Australia VCR Application Guide Final Report

VALUE OF CUSTOMER
RELIABILITY APPLICATION
GUIDE
FINAL REPORT
Published: December 2014

VALUE OF CUSTOMER RELIABILITY APPLICATION GUIDE
IMPORTANT NOTICE
Purpose
AEMO has prepared this document to provide information on the existing and potential application of the results
of its 2013-14 Value of Customer Reliability (VCR) Review, as at the date of publication.
Disclaimer
This document or the information in it may be subsequently updated or amended. This document does not
constitute legal or business advice, and should not be relied on as a substitute for obtaining detailed advice about
the National Electricity Law, the National Electricity Rules, or any other applicable laws, procedures or policies.
AEMO has made every effort to ensure the quality of the information in this document but cannot guarantee
its accuracy or completeness.
Accordingly, to the maximum extent permitted by law, AEMO and its officers, employees and consultants involved
in the preparation of this document:
make no representation or warranty, express or implied, as to the currency, accuracy,

reliability or completeness of the information in this document; and
are not liable (whether by reason of negligence or otherwise) for any statements or representations
in this document, or any omissions from it, or for any use or reliance on the information in it.
2014. The material in this publication may be used in accordance with the copyright permissions on AEMOs website.
Australian Energy Market Operator Ltd ABN 94 072 010 327 www.aemo.com.au info@aemo.com.au
NEW SOUTH WALES QUEENSLAND SOUTH AUSTRALIA VICTORIA AUSTRALIAN CAPITAL TERRITORY TASMANIA
EXECUTIVE SUMMARY
This Value of Customer Reliability (VCR) Application Guide outlines the Australian Energy Market Operators
(AEMOs) VCR values, the methodology used to calculate them, and how they can be consistently interpreted
and applied to National Electricity Market (NEM) planning and operations.
VCR values, estimated in dollars per kilowatt hour (kWh), represent customers willingness across the (NEM)
to pay for reliable electricity supply. This is the first time that NEM-wide VCR values for these customers have
been calculated. VCRs are important in AEMOs evaluation of cost-effective ways to build or upgrade infrastructure
or invest in non-network alternatives, and can be applied by industry participants in a range of planning, regulatory,
market and policy contexts for customer benefit. In Victoria, VCRs are a mandatory feature of infrastructure
planning assessments.
AEMO recognises that, in reality, there are a multitude of VCR values. Each customer will value reliability
differently, depending on its usage pattern and the type of outage. For example, some customers may be willing
to pay more to avoid long outages of several hours duration, whereas others may place more value on avoiding
short but disruptive outages during evening peak periods. In particular, different categories of customers value
reliability differently. Given that the mix of customers at each connection point varies, one would expect that the
VCR varies locationally for this reason alone. For any given application, the key is to calculate a representative
VCR that is fit for purpose, taking into consideration the types of outages and customers impacted.
To establish representative VCR values, AEMO first conducted a customer review1 to determine the value that
residential and business customers place on having a reliable electricity supply under different outage conditions.
AEMO surveyed customer groups of different sizes, at different locations, and with different consumption patterns
across the NEM. AEMO then produced a range of VCR values that reflect the diversity of customer responses.
This guide delves into the specific ways that AEMO and others can apply the VCR values to particular situations.
Participants can use these methodologies to:
Produce representative VCR values at both transmission and distribution connection points.
Produce an outage-weighted VCR value.
Plan networks in accordance with the regulatory investment test for transmission (RIT-T) and regulatory
investment test for distribution (RIT-D).
Undertake sensitivity analysis to address the inherent uncertainty that exists in VCR value estimates.
Estimate transmission and distribution reliability standards under the Australian Energy Market Commissions
(AEMC) proposed national reliability standard frameworks.
Help to develop wholesale reliability standards and settings.
Index VCR values annually.
Account for network losses and embedded generation such as solar rooftop PV when estimating the cost
to customers of load shedding.
AEMO is already applying the range of VCR values in carrying out its national and Victorian transmission planning
functions.2 We note this may be relevant to projects and proposals currently being assessed by AEMO.
AEMO notes that other parties, such as the Australian Energy Regulator (AER) and the AEMC, may have their own
views regarding the application of VCR values, particularly where it relates to their regulatory processes.
This document sets out AEMOs views with respect to its functions and aims to provide a starting point for
developing a consistent, national approach to applying VCR.
1
VCR review final report (Main Report) available at: http://www.aemo.com.au/Electricity/Planning/Value-of-Customer-Reliability-review.
2
Further information about applying VCR values to AEMOs national and Victorian transmission planning functions is provided in Chapter 5
of the Main Report.
AEMO 2014 1
CONTENTS
EXECUTIVE SUMMARY 1
1. OVERVIEW OF VCR REVIEW RESULTS 4
1.1 VCR review results for different customer classes 4
1.2 VCR values by NEM region ($/kWh) 5
2. DERIVING REPRESENTATIVE VCR VALUES 6

