NEM Regulatory Reforms Public Webinar 1

Brad ARCHER 0:07

All right, I think we’re underway here. Hi everyone. Welcome to the first of a series of three public webinars on the NEM wholesale market settings and regulatory reforms. That’s quite the mouthful. My name is Brad Archer and I’m Head of Electricity Division here in the Commonwealth Department of Climate Change, Energy, Environment and Water, and I will be chairing this session today.

I would first like to acknowledge the traditional owners of the lands on which we are all meeting today. And for me, that is in Canberra and the Ngunnawal people. So, I’d like to pay my respects to elders past and present and also extend my respects to any First Nations people attending the webinar today.

I think as everyone is aware, this webinar relates to the package of consultation material on the NEM Reforms that was released by the Department last week. That includes draft amendments to the National Electricity Laws and National Electricity Rules and the accompanying explanatory consultation paper.

Now, while that consultation package has been authorised for release by energy ministers, the positions reflected in the package and discussed here today do remain subject to change and to final decisions by energy ministers. The information presented here and in the consultation package should therefore not be relied upon, and the department disclaims any liability associated with reliance on this information.

So, the agenda for the webinar today is as shown on the screen. So, we’ll start with some preliminaries and provide an overview of the consultation process before moving to a more detailed run through of key elements of the design of the package, and of course, an opportunity for Q&A.

So just a few matters relating to, I guess, housekeeping of the session and how we will run it today. Given the number of attendees, the chat function, cameras and microphones have been disabled, primarily for bandwidth purposes. So hopefully the presentation runs smoothly for everyone.

And we do ask that participants submit questions via the Q&A function. So, we will attempt to moderate those questions for relevance. And I guess there are a few categories of questions that would best be directed elsewhere. So questions relating to the contracts under development by the contract co-design working group, we won’t be addressing those today and they’re better directed to that working group, as part of the consultation administered by ASL.

Questions relating to price responsiveness resources and AEMO’s new market visibility framework should simply be directed to AEMO. And any questions relating to Victoria’s offshore wind tenders should be directed to the email that is currently on screen for that purpose.

In addition, any questions relating to the future decisions by governments relating to the ESEM, for instance, speculation on how jurisdictions will vote at the ECMC meeting in December, are really not relevant to today’s consultation and we won’t be considering those. Not really appropriate for us to be commenting or speculating on how those sorts of decision-making processes might play out, notwithstanding, of course, how intensely interested we are in those potential outcomes.

And as people are putting questions into the Q&A function, do use the upvote function if you see questions that you would like prioritised to be responded to. Given we only have a limited amount of time, that will help us get to the questions that are of greatest interest to the group.

If there are questions that we’re not able to get to in today’s session, we will endeavour to come back to those in next week’s webinar. And I guess the final thing I’d like to note procedurally is that the webinar is being recorded and both the slides and the recording will be made available at some point in the near future after the session today.

So now I’d like to introduce you to our panel members, including from the NEM Review Implementation Taskforce here in DCCEEW, and then also from the NEM jurisdictions who have kindly joined us and will participate today in the discussion. So, first of all, we have Mel Pang, head of the Implementation Taskforce here in the Commonwealth. Thank you, Mel.

We also have Ben Ferguson from Victoria and Liam Ryan from New South Wales. Really great to have both Ben and Liam with us today. And we also have an apology, unfortunately, from our South Australian colleague and representative, Rebecca Knights. But we do expect Rebecca to be joining us in the subsequent two sessions over the next couple of weeks.

So, with the preliminaries out of the way, very happy to hand over to Mel Pang, who will take us through the consultation process and the key features of the regulatory package. Over to you, Mel.

Melissa PANG 5:51

Thanks, Brad. Morning, everybody. First and foremost, really, so I’ll start with an overview of the process and where we’ve gone to date and then move through the package, as Brad noted. But the first thing I really wanted to do is acknowledge that a lot of hard work has gone into the materials that you are accessing now.

And that is hard work across multiple NEM jurisdiction public servants who have put a lot of time into this work, but also staff and colleagues from market bodies. So we’re 80 metres into the 100-metre sprint and this is a really important point for us to get the feedback from all of you to stress test what we’ve provided. So, thank you for joining us today.

So, on process and purpose for Consultation, as you all know, the NEM Review Panel delivered their report to Energy Ministers in December last year. And as I said, since then, we’ve been working pretty collaboratively across NEM jurisdictions to get our package to the NEL and NER and the 40 so page consultation paper that you see.

Throughout that process, for those of you that are members to industry groups and to our lovely industry reference group people as well, we’ve met monthly and hopefully we’ve met most of you as well through either bilaterals or through access to forums run by your industry groups.

