The cost of losses for future network investment in the new networks regime

The supply industry is at a turning point, where the forecast costs of energy generation are expected to increase markedly beyond “traditional” levels and current market prices. The reasons for this are three-fold:

• The prospect of climate change has influenced Government policies to encourage a move to renewable energy sources;
• There is the strong likelihood of some form of carbon price in the near future, which will also increase the costs of energy generation; and
• Networks have been the subject of recent regulatory determinations, that for most have dramatically increased their capital and operating expenditure allowances.

This paper sets out an approach to determining forward-looking long run costs for the three main supply chain components of the cost of losses:

• Energy generation;
• The provision of network capacity; and
• The provision of incremental upstream losses.

The analysis in this report has provided average loss costs by voltage level and is specific to the NSW region of the Australian National Energy Market (NEM). However, it provides a clearindication that a significant change in the cost of losses now needs to be factored into investment analysis across the NEM.

The cost of losses can be a significant input to the planning, design and operational activities of network businesses. Whilst the cost of losses will rarely provide the complete justification for an augmentation project, it can change the relative ranking of alternatives (particularly when comparing augmentation options with different voltages). The cost of losses can also influence the preferred timing of an augmentation project, where moderate load growth permits this.

The cost of losses thus has potentially significant implications for the following types of investment decisions, which are routinely made by transmission and distribution network businesses:

• The choice of economically efficient augmentation options, including the choice of supply voltage level; and
• Lifecycle costs used for equipment specifications, such as optimal underground cable and line conductor sizes and transformer designs, are critically dependent on this input.

Network businesses do not incur the direct cost of losses, which are settled between trading participants in the NEM. Nonetheless, there is a direct requirement for these businesses to factor loss costs into their investment analysis, to support the NEM objective “to promote efficient investment in, and use of, electricity services for the long term interests of consumers of electricity with respect to price …”.

The Ministerial Council on Energy (MCE) has directed a review of the National Electricity Rules (the Rules) and regulatory framework on distribution network planning and expansion, including the requirements for network investment. The treatment of loss costs in investment analysis is an important factor in those considerations.

The cost of losses is also a determining factor in establishing the Minimum Energy Performance Standards (MEPS), for appliances and equipment such as distribution transformers. The specification of revised Stage 2 distribution transformer MEPS is currently underway as part of the Australian Governments’ Equipment Energy Efficiency Program (E3). The consultation Regulatory Impact Statement (RIS) on revised distribution transformer MEPS is awaited at the time of writing. >/p>