2.1 Demand weighted locational VCRs 6
2.2 Basis for demand-weighting VCRs 8
2.3 Re-weighting outage probabilities for customer class VCRs 9
2.4 Local knowledge can be applied if appropriate 9
3. APPLICATION TO NETWORK PLANNING 10

3.1 Application by AEMO as Victorian and national transmission planner 10
3.2 Using VCR values directly in network planning processes 11
3.3 Network replacements 15
3.4 Sensitivity analysis 15
3.5 Using VCR values to guide network planning standards 15
4. OTHER VCR APPLICATIONS 18

4.1 VCR and the reliability standard and settings 18
4.2 VCR and network regulation 20
4.3 VCR and load shedding/restriction schedules 20
4.4 Potential VCR application to non-market ancillary services 20
4.5 Potential VCR application to decisions to implement emergency control schemes 21
4.6 Potential VCR application to develop demand management options 21
5. ANNUAL VCR INDEXATION 22

5.1 Indexation approach 22
5.2 Annual CPI adjustment 23
5.3 Transitioning to new surveyed VCR values 23
6. CONSULTATION 25
APPENDIX A. LOSSES 26
A.1 Adjustment for losses 26
A.2 Sources of information on network losses 27
APPENDIX B. REWEIGHTING VCR VALUES 28

APPENDIX C. STAKEHOLDER FEEDBACK 29
AEMO 2014 2
TABLES
Table 1 Residential VCR review results ($/kWh) 4
Table 2 Business VCR review results ($/kWh) 4
Table 3 Large customers directly connected to the transmission network (direct connect
customers) VCR review results ($/kWh) 4
Table 4 Aggregate VCR values for NEM and states ($/kWh) 5
Table 5 Example comparison between Victorian state-level and locational demand-weighted
VCR calculation 8
Table 6 Locational VCR in assessing USE 11
Table 7 Aggregate VCRs used in valuing USE 11
Table 8 Ergon Energys distribution loss factors to be applied in 2014-15 27
Table 9 Estimated distribution losses in Australia (% of transmitted energy) 27
Table 10 Revised outage probabilities 28
Table 11 VCRs by event for Victoria residential ($/kWh) 28
Table 12 Stakeholder feedback on Draft Application Guide 29
FIGURES
Figure 1 Customer groups and the electricity supply chain figure caption 6
Figure 2 Weighted VCR calculation at distribution level example 7
Figure 3 Flow chart of VCRs applied to calculate the market cost of involuntary load shedding 12
Figure 4 Example of how losses observed at transmission connection point level relate to the
USE experienced by customers 13
Figure 5 Example of how losses observed at the generation level relates to the USE
experienced by customers 14
Figure 6 Electricity supply chain adjustment of losses 26
AEMO 2014 3
1. OVERVIEW OF VCR REVIEW RESULTS

This chapter details the VCR review methodology, and the results used to establish the VCR values.
The VCR values are based on AEMOs customer review that involved surveying a range of customer groups
with different use and outage patterns across the NEM. From this, AEMO estimated a range of updated VCR
values that reflect the diversity of customer responses. See Appendix B of the VCR review final report (Main
Report) for detailed results of the VCR review, including by individual outage type and duration.
1.1 VCR review results for different customer classes

