Major changes to the rules for grid connection took effect on 15 March 2023

Previous arrangements for dealing with system strength impacts as part of the connection process – including the controversial “do no harm” principle – have now been replaced with a new framework intended to facilitate more coordinated and efficient management of system strength.

These changes are the outcome of an extensive review of the system strength framework conducted by the Australian Energy Market Commission (AEMC) following a rule change proposal from TransGrid.  As part of its review, AEMC acknowledged the “do no harm” principle had significantly increased the cost and complexity of the grid connection process.  The existing framework was also inherently reactive, responding in a fairly piecemeal fashion to issues arising from individual generator connections.  The new framework provides for more proactive central planning to ensure  system strength, with transmission network service providers (TNSPs) primarily responsible for meeting system strength requirements.

The rule change received broad support from market bodies, TNSPs and generators, all of whom view this as an important step in the right direction - however it is only one step on a long road towards an effectively managed and regulated future grid.  Those TNSPs with obligations under the new framework will now need to undertake substantial investment to procure the equipment and technology solutions required to meet increasing system strength requirements.  AEMC has also flagged further related changes to the regulatory framework designed to facilitate procurement of other essential system security services.

What is system strength and why is it important?

System strength is technically defined by AEMC as “the stability of voltage waveforms related to the interactions between generator equipment (synchronous or inverter-based) and the rest of the power system”. Practically, it manifests as a key consideration regarding the impact an actual or proposed generator may have on the stability of the transmission system when connecting and/or generating.  It is one factor in a power system’s ability to resume operations following a disturbance.  Importantly, the stability of a power system is based on predictable and reliable voltage being maintained.

In the context of the Australian energy transition, system strength is becoming more important as connections to new inverter-based (renewable) power generators increase, replacing a relatively small number of large synchronous (coal) generators.  The Australian Energy Market Operator (AEMO) anticipates that up to 60% of synchronous generation capacity will be replaced by 2030 in its ‘Step Change’ scenario (which it considers to be the most plausible). 

The potential impacts of this aspect of the energy transition on system stability are material. As synchronous machines are electro-magnetically coupled to the power system, they are a source of strength for, and bring stability to, to the power system.  Conversely, where inverter-based resources are located away from synchronous generation or where there is a higher concentration of inverter-based resources, it is more likely that voltage waveforms will be impacted by disturbances in the power network – practically speaking, this causes instability in the power system (because inverter-based resources are decoupled from the grid and do not create voltage waveforms similar to a synchronous machine).

AEMC’s review of the system strength management framework

Recognising the importance of maintaining system strength during the energy market transition,  AEMC has established, and now substantially refined, the regulatory framework designed to ensure adequate levels of system strength.

In September 2017, AEMC made the “Managing power system fault levels” final rule determination, which relevantly included two system strength frameworks: the minimum system strength framework and the “do no harm” framework.  This rule was implemented to address immediate system strength issues at the time. 

More recently, AEMC identified a need to assess whether the two 2017 frameworks were adequate and delivering efficient outcomes in the face of ongoing changes to the power system.  This culminated in AEMC commencing consultation on an “Investigation into the system strength frameworks in the NEM”, which has formed part of the Energy Security Board’s broader system security and market development work program.  

As part of its review, AEMC identified several shortcomings with the frameworks established in 2017:

• first, the definition and magnitude of the minimum levels of system strength needed to be revised to recognise the needs of a changing power system;
• secondly, the then framework was not efficiently allocating responsibility between AEMO and TNSPs in meeting the minimum level, outside periods of normal operation; and
• thirdly, the framework was reactive, and not always effective in identifying and instigating remediation of system strength shortfalls sufficiently far in advance.

AEMC’s review took into account a large number of submissions from network operators, generators, project developers and renewable investor groups.  Among these submissions, there was broad support for the overall direction of the rule changes – particularly the move away from the “do no harm” principle towards a more centralised and coordinated framework for provision of system strength.

AEMC’s Final Report was released in October 2020, and recommended a new approach to evolving the system strength frameworks to support effective connection of new inverter-based resources.  The framework has three components:

• Supply side: TNSPs will have obligations to provide system strength to ensure system security, and to facilitate the effective connection and operation of expected volumes of new generation.  There will be a new obligation under the National Electricity Rules (NER) for TNSPs designated as a System Strength Service Providers to use reasonable endeavours to plan, design, maintain and operate their transmission network, or make system strength services available, to meet minimum system strength levels specified by AEMO.
• Demand side: recommendation of two new technical standards to apply to all new generators connecting to the power system.
• Supply and demand coordination: recommendation for a mechanism to coordinate demand and supply side arrangements through a charge on generators who decide to connect and use the system strength supplied by TNSPs.

The new framework is reflected in major changes to the connection and planning processes in Chapter 5 of the NER.

AEMC’s rule changes are intended to build on its previous work in development frameworks around system strength.  It is envisaged that the new framework will improve system strength and security, accelerate connection processes and remove uncertainty for new generators seeking grid connection.

Changes to the grid connection process

Under the new rules, certain TNSPs are designated as system strength service providers (SSS Providers) – these are the primary TNSPs in each region, being TasNetworks, TransGrid, Powerlink, AEMO and ElectraNet.  These TNSPs will have a ‘best endeavours’ obligation to plan for and provide levels of system strength required in their respective regions.  The requirements for each region will be established by AEMO.