So, the consultation process is open until 13 October. We encourage you to provide your feedback through the DCCEEW HaveYourSay website. And then looking forward and ahead on this green, teal highway, we are headed to December for agreement by ECMC unanimously to pass this legislation through South Australia Parliament.

In terms of the rules, we do hope to have a second round of consultation on the National Electricity Rules sometime in early 2027. And really, it was a function of how quickly we’ve had to pull this all together where we’ve really focused on the legislative amendment at the highest level getting the architecture and bedrock of this reform in place and then moving through to the rules next year.

So one final point to make about the webinar today, you know, to make the best use of time and for the subsequent 2 webinars that we have over the next couple of weeks, we’d really like to focus it on how can we test the package, not so much to re-prosecute policy positions of the panel, But we absolutely do welcome feedback on all of that, including policy positions through the submissions as well.

So, the structure for today, as when you registered, you would have indicated your point of interest, and without surprise, the ESEM being the flagship reform within the package got the most votes. So, today’s structure will follow the key stages of the ESEM, which is a similar structure to how we have written the consultation paper.

And once I go through all these steps, and that being beginning with governance, moving to contract co-design, trajectory setting, taking a sidetrack to strategic reserves, then following through to ESEM procurement, including auction design and contract recycling, and then moving to the arrangements for the cost recovery, cost relief and cost recovery.

Following that section on the ESEM, we’ll do a quick run through also the laws and rules package on the MMO and what we have for the price responsive resources.

Beginning with governance. So, ESEM governance refers to the regulatory frameworks that will govern the operation of the ESEM. Importantly, this includes the appointment of an entity or multiple entities to undertake the ESEM functions.

The way we have articulated this in the package is that there will be two ESEM entities or two functions carried out by ESEM entity or entities, that being the ESEM administrator and the financial management entity, which we’ve been calling the FME for short. So, the ESEMA will be responsible for setting the anticipated entry trajectory.

And of course, as we love to do, we’re adding more acronyms to the energy sector. So, we’re calling it, we call that the AET, that’s the anticipated entry trajectory. So ESEMA will be responsible for setting that. And that was very much in line with the expert panels I guess, ambition and dream to have, you know, long-term forecasting available for market certainty.

The ESEMA will also run ESEM procurement processes. The financial management entity will be the enduring counterparty to all ESEM contracts and ESEM related contracts. Both are clear terms in the laws and laws package. They will procure through competitive processes.

So yes, they will be procured through competitive processes and they will be responsible for bringing those contracted positions back to market through the contract recycling process.

Governance is something that the taskforce and the jurisdictional steering committee are working quite heavily on in this period and moving forward in the next period to December. We welcome any thoughts on what is in the package, but the note I wanted to make really was that the work is ongoing.

As is the case with other national regulatory frameworks, National Energy Regulatory Frameworks, the AER will have a compliance and oversight role in relation to a variety of ESEM obligations, including those of both the ESEM and the FME, and for example, as this is articulated in the package, the AER will be able to undertake performance audits of the ESEM entities.

And then it’s worth noting, of course, that other legislative frameworks will continue to be relevant. For example, it’s expected that these entities will be corporations and will be governed under the Corps Act, you know, with what you would expect formal corporate constitutions and membership agreements to be established.

Moving to contract co-design. So, the contract co-design process is certainly one of the most exciting parts of the reform package, depending on who you ask, but certainly is key to the success of the scheme. So, as you probably know, following the pilot that the panel ran last year, the CCDWG, the contract co-design working group, has been running all year, working hard to deliver a final report in November.

The CCDWG, the working group, is led by a group of industry specialists and their job is to do a bunch of work and workshop every 6 to 8 weeks and determine and recommend appropriate derivative contract structures for use in the three services, the bulk energy shaping and firming services. These contract types really should be suitable for managing current and emerging risks.

There is documentation available online relating to their terms of reference and what they are prioritising in their work. And as Brad mentioned earlier, to make the best use of our time, we would rather not take questions specifically on the contracts themselves unless they relate to the drafting package, given there is a parallel open consultation at the moment.

So, as set out in the slide, the process is that the convener, which is the CCDWG convener, the ESEM administrator, will convene and appoint the group. The group’s processes and decisions will be published, which is something you will have seen occur this year, while ASL has taken that convening role with DCCEEW prior to the setup of the legislation.

The group then recommends contracts to ESEMA, and then in doing so, the ESEMA, as the convener, must consult with AER and the financial management entity. The ESEMA then accepts the recommendation, chooses to accept the recommendation, and then chooses to determine or designate the contracts for use in future tenders.

Importantly, and probably a point of distinction, is that the AER is the one responsible for designating relevant contracts for use in the MMO.

