HPR penalised $900,000 for contraventions relating to provision of back-up services to NEM

Australian Energy Regulator v Hornsdale Power Reserve Pty Ltd [2022] FCA 738

In Australian Energy Regulator v Hornsdale Power Reserve Pty Ltd [2022] FCA 738, the Federal Court ordered a $900,000 penalty in a case brought by the Australian Energy Regulator (AER) against Hornsdale Power Reserve Pty Ltd (HPR) for breaches of the National Electricity Rules (NER). The penalty was jointly proposed, along with a statement of agreed facts. HPR accepted that it contravened cll 3.8.7A(l), 4.9.8(a) and 4.9.8(d) of the NER between 23 July 2019 and 14 November 2019 (Relevant Period) in relation to the provision of back-up services to the electricity grid.

Facts and contraventions

HPR is an electricity storage facility – essentially a giant battery – in South Australia, connected to South Australia’s electricity transmission network, which forms part of the National Electricity Market (NEM). Tesla Motors Australia Pty Ltd was contracted to assist with the operation and maintenance of HPR. During the Relevant Period, HPR used a lithium-ion battery with a capacity of 100MW and was paid $6,431,237.63 by AEMO to provide contingency frequency control ancillary services (or FCAS).[1]

To qualify for registration regarding contingency FCAS, HPR was required to have a generating unit approved by the Australian Energy Market Operator (AEMO) for classification as an “ancillary service generating unit” and/or a load classified as an “ancillary service load”. Immediately prior to the relevant period, HPR met these requirements. However, following an update on firmware for HPR performed by Tesla at 10.05am on 23 July 2019, HPR was no longer capable of providing contingency FCAS that complied with its “applicable dispatch instruction”,[2] its “market ancillary service offers”[3] and the technical characteristics of its ancillary service generating units and ancillary service loads.

Practically, this meant that HPR could not provide the service of changing its power output to stabilise the frequency of the power system in the event of a material frequency deviation to the requisite standards, which impacted AEMO’s ability to plan and prepare for frequency deviations. The statement of agreed facts emphasised that providers of contingency FCAS, such as HPR, must be able to respond according to dispatch when frequency deviations occur so that AEMO can ‘keep the lights on’ following a power system disturbance.

On 9 October 2019, there was an unplanned outage at Kogan Creek Power Station in Queensland. Because of the firmware update on 23 July 2019, HPR’s FCAS response was less than expected, and less than it offered and was enabled for in the dispatch instructions in accordance with the market ancillary service specification. Specifically, the 23 July update had the effect of altering HPR’s settings such that its droop was 3.7%[4] and HPR was therefore not capable of providing 41MW of FCAS at the frequency of 49.5Hz, as required.

Clause 4.9.8(a) of the NER provides that a registered participant must comply with the dispatch instruction given to it by AEMO unless to do so would, in the registered participant’s reasonable opinion, be a hazard to public safety or materially risk damaging equipment.

HPR’s contingency FCAS response was less than what it had been enabled to provide in dispatch instructions: it failed to comply with 185,738[5] dispatch instructions given by AEMO requiring a maximum response if and when the frequency deviated by +/- 0.5Hz from 50 Hz, in breach of cl 4.9.8(a).

Clause 4.9.8(d) of the NER provides that a market participant which has classified a generating unit or load as an ancillary service generating unit or an ancillary service load must ensure that the ancillary service generating unit or ancillary service load is at all times able to comply with the latest market ancillary service offer for the relevant trading interval.

Again, HPR’s contingency FCAS response was less than what it had offered in its ancillary market services offers: it failed to comply with the market ancillary service offers it made for 32,602 trading intervals (the offer being that it could provide 41MW of FCAS at the enabled frequency of 49.50Hz) in breach of cl 4.9.8(d).

Finally, cl 3.8.7A(1) of the NER provides that the values associated with the market ancillary service offer made by a market participant must represent technical characteristics of the ancillary service generating unit or ancillary service load. HPR had breached that obligation because the values associated with its 690 market ancillary service offers did not represent the technical characteristics for which it had been approved.

Penalties and other consequences

On 14 November 2019, Tesla corrected the relevant settings on the firmware and HPR subsequently repaid $3,383,631.51 to AEMO, being amounts broadly relating to the amounts it had received from AEMO during the relevant period.

The parties agreed to a resolution of the proceedings (including the payment of a $900,000 pecuniary penalty) and filed a statement of agreed facts and joint submissions.

In relation to the penalty, Besanko J reiterated the principles he applied in Australian Energy Regulator v AGL HP 1 Pty Ltd [2022] FCA 737, namely that while not bound by the proposal, so long as what is proposed is an appropriate remedy in the circumstances, it is highly desirable in practice for the Court to accept the parties’ proposal.

In applying the nine indicia set out in Australian Building and Construction Commissioner v Pattinson [2022] HCA 12, [18],[6] Besanko J weighed up:

• the seriousness, volume and duration of the contraventions as well as HPR’s failure to undertake sufficient performance monitoring; against
• the contraventions were inadvertent and as soon as HPR became aware of the deficient contingency response, it took immediate steps to rectify it.

Ultimately, Besanko J considered the proposed pecuniary penalty was just and appropriate and a penalty determined in accordance with the law.

Increasing AER enforcement activity

Judgment has now been handed down in several recent cases brought by the AER against market participants relating to breaches of the NER, each of which has resulted in the respondent being ordered (by consent) to pay substantial civil penalties and contribute to the AER’s legal costs.[7] Given the current level of unpredictability in the electricity market in Australia (and the degree of success in those actions), this enforcement activity is likely to continue.

[1] In essence, these services are grid stabilisation services.

[2] AEMO enables FCAS by providing dispatch instructions to a market participant pursuant to cl 4.9.3A of the NER.

[3] Clauses 3.3, 3.4, 4.3, 4.4, 5.3 and 5.4 of the market ancillary service specification (MASS) govern, for the respective FCAS, how the amount of FCAS response is calculated for the purposes of market ancillary service offers.

[4] The droop is a variable in the formula for calculating the maximum market ancillary service capacity, being the amount or proportionality of response to a variation in frequency. At the time of registration, HPR agreed to a droop of 1.7%.

[5] For completeness, the high number of contraventions should be considered in the context of the applicable five-minute dispatch intervals.

[6] In summary form, these are: (1) the nature and extent of the contravening conduct; (2) the amount of loss or damage caused; (3) the circumstances in which the conduct took place; (4) the size of the contravening company; (5) the degree of power it has, as evidenced by its market share and ease of entry into the market; (6) the deliberateness of the contravention and the period over which it extended; (7) whether the contravention arose out of the conduct of senior management or at a lower level; (8) whether the company has a corporate culture conducive to compliance with the Act; and (9) whether the company has shown a disposition to co-operate with the responsible authorities.

[7] See AER v AGL HP 1 Pty Ltd [2022] FCA 737, AER v HWF 1 Pty Ltd [2021] FCA 732 and AER v Pacific Hydro Clements Gap Pty Ltd [2021] FCA 733.