AEMOs VCR review has produced a range of VCR values for residential and business customers, delineated
according to customer class, consumption level and outage scenario.
The cost of an outage to a customer varies according to the type of interruption. The VCR review examined the
value customers place on a baseline outage scenario and incremental outage attributes. AEMO used the review
results to derive VCR values for 24 different outage scenarios for each residential and business customer class.
These outage scenarios included off-peak and peak scenarios. All were probability-weighted using interruption
to supply data provided to the Australian Energy Regulator (AER) by distribution network businesses. AEMO then
derived two different sets of VCR values - aggregate residential VCR values for each NEM region, and aggregate
business customer VCR values across the NEM.
A special class of business customer was also considered. Customers who connect directly to the transmission
network (direct connect customers) were surveyed separately using a direct measurement survey approach.
AEMO then compiled VCR values for three direct connect sectors (metals, wood, pulp and paper and mining)
across four outage duration scenarios. These results were load weighted to produce an aggregate VCR
for direct connect customers.
The following tables show aggregate VCR results by customer group as presented in the Main Report.
Table 1 Residential VCR review results ($/kWh)

Location NEM New South Wales* Victoria Queensland South Australia Tasmania
Residential VCR 25.95 26.53 24.76 25.42 26.88 28.58
*Includes Australian Capital Territory customers.
Table 2 Business VCR review results ($/kWh)

Sector Agriculture Commercial Industrial
Sector average3 47.67 44.72 44.06
Small size 54.87 57.13 69.66
Medium size 51.81 57.28 64.44
Large size 46.41 42.13 39.13
Table 3 Large customers directly connected to the transmission network (direct connect customers)
VCR review results ($/kWh)
Location NEM
Direct connect 6.05
customer VCR
With extra information on local customer demand composition, these customer group-specific VCR values may
be weighted to provide locational specific VCR estimates as detailed in Chapter 2.
3
See section 3.3.2 of the Main Report, in particular tables 16 and 22, for details for small, medium and large customer consumption threshold
definitions and how these classes were load-weighted to produce sector averages.
AEMO 2014 4
1.2 VCR values by NEM region ($/kWh)

Based on the aggregate customer-specific VCR values for residential, businesses and direct connect customers,
the following weighted average aggregate values are based on the mix of each customer class in the overall NEM
or state demand composition.4 Values have been calculated by either including or excluding direct connect
customer demand. Specific application of these values is discussed in chapters 3 and 4.
Table 4 Aggregate VCR values for NEM and states ($/kWh)

Location NEM New South Victoria Queensland South Tasmania
Wales* Australia
VCR excluding direct 39.00 38.35 39.50 39.71 38.09 39.43
connects ($/kWh)
VCR including direct 33.46 34.15 32.62 34.91 34.06 25.62
connects ($/kWh)
*Includes Australian Capital Territory customers.
4
See section 3.5 of the Main Report for more information.
AEMO 2014 5
2. DERIVING REPRESENTATIVE VCR VALUES

One of the values of AEMOs review is that it can provide detailed VCR values that reflect differences
in customer composition across and within the NEM states. This chapter outlines the approach AEMO has used
to develop representative VCR values under different location and outage situations. Depending
on circumstance, VCR values may be aggregated using one or more of the following approaches:
Locational VCRs where VCR values for a specific transmission or distribution connection point
are calculated based on local composition of customer load.
Outage specific VCRs where VCR values are reweighted to better reflect the outage scenarios likely
to lead to load shedding.
VCRs supplemented by local knowledge where unique information about a specific customer group
(ie direct connect customers) is obtained.
2.1 Demand weighted locational VCRs

The VCR value for a customer group typically varies less across locations in the NEM than between customer
groups. This makes it possible to use NEM-wide values to calculate indicative locational VCR values based
on each groups share of local demand.
The calculated locational VCR will more precisely represent the VCR value expressed by customers at a local level
than using the state-level aggregated VCR value as a proxy. For this purpose, the geographic area considered for
a locational VCR can be defined as broadly or as narrowly as required for an assessment.
The approach to calculating locational VCR values is the same regardless of whether the VCR affects decisions
at the:
Distribution level (Level 1, as indicated in Figure 1).