So, just a few key features of the contract co-design process I will touch on. So, the contract co-design process for developing the ESEM contracts will be specified in the rules, not the laws. Something that is a point of deviation from the expert panel’s recommendation was they had suggested that the AER be a co-convener.

We have proceeded with contract co-design working group, sorry, the convener of the CCDWG being the ESEMA only, however, absolutely necessary to consult with the AER given the AER’s expertise and access to intelligence in with through their Wholesale Market monitoring powers and through administering the DOM.

In terms of the designation of contracts, the ESEM administrator has discretion, which is an important point, to designate contracts given the ESEMA, and this links to the decision to move with a single co-convener as the ESEMA, given they will be most linked to the financial liabilities of The ESEM as a scheme.

All right, let’s move to trajectory setting. So, I know this one from feedback from the industry reference group has certainly been a key point of interest for a lot of industry stakeholders. I’ll just walk through the process now first and then we’ll walk through some of the key policy decisions that were taken in the design.

So, every two years, the ESEMA will provide a transparent, forward-looking view of future system needs, publishing A 15-year anticipated entry trajectory, AET, and associated tended plans. Obviously, this is intended to give market participants greater visibility of procurement requirements and investment opportunities.

Key to note is that while the two-year cycle aligns with the timing of the ISP, the ESEMA trajectory setting process is not formally linked or extricable linked to the ISP process. This was intentional, noting that the industry is kind of on this two-yearly cadence, but there are processes in place like the ISP review. that by building in flexibility, it allows the system and the scheme to adapt accordingly.

So, the AET will help futureproof the framework. Sorry, this process will help future proof the framework. And what is also relevant to that is the ongoing reviews by the AEMC as well.

So, per the steps, jurisdictions will first nominate policy targets to the ESEMA, and this includes schedule generator retirements and policy targets. AEMO will then develop, model and consult on the ESEM scenario. And then the administrator takes that scenario, develops the AET, translates the system needs identified in the scenario into a view of the ESEM services that may be required over the 15 years.

Following that, the ESEM administrator develops the tender plan, the tender plan being something that is also defined and specified in the NEL and NER. It’s important it sort of moves us from a what needs to be built perspective to a what needs to be procured perspective. And then finally, both the AET and the tender plan are published, providing the market with visibility of the forward trajectory and plans.

Of relevance to publication of the AET and the tender plan in terms of timing, the AET must publish, the AET will be published, within, sorry, let me rephrase, the AET will be published every two years. Within 3 months of publishing the AET, a timeline for development of the next one must be published. A tender plan must be published within three months after publication of the AET.

And then similar to the ISP, any new information in the market can also trigger an update to the entry trajectory, within that two years.

Moving to, yep, thank you. So, two key features of the trajectory setting process to highlight. Firstly, that, as I mentioned earlier, that participating jurisdictions will nominate reliability targets and electricity sector targets and scheduled generator exit assumptions. This really, this change, so the main change from the expert panel’s design was the, is now the inclusion of reliability targets into this part of the process. And this decision was really taken because it effectively reflects elements of jurisdiction=specific schemes that are currently in operation both in South Australia and New South Wales.

And this approach also recognises that jurisdictions may have different reliability requirements throughout the transition. And really, it is a good thing bringing the schemes under one enduring framework, again, a vision of the panel and providing that transparency for how those requirements will be met.

Importantly, jurisdictions that elect higher reliability outcomes will bear the associated costs, and that is covered under cost recovery as well. But it does create that sort of balancing and strong incentive for governments to carefully balance what reliability benefits they’re after against consumer impacts when determining targets.

The second point I wanted to flag as well was that, as I mentioned earlier, the AET is not, is going to sit alongside and not replace existing system planning publications. And it was intentional that, you know, the effort, the people, the machinery that goes to developing for trajectories and forecasts is used most efficiently, which is a strong rationale for keeping AEMO obviously doing what they do best around modelling.

In addition, as you have seen from the communique for last weeks, for the ECMC of two weeks ago, Energy Ministers also agreed to the terms of reference for AEMC to undertake a review of the reliability standard and market price settings as per the expert panel’s recommendation number 5.

The intention is that this review will run alongside the next sort of 12 to 18 months, ensuring the frameworks in the NEM remain fit for purpose through the transition. And no doubt, you know, while the work is occurring in parallel, it would certainly inform the finalisation and operationalization of the ESEM.

All right, moving on to strategic reserves. So, under strategic reserves, jurisdictions are able to direct the procurement of strategic reserves where additional insurance is required for high impact, low likelihood events or where a jurisdiction has specific reliability concerns. Per the panel’s design, strategic reserves would operate outside the market and could include capacity or demand response resources.

