Big day for data centres: New renewable energy, grid connection and cost recovery rules explained

When will the new data centre rules take effect?

The expected timeline for implementation varies throughout the proposals:

• there is an unknown lead-in time for the Commonwealth/ECMC to consider and develop the AEMC reforms, and after this is finalised the AEMC expects it will take a further:
  • 12 months to implement the Renewable Electricity Guarantee of Origin (REGO) obligation, and
  • 24-36 months to implement the reforms relating to connections and AEMO registration.
• Minister Bowen’s rule change request has been proposed under the standard AEMC rule change process, which will take 6-12 months to complete, and
• for NSW, several steps are required from industry bodies to establish a large load infrastructure access scheme, but with strong co-ordination this could be completed within 12 months.

However, given the urgency of the concerns being addressed by these reforms, particularly the network connection reforms, we expect that networks might promptly take steps to control data centre connections in a way that is aligned with the reforms notwithstanding that the reforms have not yet been implemented at law.

Key takeaways and impacts affecting data centres

Overview of proposals

In short, the new proposals will collectively require data centres to:

• pay for the costs of transmission and distribution network augmentations resulting from their load requirements
• ‘fully’ offset energy consumption through investment in renewable generation
• ensure loads are supported by firm capacity, and
• contribute to the system security and reliability of the grid through demand response and back up generation systems.

Each proposal is outlined in further detail below.

Key issues and questions for data centre developers, operators and investors

Key issues and questions for data centre customers

• Time to first power becomes a more important due diligence issue, coupled with understanding of network augmentation requirements and the risk allocation for utility delays.
• What will be the pass-through cost of the data centre operator meeting the power and firming sourcing requirements? Can the tenant beat it by self-sourcing its own power and firming?
• Assess the impact of any demand side response strategies or grid support requirements on key customer processing requirements. Will the SLAs be reduced if the data centre needs to turn down? Or are onsite diesel or BESS the solution to ensure continuity of operation?

Key impacts for developers and investors in renewable generation / BESS

• Mandatory REGO demand presents a potential new revenue stream for renewables, in particular for those who hold a Capacity Investment Scheme (CIS) Agreement, although the materiality of this remains to be seen.
• The reforms present a number of opportunities for BESS projects in particular, ranging from colocation benefits to new demand for REGOs and firming contracts.

Key impacts for networks

• Implementing the reforms into the connection process. This may include streamlined connection for data centres outside of congested areas which provide grid support.
• Identifying network augmentations linked to data centre loads and cost allocation methodologies.
• Reviewing prudential policies, particularly in relation to stranded asset risk.
• Reviewing connection agreements to enable pass through / charging network augmentation costs.
• Develop mechanisms and incentives for data centres to alleviate grid congestion / provide demand flexibility.
• Get ready for publication of data centre connection information.

AEMC advice to the ECMC: Renewable energy and firming requirements for data

What the AEMC proposal means for data centres and the energy sector

The AEMC advice to the ECMC identifies a package of four recommended reforms to Australia’s energy laws in order to meet the ECMC’s policy objectives in relation to data centres.

The proposed reforms are significant for data centres seeking to operate within Australia, requiring more active participation in the market both through grid stability and investment in renewable generation.

AEMC's proposed reform package

The AEMC’s policy recommendations are: 

1. Drive new renewables through the REGO scheme: Data centres would be required to offset energy consumption through the purchase and surrender of REGOs from renewable generators. REGO obligations would be separated into periods of the day, such as peak, off-peak and potentially shoulder. Although the long-term intent is that REGOs would need to be sourced from “new” renewable generators, REGOs from existing renewable generators could be used as an interim solution to account for the time taken to build and connect new generation. REGO obligations could be reduced through investment in behind-the-meter generation and storage.
2. Introduce a data centre contract obligation: Data centres would be required to hold sufficient 'firm' contracts to cover their load, with a portion of contracts intended to support new generators and storage facilities. This could replicate certain aspects of the Retailer Reliability Obligation (RRO), but would constitute a continuous, separate mechanism to the RRO. The AER would assess compliance with the firm contract obligation, with powers to subject data centres unable to fulfil obligations to early curtailment during load shedding (in addition to financial penalties).
3. Introduce market registration requirements: AEMO registration would be required for data centres over a certain MW threshold, to provide visibility over data centre load and support AEMO forecasting. Importantly, while AEMO registration would be mandatory, NEM market participation would remain voluntary and incentivised through existing market signals. However, AEMO registration would expose data centres to AEMO’s operational intervention powers (such as directions) and this could be applied to require demand flexibility in response to periods of market or system stress.
4. Support demand flexibility and co-location with generation through the connection agreement process: The connection framework under the NER would be reformed to:
   • incentivise co-location of data centres with existing renewable generation or firming;
   • establish a streamlined connection pathway for data centres locating behind a BESS or other firming asset; and
   • introduce a framework to allow data centres to voluntarily enter into ‘flexible demand’ network connection agreement.