Transmission level (planning related to connection points supplying customers or distribution networks,
shown in Figure 1 as Level 2).
Interstate or national level, such as when looking at overall NEM system reliability issues, shown as Level 3
in Figure 1.5
Figure 1 Customer groups and the electricity supply chain figure caption
Commercial
Direct connect
Residential Industry
customer
Interconnected
transmission system
Distribution
connection point
Agriculture
1
Transmission Use for

connection point
2
distribution
planning
3 Use for local
Use for system transmission
studies/shared planning
Transmission connected network
generator planning
5
The illustration is somewhat simplified, as electricity transmitted through the network generally goes through more stages between voltage levels
than shown. Generation can also be connected at distribution level (or household level, as seen with rooftop photovoltaic systems).
AEMO 2014 6
A locational VCR can be calculated by weighting the VCR review results using the composition of the customer
demand being served. This is the same whether at state level or for a transmission connection point, a distribution
connection point or an individual feeder to end use customers. The calculation relies on the availability of local
demand composition information. If this information is not available, a VCR value from a higher level of aggregation
would need to be used as a proxy.
The VCR review provided VCR estimates for residential and the following discrete customer groups in the larger
business grouping. They are:
Commercial
Industrial (non-direct connect customers)
Agriculture
Direct connect customers.6
These estimates are summarised in Section 1 and can be seen as building blocks for calculating locational VCRs.
Figure 2 provides an example of how a locational VCR estimate can be calculated based on VCR building blocks
and the demand weighting of customer groups at that location. The connection point is located in Victoria, and
therefore the Victorian VCR value of $24.76/kWh is applied for residential customers. National values are applied
for commercial, industrial, and agricultural customers. The weighted locational VCR for the Level 1 connection
point which serves a mix of customer groups, but mainly comprises residential consumers, is calculated
as $30.86/kWh.
Had the example been a Level 2 or 3 connection point, any direct connect customers served from those network
locations would have to be included as well. Otherwise, the approach is identical.
Within a state, locational VCR values can vary considerably depending on the customer mix. Table 5 demonstrates
this variation, using Victoria as an example (excluding direct connect customer demand in this case). Based on the
composition of Victorian customer demand, a load-weighted state-level VCR can be calculated as $39.50/kWh.
A residential area served by a connection point where the commercial and/or industrial demand is considerably
lower and residential demand considerably higher than the state average results in a locational VCR of $30.86/kWh
about a quarter less than the calculated state-level VCR. Where such data is not available, state-level values
would need to be used as a proxy.
Figure 2 Weighted VCR calculation at distribution level example

Commercial
Direct connect
Residential Industry
customer
Interconnected
transmission system
Distribution
connection point
Agriculture
1
Transmission
connection point Customer Demand VCR
class weighting ($/kWh)
Residential 70% 24.76
Commercial 20% 44.72
Industrial 5% 44.06
Transmission connected Agriculture 5% 47.67

generator Weighted 100% 30.86
6
Note these values are relevant only for studies at transmission level.
AEMO 2014 7
Table 5 Example comparison between Victorian state-level and locational demand-weighted

VCR calculation
Customer type Customer group VCR ($/kWh) State-wide share of Assumed local share of
demand demand
Residential 24.76 25.9% 70.0%
Commercial 44.72 61.0% 20.0%
Industrial 44.06 11.8% 5.0%
Agriculture 47.67 1.2% 5.0%
Weighted VCR ($/kWh) 39.50 30.86
2.2 Basis for demand-weighting VCRs

The demand-weighting to use in calculating locational VCRs depends on the expected time of any unserved
energy (USE) and whether the USE is targeted or untargeted.
2.2.1 Weighting using maximum demand or annual energy

The customer demand composition that determines demand-weighting varies based on individual groups
contribution to maximum demand, or annual or seasonal energy consumption.
In many cases, it is appropriate to use a weighting based on contribution to maximum demand, since unserved
energy (USE) due to capacity shortage or plant outage most frequently occurs during high demand periods.
In cases where USE is expected over a longer period, for example over a full day, using the share of annual
or seasonal energy consumption is a better option to calculate the weighted VCR.
Often only the customer groups individual share of annual energy, and not maximum demand, is available.
In this case, the customer groups individual shares of annual energy would need to be used as a proxy for
customer demand composition at the time of maximum demand unless other appropriate assumptions can
be made, such as around the flat consumption profile from industrial processes.
2.2.2 Weighted VCR based on the type of USE involuntary or voluntary