The framework does also, the design of the framework as being consulted on does also support transitional arrangements ahead of major generator exits and that allows reserve resources to be brought forward where needed to support reliability. It’s probably important to note that reliability, sorry, strategic reserves will remain an optional measure for jurisdictions to sort of flick a switch as they choose.

And flicking the switch is what’s covered in steps one, two and three here. So, the first step would be that the minister directs, sorry, the first decision point following a process of consulting is that the Minister will direct the ESEMA to run a procurement round for a strategic reserve service.

The Consultation really process step prior to that really is to inform to get information from me, ESEMA, on costs, reliability, outcomes, and so that the minister and jurisdiction can make the most informed decision.

Step 2 is that the ESEMA will procure reserve services, strategic reserve services. As currently drafted, there’s a bit of optionality here and the ESEMA would likely, subject to guidelines yet to be drafted, make a determination or work with the jurisdiction on what is the most efficient way to run a process. So that could be alongside and together with ESEM services procurement processes or as a standalone.

In some circumstances, the ESEMA can procure new entrant resources to provide strategic reserves in advance of a scheduled generator exit, and some thinking has certainly gone into that.

The third step around activating reserves and reserve contracts, so contracted projects would be required to remain available to address reliability shortfalls. There’s a pretty lengthy section in the NER around how that is to occur and certainly the drafting has leaned a lot on working with what currently exists in the system with AEMO and around administering the reliability and emergency reserve trader, RET.

So, we certainly would welcome feedback on those elements. Other elements about the strategic reserves to highlight were that participating jurisdictions could specify the time horizon over which the reserves are procured.

So, in the main, it is long term arrangements, resources maintained would be maintained out of market for the long term, and the intention is to limit wholesale market impacts while providing greater resilience for those HILP or high impact, low probability events.

There’s been some consideration given to temporary transitional arrangements, allowing the ESEMA to procure a new plant as a strategic reserve service ahead of a scheduled generator exit for example, and the way that would run would be, you know, for example, a project could provide the strategic reserve service about one to two years in advance of a scheduled co-exit under a reserves contract before then transitioning into a normal market operation supported by a regular sort of ESEM contract.

All right, moving to procurement. And under procurement, we cover auction design and contract recycling. So, at its core, it really is about ESEMA entering into contracts for ESEM services and then recycling those back to market, which was clearly an important feature of the panel’s recommendation.

In the procurement stage, ESEMA will run regular auctions starting with what we hope to be a biannual cadence in which proponents will bid for contracts to supply for ESEM services. ESEMA will review the bids, ensure they meet the pass-fail pre-qualification criteria. Or eligibility criteria, and then those projects will be assessed based on financial merit.

The ESEM then recommends those bids to the financial management entity to enter into, and in doing so, ensure that a combination of ESEM services across the regions can deliver on the entry objective.

And just a side note here on the entry objective, it is, as you would have seen in the drafting, it is to meet at least cost to consumers, the reliability standard, reliability targets, and the electricity sector emissions targets as nominated by the participating jurisdictions.

In terms of the project development stage, so the financial management entity will award and administer contracts with proponents as they move through the development stage through to commissioning. And then this process or this part of the process does also include managing the bond with proponents and other enforceable project milestones and performance obligations as you would normally see in project development.

And then in the third stage, contract recycling, the financial management entity will initially hold ESEM contracts, much like derivatives, before progressively selling them back into the market as liquidity develops. Contract recycling itself is a key mechanism for the financial management entity to manage its exposure. And then of course, as we though, to support liquidity in the derivative markets.

Again, pretty much the sort of core of the ESEM, the intention of designing and putting the ESEM in place. It’s worth noting also that strong governance, transparency and risk management requirements will apply to purchasing and recycling activities, including oversight by the AER. And of course, a theme throughout, which is publication and transparency of price information, pricing information.

A few things to note. So really, largely in auction design and contract recycling, the design that you will see through the laws and rules package is consistent with the NEM Review panel’s recommendation and design.

However, probably the main point of note was to not proceed with a cooling off period and instead just use an approach where, for example, hybrid projects could specify upfront that they need a combination of bids to be accepted. And so, taking a contingent offer approach rather than the cooling off period, it just gives the more confidence in procuring in procuring volumes and allows tenders to run more efficiently.

In terms of contract recycling, you know, I think I’ve said it enough times, but yeah, it’s the main point of it all, but also that the FME will conduct the contract recycling to manage its exposure. While the financial management entity may use exchanges and may novate contracts, it is expected that contract recycling will predominantly happen through over-the-counter contracts.

All right, cost relief. I’ll say up front that on cost relief, and we did flag this in the consultation paper as well, certainly this one was one we, over the time that we had to finalise the design, came together quite quickly. And so we really wanted it in the consultation package, however, just to get the feedback from industry. So strongly encourage some thoughts and feedback on what is proposed here.

