NEMDE INTERCONNECTOR NON-PHYSICAL LOSS MODEL CHANGES - BUSINESS SPECIFICATION

NEMDE INTERCONNECTOR NON-PHYSICAL LOSS MODEL CHANGES - BUSINESS SPECIFICATION PREPARED BY: DOCUMENT NO: 173-0190 VERSION NO: 1.03 EFFECTIVE DATE: 01/07/2010 ENTER STATUS: Market Operations Performance Final

Disclaimer (a) Purpose This Guide has been produced by the Australian Energy Market Operator Limited (AEMO) to provide information about changes to the interconnector Non-Physical Loss (NPL) correction model used within the NEMDE Market Solver software, as at the date of publication. (b) No substitute This Guide is not a substitute for, and should not be read in lieu of, the National Electricity Law (NEL), the National Electricity Rules (Rules) or any other relevant laws, codes, rules, procedures or policies. Further, the contents of this Guide do not constitute legal or business advice and should not be relied on as a substitute for obtaining detailed advice about the NEL, the Rules, or any other relevant laws, codes, rules, procedures or policies, or any aspect of the national electricity market or the electricity industry. (c) No Warranty While AEMO has used due care and skill in the production of this Guide, neither AEMO, nor any of its employees, agents and consultants make any representation or warranty as to the accuracy, reliability, completeness or suitability for particular purposes of the information in this Guide. (a) Limitation of liability - To the extent permitted by law, AEMO and its advisers, consultants and other contributors to this Guide (or their respective associated companies, businesses, partners, directors, officers or employees) shall not be liable for any errors, omissions, defects or misrepresentations in the information contained in this Guide, or for any loss or damage suffered by persons who use or rely on such information (including by reason of negligence, negligent misstatement or otherwise). If any law prohibits the exclusion of such liability, AEMO s liability is limited, at AEMO s option, to the re-supply of the information, provided that this limitation is permitted by law and is fair and reasonable. 2010 - All rights reserved. Version Control VERSION NUMBER DATE AUTHOR AUTHORISED BY NOTES 1.01 03Aug2004 S Lam M Miller Final for issue to NEMMCO Website 1.02 01Jul2005 S Lam M Miller Changes to accommodate implementation of National Electricity Rules from 01/07/2005 1.03 01Jul2010 G Huang Disclaimer updated Distribution General Public Document Meta-information Title: NEMDE Interconnector Non-Physical Loss Model changes - Business Specification Version: 3 Responsible Department: Market Operations Performance Page 2 of 14

Table of Contents 1. Reference 4 1.1 Abbreviations 4 1.2 References 4 2. Introduction 5 2.1 Overview 5 2.2 Background to NPL Model Changes 5 2.3 National Electricity Rules Requirements 6 3. Status Prior to Change 7 4. New Process Requirements 8 4.1 Scope 8 4.2 Process Requirements 8 4.2.1 Interconnector-based Application of NPL Model 8 4.2.2 Changes to NPL Model constraints 9 4.2.3 Changes to Triggering of NPL Re-Runs 10 Appendix 1: Why do Interconnector NPLs occur? 13 Page 3 of 14

1. Reference 1.1 Abbreviations ABBREVIATION EXPLANATION AEMO Australian Energy Market Operator (formerly NEMMCO) 5MPD 5-Minute Pre-dispatch process DPRG AEMO s Dispatch & Pricing Reference group LP Linear Program MMS Market Management System; software, hardware, network and related processes to implement the National Electricity Market (NEM); an AEMO department responsible for maintaining the system MNSP Market Network Service Provider NEMDE National Electricity Market Dispatch Engine (aka Market Solver) NER/ Rules National Electricity Rules NPL Non-Physical Losses TABLE 1: ABBREVIATIONS 1.2 References 1. NEM Communication 1262 Dispatch Non-Physical Loss Runs & Resulting High NSW Spot Price - 1 September 2003 - NEMMCO, issued to Market Participants 2nd September 2003 2. External Market Report Non Physical Loss Run - 1 September 2003 v1.0, NEMMCO 3. SPD Formulation v1.17.6 (24 February 2004) titled "Mathematical Modelling of the Wholesale Electricity Market Bid-Clearing System SPD: Scheduling, Pricing and Dispatch, issued to Market Participants 26 th May 2004. 4. MNSP Dispatch Issue - MNSP NPL Model - Business Specification, AEMO website: http://www.aemo.com.au/dispatchandpricing/dispatch_pricing.htm#businessspecs Page 4 of 14

