp 21-23. 7 AEMO, submission to the options paper, Coordination of generation and transmission investment, 19 October 2018, pp.11-15.

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needed across the NEM and the timeframes in which they should be developed.

• The final ISP will describe the costs and benefits identified as part of its whole of system optimisation for priority projects on the recommended development pathway (i.e. Group 1 & 2 projects).

• The final ISP would replace the current RIT-T project specification consultation report.

The ISP Action plan recommended a number of refinements that AEMO should implement in order to enhance future ISPs, including “increased capability for third parties to identify network and non-network solutions to challenges identified in the ISP”.8 Accordingly, the process for identifying credible options will be designed to establish an iterative process for considering network and non-network options.

Non-network options should be taken into account in the ISP so far as possible, with proponents of non-network options to be specifically targeted as part of the consultation process. AEMO should consult with TNSPs in order to identify and explore the effectiveness of potential non-network solutions via the joint planning process.

However, the ESB notes that some opportunities to resolve an identified system need using a non-network option may only become evident when the proposed project reaches a certain level of granularity; or require consideration of local conditions. For instance, customers with flexible loads may be present in some locations but not others. TNSPs should therefore retain an obligation to consider non-network solutions via the streamlined RIT-T process. They should issue a call for non-network solutions in conjunction with the final ISP, with an obligation for networks to consider any options put forward in their PADR.

As the TNSP ultimately has responsibility for entering into a non-network agreement, it should also be responsible for deciding whether a non-network option is taken up. However, if a TNSP declines to pursue a non-network credible option identified in the ISP, it should demonstrate why this decision is reasonable.

8 See: http://www.coagenergycouncil.gov.au/sites/prod.energycouncil/files/publications/documents/isp%20action%20plan.pdf, pg 17

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Process for implementing and delivering the ISP

A key objective of the ESB’s reforms is to develop a streamlined regulatory framework that permits the outputs of the ISP to be incorporated into TNSPs’ investment decisions. Under Recommendation 10 of the ISP Action Plan, the ISP would identify the system needs and credible options to be considered by TNSPs in their RIT-Ts.

The following table highlight the key stages in implementing and delivering the ISP. Further details on the elements that sit below this are contained in Appendix B. Table 2 Stages in implementing and delivering the ISP

Stage Description

5 Assess costs and benefits of credible options

• TNSPs are required by the NER to conduct a streamlined RIT-T for needs identified in the ISP.

• Streamlined RIT-T process uses the ISP scenarios, inputs, assumptions, market modelling (where possible) & development path for the cost-benefit analysis of the ISP credible options (unless they demonstrate why parameters should change).

• TNSPs will refine credible options and consult on new options where necessary. As part of this process TNSPs will publish a call for non-network options and consider non-network options put forward by project proponents (or identified by TNSPs).

• TNSPs publish a RIT-T project assessment draft report for public consultation.

6 Determine the “best” option

• TNSPs publish a RIT-T project assessment conclusion report that details what the TNSP has concluded is the preferred (i.e. “best”) option for the relevant component within the development pathway.

• TNSPs are required to check with AEMO that the preferred option addresses the system-wide need identified through the ISP.

• The RIT-T dispute mechanism would remain the same as it is now. This means that changes to the scope of the RIT-T would flow through to the RIT-T dispute mechanism.

7 Decision to implement

• TNSPs decide whether to implement the preferred option.

7A Safety net • The last resort planning power would reside with the AEMC as a “safety net” for the transmission planning and investment decision framework.

8 Undertake detailed costing and planning for the investment

• TNSPs undertake the detailed, project specific costing and planning for the investment, including obtaining land easements and environmental approvals, developing functional specifications for the assets and ordering/procuring the equipment.

• TNSPs could commence the AER revenue determination process before this stage is complete (see Stage 9).

9 AER revenue approval

• TNSPs apply to the AER to determine efficient costs associated with the preferred option.

10 Implement the investment

• TNSPs implement the investment – either commissioning and building the transmission investment, and/or finalising contracts with the non-network provider.

• TNSPs could commence this process before the AER revenue determination is finalised.

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Stages in implementing and delivering the ISP The outputs of the ISP (i.e. the identified system needs and credible options to meet those needs) are the culmination of a comprehensive system-wide modelling exercise which relies on a broad range of inputs and assumptions. The role of the RIT-T is to hone in on each individual project identified in the ISP, to ensure that the chosen solution maximises net market benefits when compared with other possible options.

A streamlined, non-duplicative regulatory process therefore requires that the parameters underlying ISP and the RIT-Ts are aligned. The RIT-Ts should use ISP inputs, assumptions and scenarios to analyse market outcomes with and without the option under assessment (within the broader development plan) in order to identify the optimal solution. The RIT-Ts should also use the ISP market modelling where possible, though if new credible options are being considered new modelling should be undertaken.

That said, it is important to avoid an outcome where TNSPs are obliged to rely on outdated information. TNSPs should have the ability to depart from the ISP parameters where there is evidence and good reason to consider that alternative sources of information are more up-to-date or more appropriate to the particular circumstances.

