The Australian Energy Market Commission (AEMC) has been examining the merits of its Optional Firm Access (OFA) proposal over the past fifteen months. The proposal was devised to address a number of perceived problems in the design of the Australian National Electricity Market (NEM). These perceived problems included generators bidding below their costs in order to be dispatched out of merit order, a lack of signals to promote efficient generation locational investment decisions and the imperfect reliability or ‘firmness’ of hedging instruments for supporting interstate trading. The AEMC contended that OFA would resolve these issues as well as partly transfer the risks of future transmission investments from consumers to generators.
The AEMC’s March 2015 draft report found that the benefits of OFA did not presently outweigh the costs, mainly because the prevailing level of spare generation capacity in the NEM meant that the need for new investment was a decade or more away. Accordingly, most of the benefits from more efficient investment decision-making would also only begin to accrue sometime in the future. In this respect, the AEMC’s draft report stepped back from the more positive assessment of OFA contained in the AEMC’s first interim report of July 2014. Frontier (Australia) responded to the first interim report; our response is available here.
On behalf of a group of NEM participants (AGL Energy, Origin Energy, Snowy Hydro and Hydro Tasmania), Frontier’s response to the AEMC’s draft report has now been published. We find that OFA does not offer an appropriate way forward for the NEM, irrespective of potential future changes in market conditions and uncertainty regarding generation technologies and costs. This is primarily because, in our view, the AEMC did not establish the existence of significant problems in the current market design that OFA would be likely to address. Our report also found that OFA could increase rather than reduce the risks faced by consumers and would be more likely to harm the efficiency of generation and transmission investment coordination than to improve it. Finally, our report highlighted a number of governance concerns with the OFA proposal.
For more information, please contact Marita O’Keeffe at m.okeeffe@frontier-economics.com.au or call on +61 (0)3 9620 4488.
