Marginal Loss Factors – Winners and Losers

A little bit of surprise, and perhaps some disappointment, in the media resulting from AEMO’s publication of its draft Marginal Loss Factors for 2019-20.

I thought that it might be a good time to look at the role of Marginal Loss Factors (MLFs) in the NEM and how they are calculated.

Networks have losses due to resistance in the system. These losses  leave the system as unrecoverable heat. These losses have to be paid for.

Losses are minimised when supply and demand are balanced within each local area or connection point on the NEM. Losses are also minimised where resistance to energy flow is minimised through robust transmission capacity.

To cover the cost of losses:

  • generators get paid the pool price multiplied by their individual MLF, and
  • consumers pay the pool price multiplied by their individual MLF.

Typically generation MLFs are lower than load MLFs, so consumers are always paying more per MWHr than the generators get paid per MWhr.

As MLFs are based upon marginal losses (calculated annually) and not actual or average losses, there is usually additional cash generated than is needed to cover losses; this cash is passed through to the network services provider and the residual value is passed back to consumers in the following year’s TUOS.

Each transmission connection point (such as a generator connection or a bulk supply sub-station), is assigned a an MLF annually by AEMO through a very complex calculation.

The calculation uses the previous year’s bidding behaviour, actual generation, energy flows and actual demand to calculate the amount of losses that the system incurs if a marginal MWhr of power is generated or consumed at each connection point. This calculation is undertaken over the entire system.

There is a datum MLF of 1.0 at each NEM region’s reference node (typically in the capital city; other than Tasmania, which has its node at the Basslink connection in George Town). Connection points remote from the reference node will vary up and down from the 1.0 to reflect losses in the system. Regions that are load heavy will have MLFs greater than 1.0, regions that are generation heavy will have MLFs lower than 1.0.

As the load/demand balance changes from year to year, so to does each connection point’s MLF.

In recent years we have seen some substantial changes, notably as renewable power plant connections have filled the regional networks to (in a number of cases) their thermal limits (increasing current down a line until it hits its thermal limit is never a good way to minimise I^2R losses).

Looking through the draft list for Queensland, the big change over the past 3-5 years is that MLFs in the regions have dropped (relative to the reference node), due to the increase in generation in the regions.

This has been pretty tough on generators who have signed up to contracted priced at the reference node; but it has been very positive for energy consumers in the regions, particularly North Queensland where loss factors (and therefore the cost of wholesale power) have dropped by around 15-20% over the past 5-6 years (1.12 in 2013-14 to 0.95 in the 2019-20 draft at Townsville South). This is great news if you are trying to process metals in Townsville.

South East Queensland looks like it will be most expensive place to purchase power in the Queensland NEM zone, with most bulk supply substations in suburbia being (marginally) above 1.0; however this exposure is largely protected by the ‘denomination’ of most PPAs in $/MWhr at the reference node.

Now that the NEM has evolved and we have computational power that didn’t exist when the NEM was formed, perhaps we can move to loss factor calculations on the basis of actual energy flows for each settlement period; this would eliminate/reduce the settlement pool (meaning fairer attribution of losses), and send more relevant time of day price signals (against system losses) in addition to geographical price signals.

For project developers, you need to understand your loss factor risks. In my experience, dollars spent on early modelling during the concept phase are dollars well spent.

As with all systems there will always be winners and losers. In this case, the winners are consumers in the regions (or their retailers) and the North Queensland Economy through the increased competitiveness of minerals processing in Townsville.