Over the last few years, there has been a drop in the Marginal Loss Factor (MLF) in the North Queensland region. The MLF is applied to generation for the purposes of calculating how much revenue a generator will received for its electricity. A lower MLF means proportionately lower spot electricity revenue.
Following the installation of several large solar farms in the North Queensland region, the loss factors have started to drop (as shown in the graph below). As more generation is built further away from where the electricity is used, the loss factor deteriorates.
This would have been a surprise to many of the investors as, historically, the MLFs have been stable for the previous years.
Sample of MLF in the North Queensland. Source: AEMO
The uncertainty for new generators can cause delays in investment decisions and may even cause some projects to not go ahead.
Currently, AEMO sets MLFs based on expected generation and consumption over a financial year period and are set one financial year out . For investors in new generation, this is a short timeframe as investment decisions typically take more than 10 years. For existing generators, the timeframe can be too long. The MLF is supposed to encourage more generation in less congested areas and less generation in more congested areas. As the MLF is the same throughout the financial year regardless of actual congestion, there is no price signal to decongest the network, potentially leading to expensive upgrades.
AEMO has started a debate with industry on the matter and acknowledge that understanding and predicting MLF is a difficult task. AEMO has also acknowledged the trade-off between accuracy by running loss factors in real time against the value of predictability in investment.
Currently, AEMO is beginning to address this by seeking feedback on MLF calculations for the National Electricity Market (NEM). They are keen to hear from all relevant parties and have so far welcomed all input, including suggestions provided by Edge Energy Services.
If you would like to understand more about MLF or how it impacts you, please get in contact with Edge on 07 3905 9220 or 1800 334 336.