Where USE is valued using the results of AEMOs VCR review, it represents the value of involuntary loss of load.7
Voluntary responses to market prices or conservation campaigns would have a different, lower value. A different
value would also apply where load loss relates to restrictions imposed by jurisdictions. Here, the value would also
be less than any based on the VCR results, as any restrictions applied would aim to minimise costs and impacts.
This is discussed further in Section 3.2.4 and Section 4.3.
2.2.3 Weighted VCR based on USE type targeted or untargeted

Another consideration relates to whether the USE is:
Targeted8 VCR based on mix of demand likely to be shed:

USE resulting from pre-contingent load shedding to avoid breaching network capacity limits.
Load shedding directed within a distribution network based on priority lists.
Untargeted VCR based on actual demand weighting:
USE resulting from major, sudden outages.
Likely to affect customer demand evenly across all customer groups.
For targeted load shedding, where information is available regarding customer groups or feeder types
to be targeted first, the VCR for that customer group should be used, (or calculate a weighted number
if a mix of customer groups is targeted).
7
Involuntary in this sense means that the customer did not have a choice whether to experience the loss of energy supply, i.e. the USE was
untargeted or was part of a customer demand shed under direction by AEMO or a DNSP. In contrast voluntary USE occurs where the customer
makes an active choice to turn off supply, i.e. as part of a demand response arrangement.
8
In this context, targeted USE relates to load interruptions where the composition of interrupted load is known and can be targeted. In contrast,
untargeted USE relates to load interruptions where the composition of interrupted load is unknown and cannot necessarily be targeted.
AEMO 2014 8
2.3 Re-weighting outage probabilities for

customer class VCRs
As discussed in Section 2.1, customer class VCRs are aggregated values derived by probability-weighting the
VCR of 24 outage scenarios. However, in some cases network planning may only be concerned with specific
outage scenarios (i.e. ones occurring during peak times). Then, it may be appropriate to re-weight the outage
probabilities to create an aggregate customer class VCR that better reflects the outage scenarios considered.
For example, where network planning identifies that an outage in peak conditions results in a loss of supply
to a connection point, customer class VCRs are re-weighted by removing off-peak outage scenarios and
changing peak demand scenario probabilities.
For example, consider a 22 kV underground feeder which serves residential customers only. Based on historical
data, outages on this part of the network mainly occur during peak demand periods, with few occurring at other
times. Further, most outages are restored within three hours. Here it may be appropriate to re-weight the VCR
based on revised outage probabilities that reflect actual outage times and durations.
A re-weighted residential VCR for a similar scenario may be in the range of $32/kWh, which is about 30% higher
than the aggregate Victoria residential VCR value. An example demonstrating how the VCR can be re-weighted
based on this scenario is detailed in Appendix B.
2.4 Local knowledge can be applied if appropriate

AEMO acknowledges that regional VCR calculations produce collective values that encompass a range of different
environments and circumstances.
It may be acceptable to use local knowledge to calculate a specific VCR for a given location. This would apply only
where it is possible to provide reliable evidence of alternative, better substantiated values. Any use of an alternative
VCR should be justified appropriately, recognising the robustness and statistical validity of the figures in the AEMO
review. Alternative VCR values based on local knowledge would also need to be calculated using a similar
approach to AEMOs to support national consistency.
One area where more detailed local information may have particular value is where the loads of relevant direct
connect customers are a significant percentage of the load at risk. In this case, the Transmission Network Service
Provider (TNSP) or Distribution Network Service Provider (DNSP) could gather more specific information about the
customers value of reliability. Here, it may be more appropriate to use local knowledge to calculate a local VCR
rather than use the aggregate direct connect VCR value from the review.
AEMO 2014 9
3. APPLICATION TO NETWORK PLANNING