So, as we all know, an important part of the ESEM is the existence of a cost relief mechanism that recognises and values investment support outside the ESEM, or as the exit panel liked to say, to you know people who are doing things that bridge that tenor gap.

Businesses that directly support new generation storage or firming through eligible long-term contracts will be able to receive cost relief and ensuring they’re not paying twice for the same outcome. The framework is intended to be self-limiting and responsive to market activity. Again, something that the panel was really keen to design into its core was around this sort of sense of auto stabilization.

And it was a key feature. So, cost relief will be operationalized as an input credit registry model. It will be off-taker focused, meaning that off-takers from projects rather than, or as opposed to developers are the ones who will apply for the cost relief. And then off takers are to demonstrate that projects underlying their agreements will deliver ESEM equivalent services.

However, the exact requirements are obviously subject to further specification in the guidelines. On this next, the next slide, there is basically this process laid out, again, laying this out, but certainly a piece we’re really keen to hear back from you on.

But so just to walk it through quickly, if a market customer is entering an off-take agreement, that makes it eligible for cost relief, it can apply to the ESEMA. The ESEMA will assess the application, the assessment occurs on a rolling basis, and then the market customer can submit its application as it is ready.

The ESEMA will assess the applications against eligibility criteria specified in the NER, and then similar to the process for ESEM procurements, the ESEMA is the body that assesses those applications, but the financial management entity, again similar, is the body that will enter into the financial arrangement.

When estimating what rates to charge to recover ESEM costs, the FME will account for the impact of any input credits. That’s done through an input credit registry. AEMO then applies those rates when administering cost recovery through the weekly settlement cycle. And then, as you could expect, payments will be reduced for Market customers that hold those input credits, and so on and so forth.

The last ESEM topic, Cost Recovery. So similarly, this one was very, was simple in that we largely maintained the panel’s recommendations on cost recovery. A lot of recent work has been more so about detailing the processes for how it will work, including who does what and what cheques and balances will be in place. So you break it down, we’re breaking it down to two processes, an annual process and a weekly process.

Each year, annually, the financial management entity will estimate the costs it expects to incur for the financial year ahead. And then they will aggregate the cost estimates from those with those from other parties with cost recoverable functions. The AER will then review the cost proposal for compliance and then publish A determination and that has to occur by the 28th of February.

This will provide enough time for these year ahead costs to be included in regulated retail price office was the intention. And any differences between actual and forecast costs will be evened out in the next cycle. And then as for the weekly cycle, it’s much more operational and in line with how AEMO runs business.

And it’s basically using the NEM settlement system to ensure that the financial management entity receives cost recovery payments and market consumers receive rebates under the ESEM.

The main features I wanted to highlight on cost recovery were that, as I mentioned earlier, return through the weekly settlement cycle. Doing so minimises working capital costs, incorporates transmission connect customers, and draws on AEMO’s pretty robust credential and credit support arrangements to manage non-payment risk. Rates and rebates set out the year ahead, as mentioned on the prior page.

Contract costs recovered and rebates returned in the financial year where the loss or gain has occurred. The intention, as I said, to stabilise bills. Cost recovered, rebates and all cost recovery and rebates will be returned to customers in a jurisdiction where the costs are attributed.

Again, this was a very important feature and given it is the ESEM is bringing together multiple jurisdictions schemes and given the ability for jurisdictions to nominate their policy targets, it is important that consumes within those jurisdictions wear the costs of those targets or see the gains.

AER oversight suitable for a non-profit cost recoverable mechanism. So that AER’s focus on transparency and compliance will promote market confidence. That is obviously an unsurprising part of the package.

And then the financial management entity will need to consult with AER and AEMO to set that simple, principles-based structure for recovering ESEM costs, aligning with user pays while minimising administrative complexity.

That is… Those are many words that I’ve used to describe our package for the ESEM and walking through. Now just a handful of quick slides on the MMO and the PRR.

So key features of the MMO, the AER will develop a framework to determine when it will be turned on for a given region. The obligation to bid and offer applies.

There is an ability to opt out for ministers, so that preserves jurisdictional flexibility, allowing them to determine when the MMO remains appropriate. There is a note, Queensland and Tasmania given the unique characteristics of those jurisdictions will not automatically be in, but their ministers can choose to, if they wish.

In terms of key changes from the NEM Review final report and the expert panel’s recommendations, we have opted for no obligation on non-physical participants or non-market participants, non-physical traders, I should say, to the MMO.

And really it is about reducing implementation complexity in the initial stages you know, and there is scope and flexibility built in for the AER to expand the MMO’s coverage through a future rule change.

