Marginal loss factors in the NEM explained

MLFs

By AEMC Adviser Andrew Splatt, AEMC Director Technical Specialist Julian Eggleston, AEMC Director Meredith Mayes

Introduction

The recent release of AEMO’s draft figures for loss factors in the NEM for 2019-2020 created substantial interest among market participants, for a large number of generators. Some generators, mostly remote solar and wind participants, have seen significant changes in the marginal loss factors (MLFs) number for their location proposed in AEMO’s draft report. Consequently, these generators are anticipating changes in the profitability of projects. The responses by generators received considerable attention across traditional and social media streams on the issue.

This article aims to provide an “MLF 101”. What they are, how they are calculated and an explanation of the issues. It also sets out how stakeholders can participate in the AEMC’s processes to consider two pending rule change requests that are about to formally start consulting on in relation to MLFs.

What are marginal loss factors?

MLFs represent the value of electrical losses in transmission, from generation to the load or, as in the diagram below, point A to point B. The amount of electricity lost during transmission is a function of physics. That is, as electrical energy moves through the wires, some of that energy is physically lost to the atmosphere as heat. These losses need to be priced and factored into electricity prices paid to generators and recovered from customers. The diagram below is taken from AEMO’s website and illustrates how the losses occur.

marginal loss factors, AEMC
Source: AEMO

This loss cannot be overcome through network design. Ben Skinner from the Australian Energy Council described MLFs well in a recent article by stating that:

…AEMO’s numbers are simply an expression of the laws of physics which are awfully difficult to amend.”

Ultimately, there will always be losses when transmitting electricity from one point to another. The issue is how to best estimate losses and who should ultimately bear the costs and risks associated with the variability in those losses to minimise the impact it is having on current generators, proposed projects and future investments.

Related article: AEMC proposes new technical standards for generators

Calculating MLFs

AEMO is responsible for calculating the MLFs used in the NEM based on principles in the National Electricity Rules (NER) and its detailed methodology developed through consultation with stakeholders. The NER requires AEMO to calculate a single static MLF value for each load and generation connection point that reflects the transmission network flows anticipated for the following financial year.

In the NEM the MLFs scale the spot prices. Thus a generator with a relatively high loss factor (say 0.99) will receive a greater spot market revenue than a similar generator with a lower loss factor (say 0.85), all other factors being equal. This mechanism provides a price signal for generators to locate nearer a load centre, and for a load to locate near a centre of generation.

The MLFs used in the NEM also reflect the impact of losses of an increment of additional generation or load at the connection point. This means that NEM dispatch engine (NEMDE) can consider the incremental impact of network losses when determining the minimum cost combination of generating systems in the NEM. A generating system with a low MLF will be seen by NEMDE as increasing network losses by more than a generating system with a higher MLF, meaning that NEMDE will dispatch similar generation systems with a higher MLF ahead of those with a lower MLF to minimise the cost for consumers.

The generating systems with the lowest MLFs are those that are connected a long distance from the regional reference nodes (South Pine for Queensland, Sydney West for New South Wales, Thomastown for Victoria, Torrens Island for South Australia and Georgetown for Tasmania) and in parts of the network with a number of other generating systems. This is because the losses associated with transferring the generated energy to the remote load centre at the regional reference node are high due to the long distances involved, the higher losses arising on the lower voltage transmission lines and relatively high loading on these lines due to the neighbouring generation.

Why MLFs are so topical at the moment

AEMO’s draft publication of annual loss factors across the NEM has highlighted the importance of understanding what MLFs are and how they impact on the profitability of generators. The previous years’ publications have illustrated an increasing trend in variability that ultimately influences generators’ financial position and future investments in generation, particularly in renewables.

When considering the figures AEMO has published for previous years in correlation with the increasing number of incoming generation projects connecting to the National Energy Market it is somewhat unsurprising that there has been significant variability in MLFs.

There are a number of projects currently connecting to the grid with the majority being solar PV and wind generation, which for the most part are connecting to the NEM in reasonably remote areas. This builds on the complexity of the issue as the generators connecting to ‘long skinny’ transmission lines which are further compounded by the generators’ similarity in dispatch characteristics which leads to higher loadings on the lines and even greater losses.

The huge number of incoming generators connecting to the NEM and the changing mix of generation with the geographical location of these connections is best illustrated in by the draft loss factors applied to the Broken Hill Solar Farm which saw the greatest variation in NSW with a loss factor reducing by 25 per cent.

When AEMO published their draft of the 2019-2020 loss factors it articulated the problem well:

The NEM is transforming, driven by new technology and a changing generation mix, newly formed supply hubs, leading to large year-on-year changes in MLFs. In many locations, MLFs have fallen by large margins, which in turn have material financial implications for existing and intending market participants.

The issue is three-fold beyond those factors. Current generators who may have forecasted relatively stable loss factor variation are seeing big declines in expected profitability, future projects may be deterred from investing generation and the volatility is reflected in the electricity pricing that ultimately impacts consumers.

Related article: A perfect storm in electricity distribution

Next steps

The AEMC has two pending rule change requests that directly consider the issue of MLFs and how they are calculated, as well as other related reforms. The AEMC is currently conducting preparatory work in relation to these requests, including meeting with interested stakeholders. We expect to formally commence the rule change processes in May with the publication of a consultation paper for all interested stakeholders to respond to. From there, we will work with industry and AEMO to consider whether the current methodology is fit for purpose. This will include considering what can be done to improve the calculation of MLFs and inform the market of movements in the MLF numbers over time. As is the case for all rule change requests, these proposals will be assessed against the national electricity objective, which focuses on the long-term interest of energy consumers.

These MLF rule changes will also be considered in the context of other work being conducted by the AEMC through the Coordination of generation and transmission investment implementation – access and charging review.