This chapter sets out AEMOs application of the VCR values to network planning, covering:
AEMOs application of VCR values in its role as the Victorian and national transmission planner.
The proposed application of VCR values in network planning to assist in determining, for each proposed
augmentation or replacement, the net benefits of USE reduction.
The potential application of VCR values to help guide appropriate deterministic network planning standards
that balance the cost of augmentations with the value to customers (reduction in USE) at an aggregate
level.
The importance of considering the impacts of network losses, embedded generation and demand-side
participation in determining the net benefits of USE reduction.
VCRs are important in AEMOs evaluation of cost-effective ways to build or upgrade infrastructure, and can
be applied by industry participants in a range of planning, regulatory, market and policy contexts for customer
benefit. Recognising that there is inherent uncertainty associated with the derived VCR values, AEMO also
recommends use of sensitivity analysis to gauge the importance of the VCR input to any specific investment
decision. This analysis could flag when additional effort may be warranted to improve the accuracy of the VCR
estimate through the sorts of customisations discussed in Chapter 2.
Use of the VCR in network planning is consistent with the NERs network planning and economic regulation
framework to promote efficient investment outcomes. For example, TNSPs are required to consider the potential
for investments likely to produce a net economic benefit. This is part of their annual planning reviews, and joint
planning with DNSPs to ensure efficient planning outcomes.9 The National Transmission Network Development
Plan (NTNDP) must consider and assess an appropriate course for long-term efficient development of the national
transmission grid.10 Further, the forecast capital expenditure of a network business should, in part, reflect the
efficient costs of meeting network demand and reliability requirements.11 So, using VCR, particularly when
considering investment driven by a need to meet reliability requirements, helps promote efficient outcomes
by balancing network investment cost with the reliability outcomes desired by customers. This ultimately assists
in achieving the NEO.
As the Victorian and national transmission planner and as part of the economic planning process.12, AEMO must
use a probabilistic planning approach and analyse costs and benefits to assess the reliability benefits associated
with proposed network or non-network investment projects. Occasionally, AEMO also independently reviews
transmission network service providers (TNSPs) investment decisions and may use VCRs to assess the market
benefits of these investments.
3.1 Application by AEMO as Victorian and national

transmission planner
AEMO is applying the new VCR values in its role as Victorian and national transmission planner.
This is discussed further in Chapter 5 of the VCR review final report (Main Report).
As Victorian transmission planner, AEMO must do a cost-benefit analysis to decide whether a proposed
augmentation should proceed. Augmentation benefits must be determined by applying a probabilistic planning
approach.13 This requires the reliability benefits of any proposed augmentation to be quantified using the VCR.
Where USE is identified at connection point level, AEMO will apply a locational VCR, where possible, by weighting
the customer class VCRs by the customer demand composition at the connection point. Where USE is identified
at regional level, an aggregate state VCR will be applied. This approach is summarised in Table 6 and Table 7.
9
National Electricity Rules (NER), clause 5.12.1(b)(4), 5.14.1(d).
10
NER, clause 5.20.2(c)(1).
11
NER, clause 6A.6.7, 6.5.7.
12
National Electricity Law (NEL), s.50F(2).
13
NEL, s.50F(2).
AEMO 2014 10
Table 6 Locational VCR in assessing USE

VCR applied VCR description and application
Locational VCR This VCR value is used to assess the costs and benefits of projects that affect both distribution
including direct connect and direct connect customer demand. The VCR value is derived by load weighting; taking
demand relevant DNSP and direct connect data and using that to weight the residential, business sector,
and direct connect VCR values to a single aggregate VCR.
Locational VCR This VCR value is used to assess the costs and benefits of projects that supply distribution
excluding direct connect customer demand only. The VCR value is derived by load weighting; taking relevant DNSP
demand data and using that to weight residential and business sector VCR values to a single
aggregated VCR.
The DNSP data AEMO uses to derive the locational VCR may contain other customer classes, such as public
lighting, which fall outside VCR customer classes. Where this occurs, the most relevant VCR customer class
is selected to derive the load-weighted VCR value. If no VCR customer class is appropriate, the aggregate
Victorian VCR value that excludes direct connect customers is applied to DNSP customer demand.
Table 7 Aggregate VCRs used in valuing USE

VCR applied VCR description and application VCR value
($/kWh)
Victorian VCR including This VCR value is used to assess reliability costs and benefits for projects that 32.62
direct connects affect both distribution and direct connect customer demand.
This VCR value was derived by load weighting the customer class VCRs using
Bureau of Resources and Energy Economics (BREE)14 data.
Victorian VCR excluding This VCR value is used to assess reliability costs and benefits for projects that 39.50
direct connects supply distribution customer demand only
This VCR value was derived by load weighting customer class VCRs using
BREE data.15
Direct connect VCR This VCR value is used to assess reliability benefits for projects that supply 6.05
directly connected load only.
3.2 Using VCR values directly in network planning

processes
As a part of regulatory network planning processes, the VCR may help in considering the potential reliability
benefits associated with proposed network investment. This section outlines the potential application of VCR
values to regulatory network planning processes in the NEM.
AEMO notes that the information contained in this section is intended to complement, not replace, existing
guidance on the application of the network planning processes in the NEM (i.e. the AERs RIT-T application
guidelines). This section is mainly concerned with applying VCR using VCR review results in the regulatory
network planning process.
3.2.1 Regulatory investment test

