Gaps and barriers in the National Electricity Rules for Offshore Wind: insights from the AEMC

The Australian Energy Market Commission (AEMC) has published its final report identifying the gaps and barriers in the National Electricity Rules (NER) which are creating obstacles to the expansion of investment in offshore wind (OffW) projects. The report, released on 17 October 2024, focuses on three key areas in the National Electricity Market (NEM) – power system security, network connection and planning, and economic regulation of transmission services – and suggests alternative approaches that may resolve some of the issues identified.

OffW projects present challenges for the existing regulatory framework, which was designed for onshore electricity infrastructure. The unique characteristics of OffW projects necessitate a rethink of key elements of the current approach to regulation, including the approach to transmission planning, which is crucial to securing investment in OffW projects.

The challenges facing OffW projects discussed in this article can be categorised into three broad themes:

1. jurisdictional challenges caused by the location of OffW projects in Commonwealth waters;
2. planning challenges caused by the location of OffW projects several kilometres offshore; and
3. access and connection challenges caused by the size of and unique technology used in OffW projects.

Background and context

Australia's OffW projects will be located several kilometres off the coast within six offshore wind areas declared by the Commonwealth Government. The majority of an OffW project will likely be located in Commonwealth waters, which begin 3 nautical miles (approximately 5.6 kilometres) from the coast, and will be connected to the onshore network by transmission infrastructure which traverses Commonwealth and State waters. The Commonwealth Government has granted feasibility licences to project proponents in some of the declared offshore wind areas under a regime prescribed by the Offshore Electricity Infrastructure Act 2021 (Cth).

An OffW project typically comprises an array of multiple wind turbines, collector stations that aggregate power generated by the turbines, and sub-stations that convert the power generated into electricity. These assets are all likely to be located in Commonwealth waters. Power cabling on the ocean floor connects these assets to each other and connects the sub-stations to the existing onshore transmission network via a "crossing point", where the cabling comes onshore. The diagram below highlights the infrastructure required for an OffW project.

Source: Star of the South

OffW projects are vastly larger than onshore wind projects. The average planned generation capacity of an OffW project proposed in the Gippsland offshore wind area is 2 GW, compared to the planned generation capacity of 1.33 GW for the Golden Plains Wind Farm which is one of the largest proposed onshore wind projects in Australia.

Like the Commonwealth, States have also begun legislating frameworks for OffW projects. Victoria has enacted the Energy and Public Land Legislation Amendment (Enabling Offshore Wind Energy) Bill 2024 (Vic) which amends existing land and energy laws to support OffW projects. It is supplemented by the National Electricity (Victoria) Act 2005 (Vic) (NEVA) which allows Victoria to modify or disapply parts of the National Electricity Law (NEL) and NER and adopt other arrangements instead (as it has done in relation to transmission planning and augmentation). Similarly, New South Wales has enacted the Electricity Infrastructure Investment Act 2020 (NSW), which aims to coordinate investment in new generation, storage, and network infrastructure, and which conceptually could be extended to apply to OffW projects. The cross-jurisdictional nature of OffW projects means it is essential that any State-based frameworks complement Commonwealth legislation and are consistent with the NER to ensure OffW projects are attractive to developers and are capable of being delivered.

It is also crucial that the NEL and NER can be applied clearly and consistently to OffW projects to enable them to safely connect to the NEM. It is important for the viability of the OffW projects currently in development that this clarity be achieved as soon as practicable to ensure these projects can progress beyond the final investment decision stage.

Challenge 1: Jurisdictional challenges

OffW projects, largely located in Commonwealth waters, do not lie within existing NEM regions which are broadly State-based. Consequently, it is presently unclear how the NER will apply to OffW projects. To avoid regulatory uncertainty, the AEMC proposes two alternatives:

1. define a new NEM region in Commonwealth waters which would apply to all OffW projects; or
2. extend the existing NEM regions so that OffW projects fall within the ambit of the onshore NEM region where its connection point is located.

