Entrepreneurial Interconnectors: Safe Harbour Provisions

Transmission and Distribution Pricing Review

Working Group on Inter-regional Hedges and Entrepreneurial Interconnectors

Hybrid Interconnectors:

SafeHarbour Provisions

June 1999

Hybrid Interconnectors: SafeHarbour Provisions

Definitions

The following definitions are used in this paper. Italicised terms used in the definitions but not themselves defined here are as used in the Code.

Market network service. A network service that can be offered for sale in the spot market and which does not attract regulated revenue.

Two-terminal link. One or more network elements that together enable the transfer of energy between two, and only two, connection points.

Interconnector. A two-terminal link whose connection points are assigned to different regional reference nodes. [This is broader than the definition in the Code, which is confined to transmission lines].

Entrepreneurial interconnector. An interconnector for which there is some entitlement to derive income through the sale of market network services in the spot market. [That is, at least some of the services provided by the interconnector can be sold into the spot market, although some others may be prescribed services that attract regulated revenue. The concept thus includes both non-regulated and hybridinterconnectors as defined below.]

Non-regulated interconnector. An entrepreneurial interconnector which does not contribute to the provision of any prescribed services or prescribed distributionservices and for which there is therefore no entitlement to recover any revenue through regulated network service charges. [That is, the only source of income is from selling market network services.]

Hybrid interconnector. An entrepreneurial interconnector which contributes to the provision of prescribed services or prescribed distribution services and for which there is thus an entitlement to recover a determined level of revenue through the imposition of regulated network service charges. [As with other entrepreneurial interconnectors, income may also be obtained through the sale of market network services in the spot market.]

Regulated interconnector. An interconnector which contributes to the provision of prescribed services or prescribed distribution services but does not contribute to the provision of any market network services. [There is thus an entitlement to recover a determined level of revenue through the imposition of regulated network service charges but there is no entitlement to obtain any additional income through the sale of market network services in the spot market.]

Safe harbour provisions. A set of provisions, conformance to which should ensure an application’s acceptability under the Code. [There is no implication that non-conforming applications would necessarily be rejected, although they would not be assured of acceptance.]

Preamble

The impetus to establish the National Electricity Market arose from an expectation that competitive market-based arrangements would be likely to yield more efficient outcomes in the electricity supply industry, and thus ultimately greater benefits to consumers, than had the traditional centrally planned approach. Nevertheless it was recognised that serious technical impediments existed to moving to a competitive market in electricity transport. For example, the strong operational interdependencies that arise in a free-flowing AC meshed network make it difficult to apply a market-based approach. Therefore, apart from a few exceptions, the Code treats network services as prescribed services or prescribed distribution services (as defined in the Code) to be provided by regulated monopoly businesses.

One exception relates to non-regulated interconnectors. The Code currently envisages that under some circumstances it may be feasible to adopt a competitive approach to inter-regional transport. Such a concept is potentially attractive in that it would avoid the regulatory problems and costs associated with centrally managed augmentation, however there would need to be adequate safeguards to promote efficient and equitable outcomes. The Code is silent on what those safeguards would be, specifying that the market participation rules for non-regulated interconnectors will be established by NECA through the Code change process.

NECA asked the working group on inter-regional hedges and entrepreneurial interconnectors to consider what form the rules should take, not only for non-regulated interconnectors but also for hybrid arrangements. One of the group’s terms of reference invited it to:

recommend rules to govern the participation of entrepreneurial interconnectors in the national electricity market and advise on implications for other aspects of the market design such as network augmentation criteria.

The concept of “entrepreneurial interconnector” is to be interpreted broadly. Consideration is to be given to a range of options that might vary in the degree of regulation that would be required.

In its initial response to these terms of reference, the working group made recommendations to NECA in November 1998 on safe harbour provisions to apply to non-regulated interconnectors. These recommendations were the subject of a public workshop in December 1998, and they have subsequently been reflected in the draft report of NECA’s transmission and distribution pricing review. In December 1998, NECA asked the working group to recommend Code changes to implement the safe harbour provisions for non-regulated interconnectors. Code changes closely based on the working group’s subsequent recommendations are under consideration by the Code Change Panel.

The present paper reports on the progress made so far in extending the safe harbour provisions to include hybrid interconnectors. The views and recommendations set out in this paper are those of this working group and do not necessarily reflect those of NECA.

As indicated in the definitions at the head of this paper, the term “hybrid interconnector” is intended to cover configurations in which an interconnector contributes to the provision of both market network services and prescribed services. This hybrid interconnector concept may be applicable in situations such as the following examples:

A network service provider is prepared to build a larger link than the size deemed appropriate for a regulated interconnector on the basis that it would bear the additional cost but would have the right to trade the additional power transfer capability in the spot market and retain any resultant revenue.