The new system strength planning process was kicked off late last year, with AEMO’s publication of its first System Strength Report under the new rules.  This allows SSS Providers to start their planning to meet the new standards.  It is expected that the options available to SSS Providers will include:

• network investment solutions, which would include purchase and installation of synchronous condensers; and
• non-network solutions, which may potentially involve acquiring services from synchronous generators (including remaining coal-fired generators).

Recognising that procurement and delivery of solutions to manage system strength will take time, SSS Providers will have until December 2025 to meet their new obligations.

These new obligations on TNSPs effectively replace some of the requirements imposed on connecting parties (i.e. individual renewable projects) under the Chapter 5 grid connection process.  As management of system strength will now be centrally managed by the SSS Provider (TNSP) in each region, connecting parties will no longer be subject to the “do no harm” obligations.  Instead, there will be new “access standards” and system strength mitigation requirements (SSMR) for connecting parties.

The SSMR provides connecting parties with the following two choices:

1. Pay the system strength charge (a function of the system strength unit prices (SSUP) published by each SSS Provider), which is an amount reflecting an estimate of the forward-looking cost the connecting party would place on the SSS Provider in meeting the system strength standard (i.e. this is the cost the connecting party would have if it did not undertake remediation).  Effectively, this manifests as an option to pay for time and cost certainty regarding the system strength obligations incumbent on individual renewable projects – both of these features have arguably been lacking under the previous connection regime.
2. Remediate its general system strength impact involving the relevant Network Service Provider (NSP) undertaking a full impact assessment and the connecting party either implementing a system strength remediation scheme or the NSP carrying out system strength connection works in order to remediate the general impact of the connection on system strength.  The remediation option may or may not ultimately be cheaper for an individual renewable project, and it may introduce both time and cost uncertainty, anathema to the private capital funding the vast majority of Australia’s energy transition projects.

The new access standards and SSMR commenced on 15 March 2023.  This was timed to coincide with the date that the SSUP was to be first published by SSS Providers as part of their annual pricing.  As such, this was the first date all the required information has been available to prospective connection applicants to allow an applicant to negotiate its new access standards as well as make a fully informed decision regarding how it will satisfy the SSMR.

The new SSMR and access standard arrangements apply to all connecting parties who submit an application to connect under Chapter 5 of the NER on and from 15 March 2023 (this includes parties who have previously made a connection enquiry but not yet lodged an application to connect).  Applicants who submitted an application to connect before 15 March 2023 but have not received an offer to connect will by default, come under the existing arrangements (i.e. they will be subject to the ‘do no harm’ principle, not the new access standards).

Now the real work begins

For the designated SSS Providers, these regulatory changes only mark the beginning of a major work program to meet the new system strength standards.  It is expected that over the coming years, substantial investment will be required by TNSPs to meet their new obligations, including augmentation of their networks (including installation of synchronous condensers) and procuring non-network solutions.

TransGrid estimates that 20 synchronous condensers would be required from 2 December 2025 (the date on which it will need to be compliant with the new standards) to meet NSW’s system strength requirements.  This is anticipated to increase to 29 synchronous condensers across NSW in 2032-33, as more inverter-based renewable projects connect.

Potentially significant investment will need to be made to provide the necessary levels of system strength.  TransGrid estimates the current cost of installing 4 synchronous condensers to meet an anticipated system strength shortfall (identified by AEMO in December 2022) to be in the order of $350 million.  Assuming a similar cost for the remainder of TransGrid’s anticipated requirements over the next decade, this implies a cost to meet system strength requirements of roughly $2.5 billion in NSW alone.  This cost will ultimately be paid for by electricity consumers, through regulated charges for use of the transmission system.

The cost of synchronous condensers and other necessary equipment is only likely to increase as demand for system strength solutions escalates, in Australia and overseas.

 A Promising Future: Positive Developments for Renewable Projects in the Australian Energy Market

The changes to the system strength framework should manifest as a major positive development for renewable project developers and investors.  More centralised management of system strength by TNSPs is expected to reduce the timing and cost risk for individual renewables projects.  However this will mean that TNSPs will be subject to a major burden over the next decade to meet their new obligations, and there will be a significant cost impost for electricity customers.

These changes to the system strength framework are just one element of a much broader redesign of our energy regulatory frameworks.  National and state regulation is constantly adapting to the demands of the new energy system, including the unprecedented demand for new generation, storage and transmission capacity, as well as the need for new services to deliver system security.

In many cases, the demands of the new energy system are driving a need for more centralised and coordinated frameworks.  Policy-makers are looking to exercise some control over the pace and direction of the energy market transition, and rein in what has been described as a state of ‘anarchy’ in the National Electricity Market.  The system strength rule changes are one example of this move towards greater coordination and centralisation.  Other examples include the various State Government initiatives to design and procure new generation and transmission capacity in designated renewable energy zones.

The expectation is of more change to come for our energy regulatory frameworks as economic, technological and political forces operate to quicken the pace of the energy market transition.  Our regulatory frameworks were largely designed for a stable and predictable market environment, as  existed when the energy sector was liberalised in the 1990s.  Policy-makers and market bodies are facing a major program of work to augment and update these frameworks to reflect what is now a dynamic and evolving sector.  Our hope is that the required regulatory changes can keep up with the pace of the energy market transition.