NER amended to allow interconnector cost allocation agreements

On 3 October 2024, the Australian Energy Market Commission (AEMC) published a rule that introduces a second, alternative pathway for allocating locational transmission charges to an electricity interconnector.^[1] The New Rule, made in response to a request from the Ministers for Energy of the Commonwealth, Victoria and Tasmania, allows the National Electricity Rules (NER) to give effect to an inter-governmental agreement made by the Energy Ministers from two or more regions in the National Electricity Market (NEM) (ie. the States) about the relative contribution of the signatory jurisdictions to interconnector costs.

The New Rule commences on 3 July 2025.

The need for flexibility when allocating the interconnector costs

The NEM is undergoing a major transformation as Australia moves towards net zero emissions. Reducing carbon emissions requires substantial investment in renewable energy generation and the transmission infrastructure necessary to deliver electricity from the generation site to the population centres where it is consumed. Interconnectors play a critical role by enabling electricity to flow between adjacent regions when there is excess generation in one region and excess demand in the other.

The current methodology for allocating the interconnector costs between the two regions it connects is set out in Chapter 6A of the NER. In general terms, the methodology allows the transmission network service provider (TNSP) owner of the interconnector to impose transmission charges on a neighbouring TNSP based on the energy flows to the second TNSP’s region. This charge is called the modified load export charge (MLEC). It is paid for by the transmission network users in the paying TNSP’s region.

Importantly, the New Rule does not alter the existing MLEC approach. Rather, the new pathway recognises that the MLEC’s inflexible nature can present challenges for new or upgraded interconnector infrastructure projects. For instance, a project that is expected to benefit multiple regions may be delayed or cancelled if the MLEC methodology results in a disproportionate financial impact on the customers of one region relative to the benefits other customers receive. In an environment where transmission investment is essential to attracting renewable generation capacity, deterring interconnector projects could prejudice Australia’s ability to achieve its net zero targets. Therefore, the New Rule intends to introduce flexibility to respond to these and other barriers to project delivery.

The new pathway for allocating costs

The New Rule allows governments to allocate interconnector costs in proportions, or using a methodology that determines the proportions, that differ from the rigid MLEC approach. The contribution of each jurisdiction, called the “transfer amount”, is intended to reflect the broader costs and benefits of the interconnector that accrue to that jurisdiction by requiring TNSP A’s customers who receive more benefit to pay the transfer amount to TNSP B, thus reducing the transmission charges the TNSP B’s customers are required to pay. This allows the financial impact associated with the interconnector to be distributed more equitably between the regions. The impact of these agreements on a TNSP’s revenue and transmission charging is discussed further below.

Because the agreement is between Ministers, the New Rule amends Chapter 6A to require TNSPs^[2] to recover the transfer amount. In order for a TNSP to operationalise an agreement made under the New Rules, the TNSP must submit a revised pricing methodology^[3], which must be approved by the Australian Energy Regulator (AER).

To ensure transparency and fairness, the AER will only accept a TNSP’s pricing methodology based on an interconnector cost allocation agreement if the agreement meets the following requirements:

1. The Agreement can only be made for:
   1. a new interconnector, where construction had not commenced as at 3 October 2024; or
   2. an interconnector:
      1. whose capacity has been materially updated;
      2. where construction on the upgrade commenced after 3 October 2024; and
      3. where the upgrade project is classified as an actionable project in the Integrated Systems Plan published by AEMO; or
   3. an interconnector converted from a market network service provider to a regulated interconnector^[4];
2. The Minister from each NEM region the interconnector connects to must be a party to the Agreement.
3. Ministers of any NEM regions whose Co-ordinating Network Service Provider (CNSP) will contribute revenue under the Agreement must be party to the Agreement.
4. The Agreement must be binding and executed as a deed and not subject to unfulfilled conditions.
5. The Agreement must specify one TNSP as the responsible TNSP and all contributing Co-ordinating TNSPs.

Additionally, the Agreement must contain the transfer amounts or the method for calculating the transfer amounts.

Changes made to revenue calculations for TNSPs

An agreement under the New Rule to alter the approach to allocating interconnector costs does not alter the total amount of revenue the TNSP for the interconnector can recover (called its aggregate annual revenue requirement or AARR). The effect of the agreement is to alter the proportion of that revenue that the TNSP recovers from transmission customers (equal to the transfer amounts) in the adjacent region connected to it by the relevant interconnectors.

The TNSP subtracts the transfer amounts it receives from the total revenue it is permitted to collect. This ensures the TNSP cannot collect revenue for the cost of operating an interconnector from consumers in its region if it is entitled to receive a transfer amount under an agreement.

Where there is more than one TNSP within a region, the TNSP appointed as the CNSP collects the additional revenue from the other TNSPs that it is required to pay to the responsible TNSP. This ensures the amount of revenue the CNSP is approved to recover from its own customers is not reduced by the transfer amount.

The AER requires each responsible TNSP and CNSP to provide it details of the transfer amounts and the revenue that is being proposed to be collected towards the transfer amounts.