Basslink remains an unregulated asset: What does the AER's draft decision mean for asset-owners and investors?

APA Group is the owner of Basslink Pty Ltd, the company that owns and operates the Basslink interconnector. The Basslink interconnector, a 500MW undersea transmission cable, is currently the sole electricity interconnector between Tasmania and Victoria. It is also the only market network service provider (MNSP) in the National Electricity Market (NEM).

On 19 May 2023, Basslink lodged an application with the Australian Energy Regulator (AER) to convert its network services from market network services (unregulated) to prescribed transmission services (regulated). Basslink contended (at pages 9-10) that conversion would maximise benefits to the NEM and earn sufficient revenue to invest back into the Basslink interconnector, thereby promoting the National Electricity Objective (NEO).

AER's draft conversion decision

The AER has discretion to determine whether Basslink's network service should be a prescribed transmission service under clause 11.6.20(c) of the National Electricity Rules (NER). In exercising this discretion, the AER is guided by the NEO. The AER decided (page 1) that Basslink's conversion would be unlikely to contribute to the achievement of the NEO, on the basis that the "uncertainty of benefits in different future scenarios" was not outweighed by "the certainty of cost and risk transfer to consumers".

Assessing the impact of conversion

Assessing the merits of conversion required the AER to make a comparison of outcomes between the different states of the NEM with and without conversion. This recognised that the Basslink investment has been made, the asset is already operating and would most likely continue to operate regardless of conversion.

The conversion test required an analysis of evidence about whether Basslink's conversion would better support the NEO, compared to the alternative scenario where Basslink operates as an MNSP, considering reasonable future scenarios.

Therefore, the AER considered multiple factors that have significant bearing on future outcomes, including:

• the additional capacity of the Marinus Link project (an additional interconnector that will be constructed across Bass Strait) and the timing of its delivery; and
• Basslink's operation and dispatchment methods if it remains a MNSP.

The AER's use of economic modelling indicated that several contingent scenarios had to incur for Basslink's conversion to yield significant market benefits. These scenarios included:

• the absence of any further contractual agreement between Basslink and Hydro Tasmania; and
• a delay in Marinus Link's development and/or a decision to limit it to a single cable rather than two.

In making its draft decision, the AER also considered how the development of Marinus Link would erode the benefits of converting Basslink.

Role of market modelling

The Victorian Department of Energy, Environment and Climate Action highlighted the complex challenges of modelling hydroelectric assets in Tasmania and counter price flows. While modelling provides insights, the AER acknowledged the inherent uncertainty of modelled outcomes and the modest benefits the modelling revealed. It therefore went on beyond modelling to consider the significance and irreversibility of a decision to convert.

Market benefits of conversion

The AER considered the direct consumer impacts on transmission charges and wholesale market price changes. The AER was certain that conversion would impose additional regulated transmission charges on consumers, which reflect the costs consumers pay to continue the asset's operations. The AER stated it was unclear whether potential benefits to consumers would offset these regulated transmission charges.

Impacts of conversion on reliability and non-price aspects of service quality

The AER decided that conversion would be unlikely to materially affect reliability or other financial aspects of electricity service quality. The conversion would instead reallocate – from Basslink to consumers – the risks of the Basslink interconnector being underutilised and the asset becoming stranded. The AER was uncertain whether the market benefits or benefit of lower wholesale prices to consumers would outweigh this reallocated risk.

What AER's draft decision means for APA

In APA's ASX announcement on 17 December 2024, APA Group CEO and Managing Director, Adam Watson announced that if the AER's final decision confirms its draft decision, APA will seek to maximise the value of the Basslink asset, in the interests of its investors, by progressing to trade Basslink in the spot market once its contract with Hydro Tasmania expires on 30 June 2025.

Key takeaways

While the AER's draft decision balances several competing considerations, a key reason for the decision was the high degree of uncertainty of that conversion would achieve benefits for consumers, compared to the significance and irreversibility of the decision to convert the asset.

Stakeholders are invited to make submissions on the draft decision until 31 January 2025.

It is important to consider the inter-relationship of infrastructure projects in the NEM, and the strict requirements for regulatory approvals, including the critical lens through which the AER applies and considers economic modelling in support of that regulatory approval.

If you are a potential asset-owner or investor and require advice on regulatory pathway approval or the impact of other infrastructure projects on the market, Clayton Utz is ready to assist.