An entrepreneur is willing to fund the augmentation of an existing regulated interconnector (by, say, adding series capacitors or improving ground clearance on critical spans) provided that it then has the right to trade the additional power transfer capability in the spot market and to retain any resultant revenue.

Given adequate safeguards, these examples and others represent legitimate activities that would be consistent with the goal of achieving efficient outcomes in the National Electricity Market through open competition wherever possible. Clearly, the costs of providing market network services should not be subsidised through regulated revenue. On the other hand, a proponent should have normal commercial freedom to offer market network services into the spot market. The provisions proposed in this paper are aimed at satisfying these objectives and thus providing an even-handed basis for the co-existence of hybrid interconnectors with both non-regulated and fully-regulated ones. At the limits of 0% and 100% regulated component, the hybrid arrangements are designed to produce equivalent outcomes to those already defined for non-regulated and regulated interconnections respectively.

The draft safe harbour provisions for hybrid interconnectors are a logical extension of those now being implemented for non-regulatedinterconnectors. Nevertheless they are somewhat experimental. Innovation is not necessarily bad – in fact it is essential to progress. However it should be approached with due caution. Thus it will be important for the draft provisions recommended here to be exposed to wider scrutiny before incorporating them in the Code.

As with the working group’s previous proposals for non-regulated interconnectors, these are safe harbour provisions which are not intended to prevent consideration of non-conforming projects.

SafeHarbour Provisions for Hybrid Interconnectors

The recommended safe harbour provisions for hybrid interconnectors are itemised in this Section. Commentary following the statement of each provision provides background as to the reasons for its inclusion.

The terms “market network service provider” and “regulated network service provider” will be used to refer to entities that respectively control the market network services and prescribed network services provided by a hybrid interconnector. In some cases these entities may be under common ownership, although it is not envisaged that this will always be the case.

Configuration. The hybrid interconnector must comprise a single two-terminal link of at least 30 MW power transfer capability that directly connects networks in different price regions.

This parallels a safe harbour provision already recommended for non-regulated interconnectors. That recommendation was accompanied by the following commentary:

It is considered that at this stage the safe harbour provisions should not extend to intra-regional connections or multi-terminal augmentations. While in due course it may be possible to sanction low capacity non-regulated interconnections, some areas of uncertainty remain regarding (e.g.) regulator shopping and the interface of distribution and transmission functions, the possibility of inefficient windfall gains across zonal boundaries, consequential changes necessary to the Code etc. For these reasons, it is recommended that at this stage the safe harbour provisions be restricted to fairly substantial interconnections. The proposed 30 MVA threshold would be consistent with the present Code threshold for requiring generators to be scheduled.

The restriction to a two-terminal topology was considered necessary in order to permit clear and succinct safe harbour provisions to be developed in relation to such matters as scheduling and dispatch, entitlement to spot market revenue and exposure to network service charges (see below). However it means that a development that initially complied with the safe harbour provisions would cease to be compliant in the event that an intermediate offtake point was subsequently installed. The interconnector manager would then have the option of applying to retain non-regulated status on some negotiated basis or of applying for regulated status, as discussed below.

Controllable flow. The total flow through the hybrid interconnector must be independently controllable if the interconnector forms part of any network loop.

Again, this parallels a previous recommendation for non-regulated interconnectors. The following commentary was included with that recommendation:

This should ensure that the flow can be matched to dispatch instructions without unnecessarily restricting the possible patterns of injections and offtakes. By contrast, achieving a particular flow in one element of a free-flowing meshed network may entail significant constraints on the sizes and locations of injections and offtakes.

A free-flowing link would cease to conform to the safe harbour provisions if and when it became part of a loop. The interconnector manager might then (for example) (i) install flow control equipment so as to again become conforming, (ii) adopt whatever alternative arrangements might be deemed acceptable at that time, or (iii) apply for regulated status.

It is acknowledged that the controllability requirement significantly restricts the scope of the safe harbour provisions. However the proposed entitlement to spot market revenue (see earlier) would not be appropriate as it stands in the case of a free-flowing meshed element. Some progress has been made in developing a suitable modification – perhaps based on apportioning revenues in accordance with dispatched flows rather than physical flows. As yet this work is not sufficiently advanced to incorporate into a safe harbour provision that could be relied upon to promote efficient and equitable outcomes.

Initial apportionment of registered power transfer capability. The regulator may permit a portion of the registered power transfer capability in each direction to be designated as regulated capability while the remainder will be regarded as non-regulated capability.