To give effect to this model, the ESB considers that the TNSP’s streamlined Project Assessment Draft Reports (PADRs) should:

• adopt the ISP parameters (unless there are demonstrable reasons why the TNSP considers that the ISP parameters should be varied)

• consider credible options identified in the ISP, together with non-network options put forward following the publication of the ISP, and any new credible options that were not previously identified during the joint planning process

• assess the net market benefits with and without the credible option

• where the TNSP considers that the ISP parameters should be varied, outline the TNSP’s reasons.

The ISP parameters should include the scenarios, assumptions, inputs, and development path. The TNSPs would focus on credible options of relevance to the element of the ISP development plan under consideration, but they would not be required to assess alternate credible options for other elements of the ISP development plan.

In relation to non-ISP projects, the AEMC’s final COGATI review report made two recommendations to improve the regulatory process which would complement an actioned ISP:9

• Reducing the time frame associated with completing the project assessment draft report of the RIT-T from 12 months to nine months to reduce the time it takes to complete transmission planning and investment decision-making processes, and

• Removing the preferred option assessment that the AER undertakes after the completion of a RIT-T to streamline and remove duplication from the regulatory process.

The ESB will progress these recommendations as a part of the NER change package being developed to action the ISP. 9 AEMC, Coordination of generation and transmission investment review, final report, 21 December 2019, p.36.

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Appendix C Summary of roles and responsibilities Organisation Responsibility AEMO • Develop and publish an integrated system plan (ISP) at least once every two

years in consultation with stakeholders including consumers. • Publish an explanation of the methodology used to develop the ISP. • Develop and publish an annual Input and Assumptions Report. • Conduct joint planning with TNSPs to identify system needs and credible options

that address the system needs. • Seek advice from NEM participating Jurisdictions regarding the public policy

needs to be modelled in the ISP. Where the ISP modelling differs from the advice provided by Jurisdictions, provide reasons.

• Advise whether the preferred option identified by TNSPs via streamlined RIT-T process meets the system needs identified in the ISP.

AER • Prepare and publish CBA Application Guidelines. This document should cover similar material to the current RIT-T application guidelines but be capable of applying to both the ISP and RIT-Ts. The guidelines should to recognise and provide for the different role and challenges associated with system-wide planning versus the individual project focus of the RIT-T.

• Prepare and publish Forecasting Best Practice Guidelines. • Engage with AEMO, TNSPs and other stakeholders, including consumers,

throughout the ISP & streamlined RIT-T process, including to monitor compliance with the guidelines to ensure the AER is fully informed.

• Make a determination in relation to any disputes with TNSPs raised following the streamlined RIT-T process.

• Determine the efficient expenditure associated with ISP projects within the context of the amended contingent projects framework.

TNSPs • Continue ‘local’ region transmission planning role (eg TAPR, RIT-TS, joint planning both with neighbouring TNSPs and DNSPs) and active collaboration in the development the ISP via joint planning process.

• Participate in joint planning with AEMO, neighbouring TNSPs and DNSPs to identify system needs and credible options that address the system needs.

• Conduct a streamlined RIT-T for ISP identified system needs • Check with AEMO that the preferred option addresses the system-wide need

identified through the ISP. • Apply to AER for amendment to revenue determination using the amended

contingent project mechanism. • Participate in any dispute resolution process if a dispute is raised.

NEM Participating Jurisdictions

• Advise AEMO the set of public policy needs to be modelled in the ISP in accordance with the framework set out in the Rules.

AEMC (as last resort planner)

• Monitor whether network development needs identified in the ISP are being implemented in a timely fashion by TNSPs.

• If TNSPs are not undertaking RIT-Ts on needs identified in the ISP in a timely fashion, issue a notice specifying the detailed option(s) to be considered by the TNSP.

Customers, market participants & other stakeholders

• Participate in the AEMO and TNSP consultation processes, including via consumer consultative committees and ECA processes.

• Interested parties may dispute the outcome of a RIT-T process where the matter relates to one of the dispute criteria set out in the Rules.

Proponents of non-network options

• Participate in the AEMO and TNSP consultation processes. • Submit non-network options to AEMO and/or TNSP in accordance with the

ISP/RIT-T timeframes. • Work with AEMO & TNSP to explore extent to which option meets identified

needs, and the impact of the proposed option on the power system.

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Appendix D Abbreviations and Technical Terms AEMC Australian Energy Market Commission

AEMO Australian Energy Market Operator

AER Australian Energy Regulator

APR Annual Planning Reports

CBA Cost Benefit Analysis

COAG EC Council of Australian Governments Energy Council

ECA Energy Consumers Australia

ESB Energy Security Board

LRPP Last Resort Planning Powers

NEL National Electricity Law

NEM National Electricity Market

NER National Electricity Rules

NSCAS Network Support and Control Ancillary Services

NTNDP National Transmission Network Develop Plan

RIT-T Regulatory Investment Test for Transmission

TNSP Transmission Network Service Providers

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Contact details: Energy Security Board E: info@esb.org.au W: http://www.coagenergycouncil.gov.au/energy-security-board