And then a very administrative one really was about the difference being that there would be no obligation under the MMO in the current or the prompt quarter, but commencing the quarter next, and then the language in it really just moving away from a sort of absolute three year period for clarification and turning it into a rolling coverage over the four to four quarters.

The MMO will be given effect into the NEL and NER guidelines. On this slide, I’m trying to rush a bit through so we have more time for questions. As you can see listed are what are covered in the NEL, the NER and the guidelines. It’s pretty straightforward, so I’ll move to the next slide. And then there has been a bit of interest in how we would go about concluding the RRO, as was also recommended by the panel.

There’s a very transitionary nature to this. It will be progressively switched off as the ESEM and MMO commence in various regions. Existing instruments would be honoured, we would not have overlapping obligations and that there would be a future repeal pathway. NEL and NER amendments will provide the mechanism to fully repeal the RRO when relevant and appropriate.

Last one, price responsive resources. Again, relatively straightforward. It’s the details and technical details of which are being consulted on through AEMO. And AEMO’s been doing a stella job this year, you know, shepherding work on what they’re calling the MVF, Market Visibility Framework.

But in terms of the laws and rules package, it’s really about creating definitions and the subject matter frameworks and the rulemaking power for the PRR.

Thank you for listening to my extremely long presentation about all of the laws and rules package. Really happy to take questions now. And as Brad said earlier, there’s two more webinars. We won’t be going over the slides again. It’ll very much be about question and answer only, just to give us more time. And then we will be publishing the recording of this to the web page. So, people who would like to can watch this ahead of attending one of the next two webinars.

All right. Now, I’m going to switch to moderator mode and have a look at the Q&A here. We’ve got Liam and Ben joining us. And I’m going to look at the most upvoted. questions.

So, the first one here, Katie Hepworth, has asked, what levers does the Commonwealth retain regarding targets if combined jurisdiction targets fall short of the Commonwealth target?

I can take that one. So that’s basically as per the NEM panel’s design, and as has been clear as we’ve worked through with Liam, Ben and the other people on our steering committee this year the ESEM is designed to achieve state-based targets. Commonwealth action would need to be separate and outside of the ESEM. Thank you, Katie, and of course, panellists, feel free to jump in at any point.

David Feeney. Hello David. So can a participating jurisdiction nominate a generator exit date, which is different to the date that the asset owner has nominated to AEMO?

Liam Ryan 41:09

Yeah, happy to answer that. Thanks for the question, David.

Look, I think technically under the rules that would be possible. I guess the, as they currently drafted, I guess the intent of the mechanics there are to enable ministers to nominate jurisdiction-specific policies and to carve out assumptions that would otherwise be used in the integrated system plan. As stakeholders would know, the integrated system plan optimises those closures for emissions targets, and so the intent is to allow ministers to effectively prevent that optimization process from occurring if there are firm views on when generators are expected to close. And speaking on behalf of New South Wales, I guess the intent is to use the expected closures from AEMO’s generation information page. So I think the intent is to align those things, but the current drafting of the rules do allow the prospect for different dates to be nominated.

Melissa PANG 42:19

And Ben, I wasn’t sure if you wanted to add anything from the Victorian perspective as well.

Ben W Ferguson (DEECA) 42:23

No, I think I think Liam has kind of outlined to the position well. Thanks.

Melissa PANG 42:31

OK, Con Van Kemenade. Has thought been given to whether existing CISA and LTESA holders that have not reached financial close, given it has to be new capacity, can participate, given ESEM contracts are essentially commercial contracts rather than underwriting agreements?

So this relates to transitional arrangements. I could start and then I could let any of the panellists feel free to jump in. But in terms of CISAs, is active conversation and engagement happening. You know, we are in DCCEEW.

My CISA colleagues sit just down the hallway and really active consideration about how transitional arrangements would work. The position posed in the consultation papers are really that one could not hold both at the same time.

So, and for the CIS in particular, noting that project development and where in the project development chain a project looks to be in and try and win either a CISA or an ESEM contract is different. We do need to do some sort of sequencing and planning of how that occurs, but certainly the position we’re consulting on is that one would not hold to a CISA and ESEM contract at the same time.

But keen for feedback on that. Liam, as I mentioned, so.

Liam Ryan 43:48

Yeah, look, I think I just point the stakeholder to the rules package. There’s a clear criteria that the project isn’t subject of a jurisdictional revenue underwriting support for the same capacity.

And I think just to, I guess, to explain what that means, you know, if a project would prefer to bid for an ESEM contract rather than pursue the project under the underwriting arrangement they have, they could always forfeit the jurisdictional support. So basically, terminate the any agreement they’ve entered into with either the LTESA or the CISA regime. Thanks.