Option 2 provides practical benefits because it avoids the complexity of creating and integrating a new offshore region into the NEM and the existing NER framework. By extending the existing regions to contiguous offshore areas, Jurisdictional Planning Bodies (JPBs) in each region will assume responsibility for planning across that region. This will provide greater certainty for investors in OffW projects by enabling the well-established planning processes and the existing network regulation mechanisms to apply to transmission investment necessary to facilitate OffW projects.

Challenge 2: Planning

Linked to the jurisdictional challenges, the offshore location of OffW projects present planning challenges as well. The Australian Energy Market Operator (AEMO) is the system planner for the transmission system in the NEM. Through the Integrated System Plan (ISP), it plans at a high-level when and where the transmission system needs to be augmented. It is currently unclear whether AEMO intends to (or is empowered to) include transmission connections to OffW projects within its ISP, since OffW projects lie at the edge of its planning boundary. The AEMC recommends that AEMO’s planning mandate be expanded to include transmission planning in relation to OffW projects.

The JPB and the Primary Transmission Network Service Provider (Primary TNSP)^[1] are responsible for planning and procuring transmission infrastructure planned by AEMO in the ISP. The jurisdictional challenges discussed above need to be resolved to ascertain the body that has planning responsibility for transmission infrastructure to connect OffW projects to the NEM. Being in Commonwealth waters, there is no JPB or Primary TNSP assigned to ensure that transmission infrastructure is built to connect to the OffW projects.

The AEMC notes that extending the existing NEM regions to include OffW projects will make the JPB and Primary TNSP for each NEM region responsible for planning and connecting offshore transmission infrastructure in their contiguous offshore regions. This approach will require JPBs and, in all jurisdictions other than Victoria, Primary TNSPs, to apply the same State-based framework in planning transmission infrastructure regardless of whether a project is located onshore or offshore. Having a single JPB in each region simplifies the planning process, thus promoting consistency and reducing the interface risks. It also allows the JPB to be more involved in developing the technical standards for OffW projects, ensuring a smooth application of those standards at the connection points.

Challenge 3: Network access

The scale of OffW projects and their location also present network access challenges.

Due to a lack of clear jurisdiction for OffW projects currently, there is uncertainty about which access rules would apply. The NER’s open access regime applies to all existing onshore generators, although State-based Renewable Energy Zones (REZs) provide or are contemplating providing alternative access models for generators located within the REZ. The NER open access regime allows generators to connect to the NEM network at any location. However, the AEMC is concerned that the open access regime may not be appropriate for investment in OffW projects given the risk of curtailment and the associated impact on generator revenues.

Given the large generation capacity of OffW projects and the co-location of projects in declared offshore wind areas, connecting multiple generators to the NEM at a common onshore connection point may create constraints and prevent the least cost generation from being dispatched.^[2] The AEMC considers it more efficient for OffW projects to connect to the NEM in aggregate via a connection hub.^[3] This approach would necessitate a review of the way performance standards for generators are currently determined under the NER, as they are currently modelled for a single generator connection at a time.

Additionally, AEMC suggests that the current technical standards may require reform to accommodate new technologies used by OffW projects. It notes that AEMO has already submitted two rule change requests to accommodate projects using High Voltage Direct Current (HVDC) cables within the NER technical standards. An OffW project, which will be located much further away from its connection point(s) than an onshore generator, will use HVDC or High Voltage Alternating Current (HVAC) technologies alongside converter stations to connect to the grid. The existing technical standards, which assume the generator is much closer to the connection point than an OffW project will be, will have to be modified to ensure that compliance with those standards is not unduly expensive or difficult.

Finally, the economic regulation arrangements to apply to shared transmission infrastructure that spans State and Commonwealth waters require clarification. Certainty about the regulatory treatment of revenues, the applicable investment test and cost recovery mechanisms is essential to ensure transmission projects are financed and constructed in time to connect OffW projects to the existing transmission network. Notwithstanding the disadvantages discussed above, the AEMC suggested the existing economic regulation framework could be extended to OffW to provide clarity while issues specific to OffW projects are analysed.