AEMO Victoria Planning (AVP) and TransGrid recently completed the Project Assessment Conclusions Report, the last step in the (economic) regulatory assessment, for the Western Renewables Link – VNI West (WRL-VNI).
WRL-VNI will be the biggest transmission line ever developed in Victoria, by far. For all of its 800km length, its lines will be supported by 80 metre high pylons about 500 metres from the other, each requiring four 50 tonne concrete footings.
From these towers, 24 conductors will hang from 24, four metre long polymer insulators. Laid end-to-end these conductors are 22 times the distance from Melbourne to Sydney.
Having now reviewed AEMO’s PACR we conclude that the Regulatory Investment Test (RIT) has become a complete sham.
Cost/benefit analysis is inevitably controversial, but done well it has the prospect of delivering better decisions through an iterative process of proposal and response, conducted in the public domain.
But from its first application in transmission to TransGrid’s MetroGrid project in 2001 to now, the RIT has steadily become ever more detached from reality. The assessment of WRL-VNI is not unique in this regard but we think it takes the gong for the least credible yet.
Over the years (decades!) we have become RIT tragics. We have catalogued the tricks, summarised below, that network service providers and AEMO have had to pull in order to get their RITs to cough up the desired numbers.
Until the VNI West PACR we thought this was the complete list. But we missed one that has been under our noses the whole time and has only now become evident to us through AEMO’s response to one of our Consultation Report submission comments.
Specifically, AEMO’s modelling does not produce results that ensures that the wind and solar farms that it predicts will enter, are actually financially viable. In other words, its model does not take account of the curtailment of the wind and solar farms that it predicts, in the prices that the curtailed generators receive.
AEMO says that the huge generation curtailment that their modelling predicts is “efficient” which means that “moving wind or solar capacity build to other locations with the objective of reducing spill would increase overall system cost.”
But then AEMO admits that actually this is “not necessarily the outcomes that would emerge from the current regulatory structure.”
That does not trouble them because “NEM reform activities, such as the Post 2025 project, are being looked at separately by the market bodies to ensure the regulatory and market arrangements are fit to best address the needs of power consumers, today and into the future.”
Let’s be quite clear what is going on here.
The chart below shows AEMO’s calculation of the effect of WRL-VNI on wind and solar generation in NSW. The chart shows the difference between the capacity of wind and solar in the Base Case (WRL-VNI is not built) and what would happen if WRL-VNI is built.
Positive numbers mean wind/solar is higher in the Base Case and negative numbers mean wind/solar is higher with VNI-WRL.
You can see in the chart, therefore, that building WRL-VNI according to AEMO means almost nothing changes for wind generation in NSW.
But it is a great deal for solar – about 700MW more in NSW on average over the decade from 2031 to 2040 and almost 2,500MW more from 2041 to 2050 than would happen if WRL-VNI was not built.
“Hooray” say solar investors in NSW. Or do they?
If you look at AEMO’s data on the output of NSW solar for example in the SW NSW REZ, you will see that on average AEMO expects their output is curtailed by 35% on average between 2023 and 2050.
If we assume marginal loss factors of 0.85, this means that solar farms in this REZ need to get prices that are 81% higher [100%/(100%-35%)/0.85] than those at the regional reference node in order to cover their costs and get their return.
If they don’t get these higher prices on their remaining (i.e. uncurtailed) production, they will not cover their costs.
Did AEMO take account of this in its modelling? No. Their modelling assumes that these generators get income based on prices that are established as if they are not curtailed and there are no network losses. So the solar farms that AEMO claims in its modelling will locate in the SW NSW REZ will be making huge financial losses.
A problem? Not for AEMO, “NEM reform activities,” it says, will sort this out. In other words, new market arrangements will compensate distant renewable generators for their curtailment.
AEMO has therefore modelled outcomes that it knows will not occur in our market, but then ignores that on the basis of the assertion that the market will be “reformed” so that whatever AEMO predicts, will come true.
If AEMO were actually to take account of the financial losses of the generation they predict, that predicted generation would not arise, thus eviscerating AEMO’s case for VNI West.
To put it another way, in its modelling AEMO ignored the fact that in the real-world, investors commit money with the reasonable expectation of its return plus a margin. By ignoring this fundamental principle, the claimed benefits (and need) for WRL-VNI evaporates.
Will renewable developers (or more precisely their financiers) ignore the huge curtailment that AEMO’s modelling predicts and invest anyway?
AEMO itself does not think so. And we agree. For example last week the Clean Energy Council reported that financial close for large scale wind and solar development has fallen off a cliff. To be precise, not a single new wind or solar farm proceeded to financial close in the first quarter of this calendar year.
The CEC alluded to various explanations including transmission access. It strikes us that after the experience of the “rhombus of regret” in the Murray, and wind farms in Western Victoria not “blowin’ in the wind”, investors are now a whole lot more risk averse, and rightly so.
Lenders and equity providers and others will surely be looking at AEMO’s WRL-VNI spreadsheets and thinking to themselves: you expect us to wear that volume loss without compensation? Are you kidding?
We conclude therefore that WRL-VNI is likely to deliver even less renewable energy than AEMO’s modelling predicts. When you bring it all together, WRL-VNI is a transmission expansion that presents huge financial, social, agricultural and environmental detriments, in exchange for very little new renewable entry.
Our analysis of AEMO’s modelling results reveals that building WRL-VNI means that Victoria falls short of its renewable electricity and storage targets and the renewable transition in Victoria will be deferred relative to that in all other NEM states.
By 2035 Victoria will become an importer (particularly from NSW) of 20% of its electricity needs; and axiomatically electricity prices in Victoria will rise above those in all other states in the NEM.
Sadly all of these outcomes will occur even if we are right in our conclusion that WRL-VNI will deliver even less renewable entry than AEMO predicts.
But looking elsewhere, there is reason for hope.
In South Australia, Electranet is now developing sensible plans focused on getting power to Adelaide. What a pity it thought otherwise when planning Project Energy Connect. In Queensland, our behind-the-scenes observations again suggest pragmatic and honest grappling with the challenges.
In NSW, EnergyCo seems to be making good progress in developing transmission plans that will advance their transition.
In Victoria, VicGrid’s sensible “transmission investment framework” holds much promise. Evidently our conclusion that the RIT is rubbish is widely shared.
Getting rid of a test that is so comprehensively gamed by its proponents is necessary but not sufficient.
In those places where things are heading in the right direction, there is also a clear accountability of state planner to its relevant state government. Western Renewables Link and VNI West must be similarly brought to heel.
Bruce Mountain is director of the Victoria Energy Policy Centre. Simon Bartlett is an independent analyst who is a former COO of transmission company Powerlink and chair of Electricity Transmission at the University of Queensland