2. Introduction 2.1 Overview This Business Specification describes changes to the interconnector Non-Physical Loss (NPL) correction model used within the NEMDE Market Solver software (herein called NEMDE Solver). The changes were independently certified against SPD Formulation v1.17.6 (Reference #3) & implemented as part of the June 2004 MMS release. 2.2 Background to NPL Model Changes On 1st and 2 nd September 2003 there was an unusually high incidence of Production Dispatch outcomes resulting from triggering of the NPL re-run process within the NEMDE Solver. Over that period there were two dispatch intervals where the NSW1 energy price spiked above $7,900/MWh resulting primarily from the premature binding of the hard NPL interconnector limits for the Snowy to NSW (SNOWY1) interconnector (refer to External Market Report Non Physical Loss Run - 1 September 2003 v1.0, Reference #2). At market start the NEMDE Solver s NPL re-run process was only designed to address NPLs resulting from prevailing negative energy prices (Cases 1 & 2 described in Appendix 1). However the subsequent introduction of the MNSP model, & the market events of the 1 st & 2nd September 2003 demonstrate that further refinement of the NEMDE Solver s NPL model was required to deal with MNSP-related NPL issues (Cases 3 & 4 described in Appendix 1). Following investigations into that market incident, NEMMCO identified the following issues with the functionality of the NPL re-run process at that time: 1. Indiscriminate Application of the NPL Model The NPL model was indiscriminately applied the all NEM interconnectors in the NPL rerun, even where the initial solution reported no negative energy prices & NPLs were only reported on MNSP interconnectors (& so unlikely to spread to other interconnectors in the NPL re-run). 2. Inaccuracy of the NPL Model The initial metered interconnector flow from the initial solution was used to determine the NPL model constraints (the single loss factor & NPL flow limits) that applied to that interconnector in the NPL re-run. However the cleared interconnector flow from the initial solution was typically closer to the final NPL re-run solution (given the greater relative incidence of Cases 3 & 4 above) & should therefore be used to determine the NPL model constraints. 3. Premature Application of the NPL Model For cases where NPLs were detected in the initial unpublished Fast Start Commitment Page 5 of 14

LP solution, the NPL model constraints determined & applied to an NPL re-run of the Fast Start Commitment solve, NEMDE Solver then continued to apply those same NPL model constraints to the subsequent published Dispatch & Pricing LP solve, even if NPLs would not have occurred if the NPL model had not been applied. To address these issues NEMMCO, in conjunction with its Dispatch & Pricing Reference Group, agreed to the following changes to the NEMDE Solver s NPL re-run process: If NPLs are detected on MNSP interconnectors only, with no negative energy prices, then only the loss models of those MNSP interconnectors are converted to the NPL model in the NPL re-run. However if NPLs are detected on any regulated interconnector, or if any negative energy prices are reported, then the NPL models for all interconnectors are applied in the NPL re-run. Both the single static loss factor & the NPL limits for each interconnector s NPL model are determined using the interconnector s flow target from the initial solution. The NPL detection & re-run process is independently performed after the initial solves for each of the "Fast Start Commitment" & subsequent Dispatch & Pricing LP passes. 2.3 National Electricity Rules Requirements NER clause 3.6.1(d)(3) requires that inter-regional losses must: i. as closely as is reasonably practicable, describe the marginal electrical energy losses for electricity transmitted through the relevant regulated interconnector between the 2 relevant regional reference nodes in adjacent regions for each trading interval of the financial year in respect of which the inter-regional loss factor equations apply;and ii. aim to minimise the impact on the central dispatch process of generation and scheduled load as compared to the dispatch of generation and scheduled load which would result from a fully optimised dispatch process taking into account the effect of losses It is required that MNSP inter-regional flows & losses must be related by the loss versus flow relationship described in Scheduled Network Service Data in Schedule 3.1 - Registered Bid And Offer Data which in part reads: Loss vs flow as piecewise linear relationships for each direction which, taken together, are convex over the entire range of power transfer capabilities in both directions The enhancements in this Business Specification improve compliance with the above objectives, by minimising the unnecessary use of the less-accurate single loss factor NPL model (& thus avoiding loss inaccuracies on regulated interconnectors) where NPLs are only dispatched on MNSP interconnectors. Page 6 of 14