A hybrid interconnector that conforms to the safe harbour provisions must be a single two-terminal link (see Configuration, above). However its power transfer capability is to be treated as two separate components – regulated and non-regulated. Admission of power transfer capability to regulated status is to be at the discretion of the relevant regulator. Conceivably, the amount designated as regulated capability could be context-dependent in some cases, eg it might be related to the direction of flow and/or be different for business and non-business hours.

Following the regulator’s initial determination, the market network service provider may at a later date apply to have some or all the non-regulated capability re-designated as regulated capability, but conversion in the opposite direction will be restricted (see provision headed “option to convert to regulated status”, below).

Regulated capability. The criterion for admission of power transfer capability to regulated status will be the same as if the capability was to be provided by a regulated interconnector.

Code clause 5.6.6 describes a process whereby a link may be designated as a regulated interconnector provided that certain criteria are satisfied. It is proposed that equivalent criteria should apply for the purpose of deciding what portion of the power transfer capability of a hybrid interconnector can be admitted to regulated status.

The assessment is to be made on the same basis as if the capability was to be provided by a stand-alone link. Thus for example if a 300 MW interconnector would be eligible for regulated status, 300 MW of a 500 MW hybrid interconnector could be deemed to be regulated power transfer capability.

Taken in conjunction with the other safe harbour provisions described here, this should ensure that the same regulated capability is provided in return for regulated revenue as though a stand-alone interconnector was involved.

Prescribed and market network services. The regulated power transfer capability must be used to provide prescribed services. The non-regulated power transfer capability may be used to provide market network services, which can earn income in the spot market.

The regulated network service provider will be required to make the regulated power transfer capability available to provide prescribed network services on a comparable basis to that which would apply if a fully regulated interconnector was involved. The market network service provider may use the remaining, non-regulated, power transfer capability to provide market network services.

The intent is that market participants should receive the same level of prescribed network services as if a fully regulated interconnector was involved. On the other hand, the market network service provider retains the right to market any additional services that can be supported by the non-regulated component of the interconnector’s power transfer capability.

Regulated revenue. Regulated revenue for prescribed services provided by the regulated power transfer capability should be no greater than if a regulated interconnector was providing the service.

Again, the intent is to obtain an equivalent outcome to what would prevail if a fully regulated interconnector was involved. The following examples illustrate the concept.

Example 1. Suppose that at the time of construction, the optimal size for a regulated link would have been 300 MW, whereas a 500 MW link was built, of which 300 MW was designated to be regulated capability.

In this case, the regulated revenue should be equivalent to that applicable to a 300 MW regulated interconnector. An exception would be if, due to subsequent under-utilisation, the optimised deprival value process excluded some of the 300 MW from the asset base. A smaller regulated revenue would then apply.

Example 2. Suppose instead that at the time of construction, the optimal size for a regulated link would have been 500 MW. A link of that size was built, but only 300 MW was designated as regulated capability.

In this case, it might be concluded that an equitable sharing of the benefits of economies of scale might be obtained by determining the regulated revenue to be 300/500 of the revenue applicable to a 500 MW regulated link. That is, the regulated revenue would probably be somewhat less than in example 1.

Example 3. Addition of series capacitors to a 300 MW regulated link provides an extra 200 MW of non-regulated capability.

In this case, it could be appropriate for the regulated revenue to remain unaltered.

The above examples are only indicative as special considerations may apply in particular instances. It is intended that a regulator would seek to achieve outcomes that satisfied the general principle that the cost of prescribed services should be neither increased nor decreased as a result of their being provided via a hybrid interconnector rather than a regulated one. That is, charges for prescribed services should not cross-subsidise the costs of market network services and vice versa.

Requirement to be scheduled. Both the prescribed and market network services provided by the interconnector are required to be scheduled.

At present regulated interconnectors, like Market Participants’ scheduled plant, are required to be centrally dispatched. The pending Code changes also require non-regulated interconnectors to be scheduled. This provision extends these requirements to hybrid configurations.

Basis for dispatch. Both the prescribed and market network services will be dispatched on the basis of offers to transport energy between the interconnector’s connection points.

The pending Code changes for non-regulated interconnectors provide for market network services to be dispatched on the basis of offer prices that apply between the link’s connection points. Broadly, an increment of power transfer will not be dispatched unless the offer price is obtainable for that increment after transport losses though the interconnector have been taken into account.

It is proposed that this framework apply to both the prescribed and market services provided by hybrid interconnectors. The adoption of a common framework is desirable, given that the services are all provided by a single physical facility.

The proposed framework is slightly different to that applying in the case of fully regulated interconnectors, which are deemed to terminate at the regional reference nodes rather than at separate connection points. However, provided that the offer price for the prescribed services from a hybrid interconnector is always taken to be zero (see below), the dispatch outcomes should be similar in both cases.

Offer price for prescribed services. The offer price for prescribed network services shall be zero.