20 February 2023

By Jack Sorensen

What is congestion in the NEM? 

Congestion occurs when the energy generation in an area is greater than what the local transmission network can carry. Similar to how roads become congested when there are too many cars, the poles and wires that make up electricity grids can become congested when there is too much power. However, unlike roads, electricity grids can face catastrophic damage and blackouts when they carry too much power, and so there are controls in place to prevent this. When roads are congested, everyone is still able to get where they are going albeit with some delay. However when transmission networks are congested, the excess power cannot enter the grid at all and instead faces curtailment. 

What is curtailment?  

In order to maintain system security during periods of congestion, the Australian Energy Market Operator (AEMO) will step in and order certain generators to reduce their power output. Generators may also be curtailed for several other reasons such as maintenance and commissioning, or because it would not be profitable for them to generate at the given spot price. For intermittent generators like solar and wind, the curtailed energy is lost and unable to be recovered. Whereas other technologies can usually store that curtailed energy to be used later.   

How does congestion affect the market price? 

As well as having a physical component, the NEM is a market, where supply and demand are matched through a centrally coordinated reverse-auction process every five minutes. The AEMO compiles bids from every generator and selects the ‘least cost’ dispatch needed to balance demand, and sets the price according to the most expensive bid in the dispatch.   

When cheap renewable generators are curtailed – which is overwhelmingly what we observe in the market –  their role in the dispatch must be filled by more expensive generators which will typically drive up market prices. This is the primary mechanism through which congestion affects market prices. There are however a couple of secondary mechanisms through which congestion can place downward pressure on market prices, such as by incentivising ‘race-to-the-floor’ bidding strategies among curtailed generators. The exact impact of congestion on market prices is difficult to define and quantify. 

How can congestion be reduced? 

There are three main avenues to reduce congestion; 1) investment in transmission, 2) investment in storage, and 3) market reform. None of these are a silver bullet, and all three are likely to be part of an effective solution. Transmission investment is the simplest, and involves increasing the network’s hosting capacity so that more generators can produce power without causing congestion. However this is costly and is likely to only provide temporary relief on its own, as it will create a niche for new generators to rush in and connect until the network is stretched to its new limits. Investment in grid-scale energy storage (such as batteries and pumped hydro) also has a role to play, by allowing the excess energy to be stored during periods of congestion and released back into the market at a later time. This is also quite costly, so much so that it is actually widely acknowledged that it is more cost effective to waste some energy than to invest in all of the storage infrastructure needed to save it all. 

Both of these are however likely to only be effective if supported by synergistic market reforms, which has been the aim of the ESB’s current ‘Transmission Access Reform’ (TAR). This process has largely centred on developing the appropriate locational signals needed to coordinate new generators by incentivising them to connect in areas where the network has a suitable hosting capacity.  

Why is renewable energy being curtailed?  

Much of the existing transmission infrastructure in this country has been designed around transporting massive amounts of power a short distance directly from large coal generators to major population centres. However new renewables generators are usually locating much further away in rural areas with abundant sunshine and wind, large swathes of available land, but also weaker transmission infrastructure. As a result, we are seeing that renewables – particularly utility-scale solar – are being disproportionately impacted by congestion.  

Why aren’t batteries solving the problem? 

At present, there is still only a small number of batteries in the NEM and they are typically either too small to provide meaningful congestion relief, or are located in the wrong places.  

The ESB has also been advocating for more explicit incentives to reward storage and flexible loads for relieving congestion. However our analysis has shown that even in the absence of an explicit incentive, batteries currently do try to relieve congestion most of the time. This is because congestion can usually be correlated with prices that make it favourable for batteries to buy energy for arbitrage, thereby relieving congestion. Although it is also clear to see for each of the existing batteries that there are some rare occasions where they have sought to make congestion worse by discharging. 

What is AEMO, the market regulator, currently doing to manage congestion? 

In order to manage congestion on an operational timescale, AEMO issues Mis-Pricing Adjustments (MPA) to generators in congested areas. These have the effect of forcing generators to offer their power at lower and lower prices in order to remain competitive in the market. These represent a significant barrier to market participation, however are easily bypassed by generators using a ‘race-to-the-floor’ bidding strategy. When MPAs are insufficient to reduce generation, AEMO will start to forcibly curtail generators based largely on their location in the grid. 

On the investment timescale, AEMO has announced its Renewable Energy Zones (REZ) aimed at coordinating investment in generation, transmission, and storage into targeted areas throughout the country. Analysis by the Battery Storage and Grid Integration Program reveals that dynamic carbon costs incentivising the operation of batteries to occur at particular times of the day could be a useful tool for optimising energy storage. 

Why is curtailment more frequent in NSW than other regions? 

The location of generators plays a large role in whether or not they are affected by congestion. Our analysis has shown that curtailment due to congestion is greatest in NSW, particularly for solar generators. There are two particularly significant clusters of heavily impacted solar generators related to the ‘line of losses’ in central-west NSW and the ‘Rhombus of Regret’ in south-west NSW. These are relatively small parts of the grid where a large capacity of utility-scale solar has connected in recent years, resulting in heavy congestion on most sunny days. These two clusters host almost all of the worst impacted generators in the NEM, including several that sit outside of announced Renewable Energy Zones.