New Marginal Loss Factors mean renewables will earn less than non-renewables

By Jonathan Fulcher / 10 May 2019

Today the Australian Energy Market Operator (AEMO) published its Marginal Loss Factors (MLF) for the 2019/2020 financial year. The result is that for the same amount of electricity generation most renewable generators will earn less than most non-renewable generators.

The AEMO is required to publish its MLF by 1 April every year. This year the AEMO published a draft MLF on 1 April and published the finalised MLF today (10 May, 2019). The delay may indicate the political tension involved in increasing the operational costs for renewable generators.

Meanwhile, in stark contrast, Britain just went an entire week without burning coal.

In this article,  Kate Thorogood discusses what the changes are, what this will mean for renewable providers and what should be done in future so that Australia too can go a week without burning coal.

First, what are ‘Marginal Loss Factors’?

MLF are set by AEMO every year and directly affect generator revenues.

As electricity flows through transmission and distribution networks towards end customers, a portion of that electricity is ‘lost’. These losses increase the further the electricity has to travel. The MLF applies these losses to the sale and purchase of electricity in the National Electricity Market (NEM).

The AEMO sets MLF as follows:

  • the higher the marginal loss the lower the MLF; and
  • the lower the marginal loss the higher the MLF.

MLF directly affects generator revenue:

  • A higher MLF is beneficial for a generator’s revenue because it means that more of the generator’s electricity reaches customers, while a lower MLF reduces a generator’s revenue for the electricity that they produce.
  • Further generation with a lower MLF will also be more expensive which means that electricity from this generator will be dispatched (read sold) after other generators and may not even get dispatched at all.

MLF changes

The MLF changes mean that generators close to the grid have a higher MLF while generators further from the grid have a lower MLF.

The problem is that our transmission network was designed for a non-renewable, coal and gas powered system. Transmission and distribution networks were built near coal mining and gas operations. They were never designed to support the influx of wind and solar power scattered around the country.

The result is that, for the same amount of generation, coal and gas generators located close to the grid will receive more than solar and wind renewable generators located further from the grid.

More investment in grid infrastructure needed

On one hand, it makes sense that generators whose electricity can be transported more efficiently can sell that electricity for more than generators whose electricity is transported less efficiently. On the other, it entrenches the existing outdated grid. Adopting a policy that allows renewable energy generators to earn less than non-renewable energy generators for the same amount of energy generated does not support a shift to renewable power and certainly puts us a long way behind Britain in achieving a week without burning coal.

What is needed is proper investment in new grid infrastructure so that renewable generators can also transport electricity efficiently.

Renewable generators should be prepared to contribute to this infrastructure investment, given that it is for their own benefit. To support a shift to a greater reliance on renewable energy, government investment and subsidies are also necessary.

The next Federal Government has some big decisions to make.

For more information or discussion, please contact HopgoodGanim Lawyers’ Resources and Energy team.

Jonathan Fulcher
Jonathan is a Partner and the head of our leading Resources and Energy practice in Brisbane and is also the leader of our Native Title practice.

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