3. Status Prior to Change A NEMDE Solver NPL re-run is triggered whenever the error between the cleared & ideal losses on any interconnector (calculated from the initial solution) exceeds a pre-defined threshold (currently 1 MW). In the subsequent NPL re-run the NPL model constraints are applied, whereby the dynamic loss factors for all interconnectors are replaced with a single static loss factor for each interconnector. The single static loss factor for each interconnector is determined based on the initial metered interconnector flow from the initial solution. In addition upper & lower flow constraints (NPL Limits) are applied to each interconnector, centred about its initial metered interconnector flow +/- a NPL Delta value defined for that interconnector. For MNSP interconnectors, the MNSP flow is further constrained in the direction of initial metered MNSP flow by setting the relevant NPL Limit to zero MW. For cases where NPLs are detected in the initial unpublished Fast Start Commitment solve & an NPL re-solve occurs, the current design continues to apply the NPL model in the subsequent published Dispatch & Pricing solve, even if NPLs would not have occurred without the NPL model applied in that solve. This process is illustrated in the SPD Formulation extract below. The triggering of an NPL re-run from the initial Dispatch & Pricing solve is reported to market participants in the MMS as Case Solution NPLStatus =1 for the relevant interval. The following paragraph & Diagram 1 below describes the current NPL re-run process & is an extract from the SPD Formulation (Reference #3): If the presence of Non-Physical losses is detected during either of the two FSI Solves, then the NPL mitigation logic is employed. This will result in the solver being invoked an extra time in either Step 1 or 3. Note that once the NPL mitigation logic has been applied once, it does not have to be re-invoked for the current period. Hence the worse case is that the solver is invoked three times as shown below. Page 7 of 14

DIAGRAM 1: CURRENT NEMDE NPL MITIGATION PROCESS STEP 1a: Solve with FSI Profiles Ignored STEP 1: Solve with FSI Profiles Ignored STEP 1b: Re-solve with NPL logic STEP 2: Commit FSI units STEP 2: Commit FSI units STEP 3a: Solve with FSI Profiles Enforced NPL Detected in STEP 1 STEP 3a: Solve with FSI Profiles Enforced STEP 3b: Re-solve with NPL logicenforced NPL Detected in STEP 3 Further details of the NPL model can be found in Sections 9.1.2, 14.1 & Additional MNSP corrective scheme of the SPD Formulation. 4. New Process Requirements 4.1 Scope The changes in this Business Specification apply to all Solver modes (Dispatch, Pre-dispatch & 5MPD processes) of the NEMDE Solver. There are no consequential changes to existing market participant reporting via the Infoserver/CSV delivery mechanisms. 4.2 Process Requirements The changes to the NEMDE Solver NPL re-run process cover three areas: 1. Interconnector-based Application of NPL Model 2. Changes to NPL Model constraints 3. Changes to Triggering of NPL Re-Runs 4.2.1 Interconnector-based Application of NPL Model From the initial solution of each of the Fast Start Commitment & Dispatch & Pricing: Reset the NPL Re-Solve flag For each Interconnector: IF Interconnector (Ideal minus Cleared) Losses NPL Threshold THEN Set the NPL Re-Solve flag Page 8 of 14

