Data centres – The firming stick and colocation carrot

On Tuesday, the Commonwealth Minister for Climate Change and Energy, Hon Chris Bowen MP, asked the Australian Energy Market Commission (AEMC) to change the National Electricity Rules (NER) so that data centres:

• prove that their electricity demand is backed by new, firm supply in the same region (Contract Obligations Rule Change), and
• have clearer, faster ways to connect to the grid when they are colocated with renewable generation or storage, or when they agree to operate flexibly (Connections Arrangement Rule change).

This announcement is another big step in reforms aimed at future-proofing the impact of accelerating data centre growth on energy demand.  

What you need to know

• Data centres must back their load with new and firmed supply. While the obligation could be based on the Retailer Reliability Obligation (RRO), the firming requirement:
  • would have to be linked to specific projects
  • could apply to the 24-hour demand shape and profile of the data centre load (rather than peak demand), and
  • would not be limited to reliability gaps - AEMO would set the level of firmness required, but could potentially be for the full load.
• This could require a level of over-procurement (particularly in the ramping stage and given plant outages etc), but the rule change is at a very high-level and this will no doubt be addressed in the details.
• The AEMC is asked to consider the minimum contract tenure to support bankability. There is an interesting contrast to the Electricity Services Entry Mechanism (ESEM) where contracts are not project-linked and there is a minimum in market period of 3 years (which may not be bankable). The rule change does note the need to mesh with the ESEM but, at first glance, it seems that data centre procurement will run in parallel with the ESEM, which makes the (currently undeveloped) cost relief mechanism in the ESEM for bilateral offtakes critical. 
• The rule change suggests a high default level of what is new firming supply which jurisdictions could potentially change. There is an interesting ‘shot across the bows’ at Queensland, where it states that if jurisdictions with excess firming capacity from legacy plants allow this to be used for firming, it will have a negative impact on supply-demand balance and increase prices.
• There is also concern to avoid a possible ‘wait and see’ period in which developers delay financial investment decisions until the rule commences so as to be new. This could be dealt with by setting an earlier reference date for eligibility.
• The connection benefits proposed of colocation would reinforce the trend we are seeing of hybrid projects and energy precincts and, in New South Wales at least, the push to locate data centres regionally rather than in the Sydney metropolitan region.

Contract Obligations Rule Change

Connection arrangements rule change

The rule change proposes several conceptual changes to the rules to facilitate colocation of data centres with renewable generation and storage.

One connection pathway for integrated sites

Network Service Providers (NSPs) would identify the right connection pathway at the start. That includes the applicable technical schedules, the assessment boundary and the studies required.

The assessment would focus primarily on how the whole facility behaves at the connection point, rather than the individual components.

Ownership separate from physical connection

Assets that share a connection can stay separately owned and operated.

The rules should set out who is responsible for registration, compliance and performance. This could differ from the current intermediary approach, whereby one person registers and the others are exempted but have joint and several liability.

Staged developments

Applicants would disclose foreseeable future stages. This disclosure would not create an entitlement to capacity. A conditional approval could allow the first stage proceed while later stages are assessed.

Proportionate modelling

Seven modelling principles would be considered for inclusion in the NER, including proportionality, materiality, efficiency and transparency.

Lighter treatment for non-exporting batteries

A battery that only supports the data centre's load, and does not export, could face requirements matched to that role rather than those for a market-facing system.

Colocating with existing generators

Adding new plant would not, by itself, reopen the existing plant's performance standards. An alternative ‘black box’ approach would treat the existing connection as a fixed baseline. The new facility would then have to show it operates within that baseline's technical limits.

Demand flexibility recognised in connection agreements

A facility could be assessed against an enforceable operating profile instead of its theoretical maximum demand, with some examples including:

• import caps
• staged or non-firm capacity
• ramping limits, and
• operating windows.

Non-binding intentions to operate flexibly would not count. They would need to be binding and enforceable under the connection agreement with the NSP. 

The AEMC is asked to consider rewards for flexible, renewable-backed configurations, such as reduced demand offset obligations. It may also consider giving priority in the connection queue, drawing on approaches in Denmark, the United Kingdom and the United States (specifically in California).