Melissa PANG 44:31

All right, Owen Logan has asked, why is recycling aimed primarily at OTC products and not allowing the FME to utilise all potential hedging activities such as an exchange to create a lowest cost outcome for consumers? Liam, do you have an answer to this one?

Liam Ryan 44:52

Yeah, look, I think, look, I think the answer is the actual contract recycling provisions are intended to be governed by the risk management framework, which is sort of set out in the rules.

The provisions at the moment in the rules are fairly high level, and I guess they don’t they don’t prevent other sorts of activities from occurring. I guess hearing from stakeholders about the need to empower things like creating an exchange would be helpful. But of course, you know, these reforms also relate to the market making obligation.

And so I guess we are, we are contemplating these elements, but like the rules are trying to provide operational flexibility and administrative flexibility, and so those things aren’t clearly ruled in or out in the packages currently drafted.

Melissa PANG 45:50

Thank you. Emma Fagan, has asked, interested in further digging into the ISP and ESEM trajectory, will AEMO and the ISP transmission planning be based on ESEM trajectories? Liam, happy for you to have a go first.

Liam Ryan 46:11

Yeah, look, I think the important thing to, Mel, I think you explained in your presentation that actually the integrated system plan and the anticipated entry trajectory are two separate processes. And so the integrated system plan at this point, you know, with the package that we’re consulting on doesn’t change. The scenarios, scenario development that AEMO goes through doesn’t change.

The ESEM, I guess, trajectory builds off that process, but it is a separate process. So I think the short answer to your question is no, under the current rules package that we’re… we’re developing. It does then pose the question, what is the transmission that’s assumed in the ESEM trajectory?

And I think that’s an area that I guess the idea is that the trajectory builds off the same modelling framework as the ISP and you know developing a future outlook of a network background is an important thing to understanding what the lowest cost mix of you know firming and shaping and bulk energy are.

Melissa PANG 47:28

Thanks, Liam. Yeah, and I’ll just add to that, I think I mentioned this in the presentation too, you know, with ongoing processes like ISP review and whatnot, at the end of the day, it helps having AEMO as the holder of a lot of the processes around modelling, transmission, planning and whatnot, the same as that doing the ESEM trajectory.

All right, another one from David. How does a strategic reserve asset transition back into market following thermal exit to the extent it has been procured on a transitional basis? Ben.

Ben W Ferguson (DEECA) 48:05

Thanks for that, Mel. So, it was noted in Mel’s presentation that ESEMA can procure strategic reserves alongside its other procurement processes as well. And so if a jurisdiction was to undertake the pathway around the transitional strategic reserve, effectively, ESEMA would procure for those transitional out of market services, but then also look to contract for in-market contracts following the trigger event that would bring the asset back into market.

Melissa PANG 48:50

Thanks, Ben. Ziggy has asked, is the intention that the financial management entity hedge? Its future exposures, for example, by offering contracts to retailers rather than simply recycling generator contracts.

Yes, is the short answer. Yes, that is absolutely the intention that the FME hedge its future exposures.

Owen Logan, another question. So, is it perverse to force MMO participants to use ESEM contracts if they do not cover the risk of the participant and only increase their risk? Is it perverse to force MMO participants to use ESEM contracts if they do not cover the risk of the participant and only increase their risk?

I mean, happy to take your views on that. The intention is that MMO, that ESEM contracts are, you know, fungible and therefore easily recycled through the market. And so, you know, having them recycled through is intended to increase market liquidity and such, but certainly the issues of whether those derivative contracts and their design, you know, adequately account for and cost risk and allocate risk is certainly a matter for the Contract Co-Design Working Group in the first instance to design those contracts and those terms.

And there’s certainly a process following, for example, their final report and recommended three contracts in November. And there will be a subsequent process in a subsequent phase over next year around whether those contracts are appropriately selected. Liam, I don’t know if you want to add to that?

Liam Ryan 50:35

Well, yeah, look, I just wanted to add one thing, just that the obligation in the market making obligation is effectively a bid-price spread. It’s not necessarily a contract holding provision to manage risk. So I think in an instance where a market participant didn’t want to use those contracts to manage their risk. I’m not sure how the MMO would actually require them to manage their risk using the contracts.

It’s more about the pricing offers to purchase and sell that the obligation comes in that.

Melissa PANG 51:18

I might save up your process question for the end. Oh, well, we’ve got 2 minutes. Sorry, let’s rush through these. Emma, Emma Fagan, if there are any concerns with the contracts, lack of market appetite to buy or sell specific contract types, is there scope for review within? the full period?