IF Interconnector is an MNSP AND No Negative Energy Prices exist in any NEM region THEN Determine & apply NPL Model constraint for that MNSP Check Next Interconnector ELSE Determine & apply NPL Model constraints for All Interconnectors Check Next Interconnector IF NPL Re-Solve flag is set THEN Trigger an NPL Re-run, with above NPL model constraints applied. From the initial solution, if NPLs are detected on MNSP interconnectors only, then only the loss models of those MNSP interconnectors are converted to the NPL model in the subsequent NPL re-run, provided that the initial solution does not report any negative energy prices for any NEM region. However if NPLs are detected on any regulated interconnector, or if any negative regional energy prices are reported, then the NPL models for all interconnectors are applied in the subsequent NPL re-run. The rationale behind this NPL model refinement is that, to only replace the dynamic loss model of the specific interconnector that initially triggered the NPL re-run (particularly if negative regional energy prices also exist in the market) may simply result in shifting the NPLs onto another interconnector that initially did not report NPLs. However where the NPL re-run is triggered by the detection of NPLs on an MNSP interconnector only, & there are no negative energy prices for any NEM region, then these NPLs are mostly likely associated with the MNSP dispatch model (Cases 3 & 4 as described in Section 3.2) & NPLs are therefore unlikely to shift to another regulated interconnector following the NPL re-run. Diagram 3 below illustrates these changes. 4.2.2 Changes to NPL Model constraints The NPL model constraints for an interconnector comprise the single static loss factor (to replace the full loss segment model) & a set of hard upper & lower flow constraints (NPL Limits). The NPL Limits constrain cleared flow around an initial flow value (+/-NPL Delta value pre-defined for that interconnector) in order to limit the change in flow away from that Page 9 of 14

initial value & hence limit the potential error between using the single loss factor model versus the ideal full loss factor model. In the previous design both the single static loss factor & the NPL Limits for each interconnector were determined based on the initial metered interconnector flow from the initial solution. This design has changed so that both the single static loss factor & the NPL Limits for each interconnector are now determined based on the interconnector flow target from the initial solution for that interconnector. Additionally, for MNSP interconnectors only, the upper & lower bounds of the NPL Limits are now calculated so that MNSP flow is constrained in the same direction as the MNSP flow target from the initial solution, rather than in the previous design where MNSP flow was constrained in the same direction as initial metered MNSP flow. This change affects the MNSP flow variables in the NPL re-run, as described on page 41 of the SPD Formulation. The rationale behind the design changes is that in the majority of NPL cases (Cases 2 & 3 as described in Section 3.2 above) the interconnector flow target calculated in the initial solution is closer to the interconnector flow target in the final published NPL re-run solution than the initial metered interconnector flow. Therefore by using the interconnector flow target from the initial solution the calculated single loss factor for the NPL re-run is more accurate & there is less risk of an interconnector flow target binding upon a hard NPL Limit in the NPL re-run. 4.2.3 Changes to Triggering of NPL Re-Runs The NPL detection & re-run process is now independently performed after the initial solves for both the "Fast Start Commitment" & the subsequent Dispatch & Pricing passes. This is a change from the previous design, whereby if NPLs were detected in the initial "Fast Start Commitment" solution (STEP 1a of Diagram 1 above) then the NPL model was correctly applied in the "Fast Start Commitment" NPL re-run (STEP 1b) but incorrectly remained in place for the published "Dispatch & Pricing" solve (STEP 3a). In the past this has resulted in the premature application of the less-accurate NPL model to the "Dispatch & Pricing" solve where NPLs may not have otherwise existed, such as for Production dispatch runs for DI ended 06:05 on 22 nd October 2003 & DI ended 05:05 on 25 th November 2003. Diagrams 2 & 3 below illustrate these changes. Page 10 of 14

Diagram 2: Overall NPL Re-run Process For convenience the overall NEMDE Solver process is illustrated in Diagrams 2 & 3 below. The circle with 'A' inside represents the main NEMDE Solver process shown below it, with the main process calling sub-process 'B' (shown on Diagram 3) multiple times. Areas where NEMDE Solver has changed are enclosed within a dotted box. A Perform Fast Start Commitment Solve B Perform Dispatch & Pricing Solve (published) B CHANGES Write Solution to File Intervention? No Yes Perform "What-If" Fast Start Commitment Solve B Perform "What-If" Dispatch & Pricing Solve (published) B CHANGES Write Solution to File END Page 11 of 14

