Commonwealth Government introduces a Bill to establish the Grid Reliability Fund

Articles Written by John Keeves (Partner), Tom Barrett (Senior Associate), Candy Cheung (Associate)

On 27 August 2020, the Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 (Bill) was introduced into the Commonwealth Parliament.  If enacted, the Bill will establish the Grid Reliability Fund (Fund) under the Clean Energy Finance Corporation Act 2012 (Cth) (Act) and appropriate $1 billion to the Fund.

The Commonwealth Government proposed the Bill as it identified a shortage of investment in dispatchable electricity generation in Australia, which is needed to balance the increasing intermittent generation levels in Australia’s electricity networks and support the reliability of those networks.  To this end, if the Bill is enacted, the Fund will provide funding to encourage and support increased private investment in energy storage projects (such as pumped hydro and batteries), electricity generation, transmission and distribution, and grid stabilisation technologies.

Background

There is a wide range of renewable electricity technologies currently available, including hydro power, wind power, solar power (photovoltaics and solar thermal), ocean energy, tidal power, and geothermal.  In Australia there are, in particular, increasing levels of wind and solar generation being connected to electricity networks and these levels are expected to continue to increase.  For example, the Australian Energy Market Operator has predicted that the wind and solar generation capacity in the National Electricity Market will increase from its current level of 17 gigawatts to 27 gigawatts by 2025.[1] 

Wind and solar generation are intermittent, meaning that they are not continuously available and exhibit uncontrollable increases or decreases in output.  The increasing levels of intermittent generation in Australia are posing a number of issues to the system security of Australia’s electricity networks.  System security relates to an electricity system’s ability to operate within defined technical limits, even in the event of a major event or disturbance such as the disconnection of a large generator, load or major network element such as an interconnector.[2]

Electricity systems need (among other things) inertia, frequency control services and system strength services to function securely, which have traditionally been provided as an inherent part of dispatchable electricity generation in the form of coal and gas-fired power stations.  Coal and gas-fired power stations provide such things partly due to their use of synchronous generators that are electromagnetically coupled to the power system,[3] and partly due to their ability to regulate their power output relatively quickly.

Wind and solar generation are non-synchronous generators and therefore do not inherently assist with maintaining the system security of electricity networks.  Accordingly, as the generation mix in Australia transitions from dispatchable to intermittent, there are fewer generation sources to assist with maintaining the system security of Australia’s electricity networks.  An example of the issues that can be caused by this transition is the State-wide blackout that occurred in South Australia on 28 September 2016, which was found to have, in part, been caused by the increasing levels of wind and solar generation connected to the electricity system,[4] and this must be seen in the context of the removal of synchronous generation at the coal-fired Northern Power Station which was closed some months before the State-wide blackout.

Overview of the Bill

The Bill will amend the Act to create the Fund and appropriate $1 billion to it.  The Fund will be administered by the Clean Energy Finance Corporation (CEFC). 

The Fund is to be used by the CEFC to make “investments” that support energy storage, electricity generation, transmission or distribution, or electricity grid stabilisation (GRF investment).  A GRF investment must only be made by the CEFC in respect of financial assets,[5] and the CEFC will make its GRF investment decisions independently of the Government.

Currently, the Act defines an “investment” as being any mode of application of money or financial assets for the purpose of gaining a return (whether by way of income, capital gain or any other form of return) or giving a guarantee.  The amendments to be made by the Bill will allow regulations made under the Act to prescribe additional classes of activities as an “investment” for the purposes of a GRF investment, including activities that may not make an investment return.  The Government expects that the need for such regulations will be determined as the Fund is implemented and its intent is that such regulations, where required, will narrowly define activities which are “investments”.[6]  While individual investments may not need to make a return, the Fund as a whole will need to provide a return to the Government.[7]

An additional requirement for an “investment” to be a GRF investment is that the investment must, at the time it is made, meet any criteria set out in the CEFC’s Investment Mandate relating to the role of an investment in supporting the security or reliability of the energy system in Australia.  The Government has indicated that a new Investment Mandate will be developed, which will set out detailed criteria for determining what constitutes supporting the reliability or security of the energy system and what investments should be prioritised.[8]

The Government’s intent is that certain types of gas-fired electricity generation will be eligible to be the subject of a GRF investment if such generation will support the achievement of a low-emissions system and that battery technologies will be eligible irrespective of how they source their energy.[9]  Coal-fired electricity generation technologies will not be eligible to be the subject of a GRF investment.  Eligible projects that have been shortlisted under the Government’s Underwriting New Generation Investments program will also be able to be the subject of a GRF investment.  That program was established by the Government to provide financial support to facilitate the development of firm electricity generation capacity and is technology neutral.

Currently, the CEFC is required to ensure that 50% of its funds are invested in renewable energy technologies.  The Bill will amend the Act to ensure that the Fund is excluded from this requirement.  The intent of this exclusion is to allow the Fund to be technology neutral and the CEFC to focus on the best investments to improve grid reliability without being constrained by a minimum renewable energy requirement.[10]

The Fund, including money received by the CEFC from its GRF investments, will be treated separately from the funding previously provided to the CEFC for its other investment functions and the money received by the CEFC from such other investments.  If an investment meets the requirements to both be a GRF investment and be funded out of the CEFC’s general portfolio, the CEFC will be able to choose whether the investment is made out of the Fund or its general portfolio.[11]

In addition to the CEFC’s role as administrator of the Fund, the amendments made by the Bill will allow the Minister to request the CEFC to assist Commonwealth agencies in the development or implementation of policies or programs relating to supporting the reliability of energy grids.  The Fund is not intended to be used to fund projects under any such programs.[12]

Closing observations

While the Bill is one of a number of steps being taken across Australia to address grid security issues arising from Australia’s transition to renewable energy sources, the indirect nature of its approach to remediation of those issues means that it may be a number of years before the effectiveness of the Fund (and the associated use of taxpayers’ money) in achieving its desired outcomes will be able to be assessed.  Of concern to some sections of the community will be the ability of the Fund to invest in gas-fired electricity generation.  However, gas appears to be an important transition fuel in the short-term as battery and other storage technologies are developed and regulatory reform is undertaken to address the grid security issues caused by Australia’s increasing renewables penetration.

[1] Australian Energy Market Operator, ‘Renewable Integration Study: Stage 1 report’ (April 2020), page 6. Available online here.

[2] Australian Energy Market Commission, ‘Fact Sheet: The need for a new power system security plan’, page 1.  Available online here.

[3] GHD Advisory, ‘GHD Report for ARENA - Managing system strength during the transition to renewables’ (2020), page iv. Available online here.

[4] Australian Energy Market Operator, ‘Black System South Australia 28 September 2016 – Final Report’ (March, 2017), page 93. Available online here.

[5] See Clean Energy Finance Corporation Act 2012 (Cth), s 63.

[6] Explanatory Memorandum, Clean Energy Finance Corporation Amendment (Grid Reliability Fund) Bill 2020 (Cth) 5 [14].

[7] Ibid.

[8] Ibid 10 [65].

[9] Ibid 10 [68].

[10] Ibid 10 [63].

[11] Ibid 10 [66].

[12] Ibid 6 [20].

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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