Implementation of the AEMC reforms

The AEMC has advised it will work with industry, market bodies and governments to develop the detailed design of the policy package once Ministerial endorsement is received.

If the proposed policy package is endorsed, there are two potential pathways to implement these changes.

• Approach 1 contemplates staged implementation, where the REGO recommendation would be implemented in Commonwealth legislation and the AEMC would progress other rule changes through NER changes.
• Approach 2 contemplates a combined NEL and NER rule change package for all recommendations.

Queensland’s apparent dissent to data centre reforms being pursued by the ECMC will likely create roadblocks to changing the NEL as contemplated by Approach 2. Considering this, Approach 1 may currently be seen as the more likely implementation pathway.

Indeed, Minister Bowen’s Press Club address indicates the Commonwealth will use all powers available, including Commonwealth legislation, to ensure data centre reforms will be progressed as a national standard, with the option for states and territories to pursue more rigorous requirements if desired.

Minister Bowen’s proposed network cost recovery change request

Summary of impacts

Minister Bowen has identified 7 ‘gaps’ in the Rules relating to network cost recovery in respect of data centre connections, and has requested that the AEMC close these gaps by amendment to the NER.

If implemented, the proposed changes will be significant for data centres looking to get grid connection for their projects, both in terms of the charges payable (which will be higher) and the negotiations that will be required with networks.

Seven ‘gaps’ in rules relating to data centre network cost recovery

The gaps identified by Minister Bowen are:

1. Data centres connecting to the distribution network will be required to pay for the costs of new or accelerated transmission augmentations required to meet their load requirements.
2. Data centres will likely be required to provide prudential support to cover, at least, their charges for network augmentations required by that data centre which are at risk of stranding. Networks are likely to require bank guarantees or cash (eg capital contributions or prepayments) so they do not have the risk of bearing any under-recoveries.
3. Networks will be restricted from rolling in data centre funded assets, which are stranded, into their regulated asset bases (which are recovered from consumers). This will mean networks are more likely to require full bonding of the relevant charges for augmentations discussed in items 1 and 2 above.
4. Networks must publish detailed information on existing and prospective data centre connections including proponent, site, timing, capacity, connection status and planning status. This does not extend to customers, or potential customers, of the data centre.
5. At the transmission level, the current mechanism which allows applicants to fund upstream augmentations through a “funded augmentation” will be clarified to ensure (a) it applies to data centres (particularly clustered connections) and (b) future users of those funded augmentations contribute to the costs paid by the original funders. However, unlike gap 1, this does not appear to be a mandatory mechanism requiring transmission connected data centres to fund transmission augmentations but see gap 7. Query if the intention is that a funded augmentation could be agreed in place of formulaic charges discussed under item 7 (referable to gap 7) below.
6. Transmission connected data centres will likely be required to bear the costs of jurisdictional schemes which are currently recovered from distributors. Charges will likely be based on their contracted demand rather than consumption. This includes schemes like the NSW Roadmap and NSW Climate Change Fund. It will not be possible to avoid these costs by negotiating bespoke services.
7. Similar to distribution arrangements, transmission connected data centres will likely be charged for network augmentations according to a specific guidelines which may be formulaic (eg $/MW or $/km). These charges may change over time to reflect the actual cost of the transmission augmentations.

Timing for the AEMC rule changes and process

The AEMC will need to initiate these rule changes and process them in accordance with the standard rule change process (which could take 6-12 months).