Diagram 3: Changes to NPL Re-run Process B Initial Solve Perform Initial Solve with full Interconnector Loss Models applied For each Interconnector Calculate Ideal Interconnector Losses from Cleared Flow (Ideal - Cleared) Interconnector Losses > NPL Threshold? No Next Interconnector Yes Set "NPL Re-Solve" flag No CHANGES Is this an MNSP Interconnector? Yes Any Regional Energy Price < $ 0? Yes No Determine & apply NPL Model to this MNSP interconnector Determine & apply NPL Model to all Interconnectors Next Interconnector No "NPL Re-Solve" flag set? Yes NPL Re-Solve Repeat Solve with NPL Models applied for relevant interconnectors A Page 12 of 14

Appendix 1: Why do Interconnector NPLs occur? There are known limitations with the NEMDE Solver s LP optimisation in the modelling of an inherently non-linear interconnector loss/flow relationship as a linear flow constraint containing an unordered series of dispatchable loss segments with increasing loss factor coefficients. These limitations, if not addressed, would at times result in distorted market outcomes with potentially significant inaccuracies in dispatched interconnector losses, flows & therefore energy prices. NEMDE Solver s Interconnector Non-Physical Loss correction re-run mechanism (herein referred to as the NPL re-run process) is designed to address these limitations, by checking for NPLs in the initial LP solution &, if detected, converting the multi-segment interconnector loss model to one segment with a single loss factor (this is called the NPL model) before resolving the LP. Interconnector non-physical losses arise under the following circumstances: 1. Negative energy prices across the whole market are set by a negative marginal energy offer, with no binding interconnector flows between regions. In these cases the regional demands are typically low or are rapidly decreasing & generating units are approaching their ramp down limits. The LP optimisation process attempts to minimise the total objective cost by maximising the dispatch of interconnector loss (aka demand) segments in an incorrect or nonphysical loss order - that is, incorrectly dispatching segments with the highest losses before lower loss segments. From market experience these cases are extremely rare. 2. Negative energy price occurs in a local region only, following a sudden change in interconnector flow limits into or out of that region that constrain-off that region s units towards their ramp down limits. Again the LP optimisation attempts to minimise the total objective cost by maximising the dispatch of interconnector loss in non-physical loss order. In extreme cases the interconnector flow may be over-constrained (limit violated), triggering the relaxation of the limit & subsequent NEMDE Solver OCD re-run. From market experience these cases are reasonably rare. 3. An MNSP s flow at one connection point end is constrained by a conflicting MNSP flow limit (typically invoked by AEMO) at the same connection point, & there is an effective negative MNSP offer price at that connection point. In these cases the regional energy prices of the connected regions are not necessarily negative. Page 13 of 14

From market experience these cases have occurred more frequently than Cases 1 or 2 above (References #1 & #2), with their incidence depending largely upon MNSP offer behaviour. 4. An MNSP s flow at one connection point end is constrained-on by a conflicting MNSP flow constraint (typically invoked by AEMO) to a level that is contrary to (after accounting for MNSP losses) the intended MNSP flow target at the other connection point end as based upon the MNSP flow offer at that point. Again, in these cases the regional energy prices of the connected regions are not necessarily negative. From market experience these cases occur the most frequently of all the above cases. This issue was partly addressed in the NEMDE Solver changes to the MNSP dispatch model as part of the November 2003 MMS release (refer MNSP Dispatch Issue - MNSP NPL Model - Business Specification, Reference #4), by aligning the connection point end where all generic constraints applied & MNSP flow offer was dispatched, based on the initial metered MNSP flow direction. However as noted in Section 5.3 of that Business Specification, NPLs may still occur for this case where the direction of initial metered MNSP flow is opposite to the MNSP flow target. Under Cases 1 & 2 above, NPLs occur on all interconnectors where there are negative energy prices for one of the connected regions. However under Cases 3 & 4 the NPLs are usually confined to the MNSP concerned. Page 14 of 14