Eligibility, certification of capacity and reassessments

The first thing we notice in 2028 is that all types of facilities are eligible to earn ARCs, issued by the Australian Energy Market Operator (AEMO). The ESB Advice prevailed in its push that certificates would be assessed for all types of resources which contribute to reliability, including renewable and conventional generators, demand side and storage.

Example 1: The gas-fired power station

Our first generator is a gas-fired power station, which, with its high fuel costs, only generates on one or two days a year, when the spot price is high enough to cover its fuel costs. However, it remains profitable, thanks to the Physical RRO and the ARCs that AEMO issues to it each year, which are linked to its ability to contribute to reliability during ‘at risk’ periods (with less ‘firm’ – ie less reliable – generators being de-rated).

The gas-fired power station is assessed as being very likely to dispatch electricity in ‘at risk’ intervals during the relevant period and is therefore allocated ARCs corresponding to its full capacity.

Mind you, the gas-fired generator had a difficult experience in last year’s recertification process, following a failure to generate on a high-demand summer day that required AEMO market intervention. The failure led to uncomfortable questions about why the generator was not available, despite receiving ARCs on the basis that it would be available on peak days.

Example 2: The large wind farm

In contrast, while our second generator (a large wind farm) still earns ARCs, it is a less ‘firm’ generator and therefore is allocated ARCs on a de-rated basis relative to its installed capacity. As a result, it still relies on pool price revenue, the wholesale contract market and the sale of renewable energy certificates for its revenue.  Notably, the days of renewable generators bidding into the market at a nominal price are long gone. Our wind farm now bids at a substantial (positive) price and is eyeing the looming expiry of renewable energy certificates with some concern.

Example 3: The new utility scale battery

Our third facility is a new utility scale battery, specifically designed to optimise output on peak demand days, matched to the Physical RRO design. The annual ARC allocation was a large value item in its business case. Its major challenge was a debate with AEMO about how its recharge policy and contractual commitments should affect its ARC allocation. But, now that is over, the long-term battery tolling agreement it signed means the offtaker pays the agreed fixed price each year for the ARCs that the battery produces.

Allocating certificates and tenor

After a few initial teething issues, the process for issuing ARCs for generators has now settled into a regular operating rhythm:

  • ARCs are issued by AEMO annually, following an audited compliance self-assessment by each generator;
  • each ARC is issued for 1 megawatt (MW) of available capacity (de-rated where applicable);
  • each ARC has a vintage; it is only ‘good’ for a specified year;
  • within each year, the vintage is further subdivided into eight sub-vintages, reflecting quarterly vintages split into peak and off-peak hours each day. Not surprisingly, while all ARCs have some value, the vintage covering peak hours in the summer quarter have quickly become the most sought after (and valuable) ARCs; and
  • the ARCs are issued on a rolling three-year basis, with each generator receiving one-third of its approved ARCs for each of the following three years; Y1, Y2 and Y3.
Carbon discount

One twist in the Physical RRO is that, to address concerns the scheme might incentivise generators with the highest emissions intensity, it incorporates a ‘carbon discount’, where each generator’s ‘standard’ ARC allocation is discounted to reflect emissions above the agreed benchmark. The discount increases over time, providing an increasing advantage to low-emissions reliable generation.

Teething issues

While the transition to the Physical RRO is now behind us, there were a number of challenges for the market to manage. Chief among these was the impact on legacy offtake agreements and wholesale market contracts, and on matters such as whether offtakers should receive ARCs for no additional charge; and the impact of the scheme on the electricity spot price.

The rule changes did not provide any statutory mechanisms to solve these issues, leaving it to market participants to sort things out themselves. Thankfully, a general consensus emerged across the market and, despite a handful of notable disputes, most contracts were updated without controversy.