Observation 8/22 from GenInsights21–what is the purpose of the ESOO (Electricity Statement of Opportunities)?

We released GenInsights on 15th December 2021 – containing 22 ‘Key Observations’ inside of Part 2 of the report (and incidentally had a good discussion about it via this Smart Energy Council webinar on Tuesday 5th April 2022, complete with a good number of questions we’ll look to answer more fully here on WattClarity in the coming weeks).

This report explored not only what’s been happening in the NEM physically/operationally in recent years – it also discussed how the NEM is modelled in a number of ways… which is the reason why we choose to share this article today.

1)  The AEMO’s Electricity Statement of Opportunities (ESOO) is released annually each August (and in recent years we have tried to include a discussion of some highlights via WattClarity here). 

2)  We understand that the AEMO is intending to (soon) release an interim update of last year’s 2021 ESOO to cover the ‘might close as early as 2025’ announcement by Origin Energy for Eraring Power Station. 

3)  If past form on social media is predictive of future outcomes, I would expect a pile-in to ensue when the Interim Update is released – with people using the ESOO (and possibly reading out of context?) to ‘prove’ or ‘disprove’ their own positions in relation to the energy transition (especially when an election campaign is involved!):

(a)  for instance, with respect to the rationality for the Federally Government funded (via Snowy Hydro) Kurri Kurri GT.

(b) and more generally about ‘the lights will go out, if…!’ type of simplistic sensationalism.

4)  For this reason, I thought it might be of value to share ahead-of-time Observation 8 of 22 within Part 2 of GenInsights and ask the question of themselves … What is the Purpose of the ESOO?

What follows is the whole of Observation 8 in its entirety (with links added, for ease of reference) …

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Also, it should be noted that this article is not directed at the AEMO (lest it be misconstrued by any reader) – the AEMO purchased their own access to GenInsights21 some months ago and have been utilising since that time.  It’s shared here for the benefit of energy sector participants, spectators and commentators more broadly.

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We understand that this is a provocative title – one that might be misinterpreted by some readers as implying that the authors think that the ESOO has no purpose.

So let us be very clear, up front, that the title is meant to speak to what’s essentially the opposite problem.

In the early years of the NEM the annual publication of the Statement of Opportunities (the SOO) was perhaps the biggest event on the NEM calendar.  For an industry facing continued growth in electricity demand (Appendix 15), with a younger fleet of workhorse coal generators supplying most of that demand, and with concerns about decarbonisation not yet at the forefront of planning decisions, the ESOO gave a line in the sand that would change slightly from year to year, hence was a reliable source of truth.

Back then, ‘the challenge’ was arguably much simpler – continue to build new capacity to meet the growing demand, and don’t give any thought to plant retirement.

Over the 23 years that have followed since the creation of the NEM, what’s now called the Electricity Statement of Opportunities (ESOO) has evolved in various ways – but it’s facing challenges that it has not seen before.

Leaving aside the rule-based prescriptions for what it needs to deliver, the market seems to be interpreting the purpose in different ways, including (at least) three big ones:

Purpose #1:    Should the AEMO intervene in the market?

Some might have the view that this is what the ESOO is, and/or should be – a rigid following of a very prescribed process against a clearly defined Reliability Standard.

For a number of years, it has been closely watched on each annual release date to see what the prognosis is using this prescribed formula, and hence whether intervention is necessary in the market:
•    For a period of time, the triggering of the RERT was the only intervention assessed.
•    But now there is also the potential trigger of the Retailer Reliability Obligation (RRO) that is also dependent on modelled ESOO outcomes.

If the objective of the ESOO is to determine should the market operator (or someone else – like a government agency) intervene in the market, then it is right that the process followed is heavily prescribed and formulaic.

If this is to (continue to) be the primary purpose of the ESOO, then we have questions that we can pose another how this process might need to evolve to meet the changing nature of the market (some of which were discussed in Observation #7 above).

However, doing so here would distract from the broader question posed in Observation #8) – what is the underlying purpose of the ESOO?

Purpose #2: A genuinely focused ‘Summary of Commercial Opportunity’

An alternate (and quite common) interpretation can be found in the name of the document itself – a statement of (commercial) opportunity.

If it is a genuine commercial ‘Electricity Statement of Commercial Opportunity’ (ESOCO) then our sense is that the document has not kept pace with the growing complexity of ‘the Challenge’ (referencing Observation #3).

For us, the recent debate about whether Kurri Kurri GT (with various protagonists on social media mistakenly using USE projections from the ESOO to claim that the project should, or should not proceed) demonstrated clearly how far away the document is from being a truly useful as a ‘statement of commercial opportunity’ (ESOCO).  Through GenInsights21 we have included a number of different ‘Deep Dives’ into the types of parameters we would expect to have discussed in something that would prove a useful objective guide to investors and project proponents exploring what to build, and where.

Importantly, a ‘Statement of Commercial Opportunity’ should:
•    not just model what’s ‘committed’ (in terms of entry and retirement); and
•    should stress test with more than just ‘credible contingency’.

If the purpose of the ESOO is going to be deliberately re-focused as a genuine ESOCO, then it would be wise to fulfil Purpose #1 with a completely different report with a more correctly aligned name (perhaps a ‘Likelihood of Market Intervention Report’) to avoid ongoing confusion.

Purpose #3    A study on ‘How resilient’ is the NEM with respect to HILP events?’

The phenomena of High Impact Low Probability (HILP) events have already been discussed above in Observation #7.

With the risk of HILP increasing (including because of climate change itself), there seems a growing call for a specifically focused report on a periodic basis exploring the likelihood, and possible impacts, of long-tail events.  Floods, droughts, bushfires, Dunkelflaute (Observation #10), widespread cloud cover , coincident coal outages – or messy and sudden closures, transmission calamity, etc…

Again, if such a report were prepared:
•    It should be separate from the two above; and
•    It should be unambiguously named to reduce the risk of confusion, as much as possible.

Such a report would help with contingency planning, to stress test models, and to identify leading indicators.  A key aspect of this third type of report would be that the qualitative discussion would perhaps be more important than the quantitative results.