Liam Ryan 51:41

I might take this, Mel. Yeah, look, there are some provisions in the rules that allow the ESEMA to deviate from the recommendations from the contract co-design working group and to update those contracts over time with, you know, emerging market trends. So those provisions for change are in the rules. I guess we welcome feedback on whether or not they’re sufficient or too broad. Thanks.

Melissa PANG 52:12

Okay. Trajectory setting question from Marilyne. Proposal for jurisdictions to nominate targets but also schedule generator exits, aren’t those generally nominated by plant owners outside Queensland? Liam and that one’s yours too.

Liam Ryan 52:30

I think it’s linked to the same question that David Feeney asked earlier. Sorry for name-dropping you there, David. Yeah, look, yes, they are typically nominated by plant owners. And I guess the mechanics of the rules at the moment make the deviation from AEMO’s inputs and assumptions report the job of the minister in each jurisdiction. That’s a feature of how the rules have been crafted.

So the intent is that ministers can nominate dates for, I guess, the purposes of the trajectory, which would otherwise use the inputs and assumptions that AEMO develops for the integrated system plan where those closure dates aren’t fixed, I guess is the core point. So this is the mechanic that the taskforce and the jurisdictional steerco has come up with to solve that problem where the closure dates aren’t fixed.

Fixed, I guess, in the market modelling exercises that AEMO would otherwise do.

Melissa PANG 53:36

Okay, I’ll take another couple. So Katie Hepworth has asked, do pass-fail criteria to be assessed by ESEMA include non-financial criteria? And has any consideration been given to these criteria?

I could do a really quick one on that, which is that, yes, they will need to be assessed by the ESEMA, but they are a pass-fail, a pass-fail in or out eligibility criteria so just filtering.

What will be the term, Con has asked what will be the term of ESEM contracts that are recycled back into the market quarterly, annual, three years?

Liam Ryan 54:23

At this point, Con, those parameters aren’t set in either the rules or the law. They’re effectively delegated to the risk management framework that the ESEMA would develop and the FMA would implement. Sorry for using lots of acronyms there. The ESEM Administrator would prepare the risk management framework and the financial management entity would actually deliver those activities.

Melissa PANG 54:49

All right, let’s have a cost relief question here from Margie. So cost relief is the aspect of the most critical part of the package for Australia’s aluminium industry. The current package refers to new contracts but does not recognise long-term contracts which are in place now and will be in place for many years after the ESEM starts. Can you please clarify treatment of grandfathered contracts?

Liam or Ben?

Liam Ryan 55:15

Oh, look, yeah, I think if you look at the consultation paper, I guess this is one area that, you know, DCCEEW and the taskforce are very keen to hear stakeholder feedback on. We’ve clearly articulated that the cost relief mechanism needs to be in place within 12 months of the ESEM commencement. But that’s sort of highly provisional based on, I guess, how this actually rolls out.

And basically to limit the uncertainty on how the cost relief will be treated, the idea is that there will be transitional provisions that allow contracts entered into within a defined period before the ESEM commences to be eligible to apply for cost relief. And I guess we’re welcoming feedback on what that appropriate timeframe might be.

So that’s one of the, I guess, big issues that we are hoping to get stakeholder feedback on. And sorry, just to jump in, one other question I saw related to this was about the rolling application, annual application process for cost relief.

Just to clarify what’s intended is that there’s an annual application process, but that once the contracts are accepted for cost relief, they’re recognised, I guess, for the term of those contracts. So you’d only apply once, just to be clear, and then if accepted, you’d be on the cost relief register and awarded credits over the term of that contract that was accepted.

Melissa PANG 56:52

Thanks, Liam. One minute to go. Might hand back to Brad, noting sorry, apologies everyone, there’s a number of questions still. Is. Q&A chat.

Brad ARCHER 57:03

All right, thanks very much, Mel, Liam and Ben. And thanks to everyone who has come along to listen today and to ask questions. Really appreciate that. You know, as I think is probably self-evident from the consultation package, you know, an enormous amount of work and detail as there’s been worked through over the course of this year to get us to this point. A huge amount of work by Mel, Liam, Ben, their teams, and teams of the other NEM jurisdictions.

It’s been a very collaborative approach. Notwithstanding that at this stage, your input via feedback through this consultation process is really critical for ensuring that we haven’t missed anything and that everything is very clear about in terms of how the ESEM arrangements and related arrangements are intended to work. So, we do thank you in advance for the feedback that we will receive through this process.

So, we will have two further webinars. I think they are scheduled for the 1st and 6th of October. And as Mel mentioned, not intending to run through the full presentation, but we’ll have plenty more time for Q&A at those sessions. I think, as I said, we do expect to be joined by Rebecca Knights in those sessions. Rebecca from South Australia, of course.

And just a final reminder that submissions do close just before midnight on Tuesday, the 13^th