The regulatory investment test for transmission (RIT-T) and regulatory investment test for distribution (RIT-D)
are cost-benefit assessments used in network planning to identify the investment option that maximises net
market benefits. Where the investment being considered is to address potential reliability concerns, it must also
meet relevant jurisdictional reliability standards.16 Generally, the RIT-T is applied to transmission network planning
and the RIT-D to distribution network planning. The RIT-T and RIT-D are developed and published by the AER.17
TNSPs and DNSPs are required to apply the RIT-T or RIT-D to proposed investments where the estimated cost
of the most expensive option exceeds $5 million.18
14
See section 3.5 of the VCR Main Report for more information.
15
See section 3.5 of the VCR Main Report for more information.
16
NER, clause 5.16.1(b).
17
Available at: https://www.aer.gov.au/node/8865.
18
NER, clauses 5.16.3. 5.17.3.
AEMO 2014 11
Both the RIT-T and RIT-D require the network planner to use a reasonable forecast of the value of electricity
to consumers19 when considering market benefits of an investment option that alleviates involuntary load shedding.
This value is also likely to be needed to calculate market benefits associated with voluntary load shedding.20
If the market benefits of the proposed investment are considered material, they must be quantified under
the RIT-T21; quantification is optional for the RIT-D.22
VCR review results can be applied to develop a reasonable forecast of the value of electricity to consumers.
As outlined in Section 3.1, AEMO uses the VCR values derived from the VCR review results in its network planning
functions. Using the VCR review results in the approach set out in Chapter 5, VCR values can be developed that
reflect the composition of the customer demand at risk in any analysis. The level of detail depends on the network
need that the RIT-T or RIT-D is addressing and the availability of customer demand composition data. This is set
out in the flow chart in Figure 3.
Figure 3 Flow chart of VCRs applied to calculate the market cost of involuntary load shedding
What type of involuntary load shedding has been identified?
Involuntary load shedding Involuntary load shedding

at connection point level at state level or across NEM regions
Locational value of electricity derived by Aggregate state VCR(s) used to represent

load weighting VCR survey results with customer value of electricity. Where there
customer composition at the connection are benefits across states, separate VCRs
point. should be used for each state or NEM
region.
If there are multiple connection points, a
separate locational VCR for each Where the affected customer demand
connection point should be derived if the associated with the involuntary load
involuntary load shed at each connection shedding in a state can be identified, a
point can be identified. Otherwise a load weighted VCR by customer
combined locational VCR representative composition can be used to represent the
of the total customer demand composition customer value of electricity.
of the connection points can be used.
If quality information is not available to
calculate a locational VCR, a state
aggregate VCR will be applied.
Where investment benefits are not primarily driven by the value of avoided load shedding, it may be appropriate
to use a less detailed VCR (i.e. aggregate state VCRs). For example, investments that explore increases
in interconnector capacity benefits will use market stimulations where data on USE events, such as timing
and duration, can be extracted. This allows more detailed VCR estimates to be used, based on the time of day
and duration. However, such larger projects are often mainly driven by lower market costs (such as fuel,
or generation investments) with reliability playing a minor role. This extra detail may therefore not be warranted.
Where a demand side participation (DSP) option is considered, there may be market benefits associated with
voluntary load shedding. The voluntary load shedding market benefit is derived by calculating the difference
between the reduction in involuntary load shedding and increase in voluntary load curtailment.23 An example
of this can be found in the AERs RIT-T Application Guidelines.24
19
AER, June 2010, RIT-T, paragraph 5(c); AER, August 2013, RIT-D, paragraph 7(b).
20
See A.2 of the AER RIT-T Application Guidelines, June 2010.
21
AER, June 2010, RIT-T, paragraph 7.
22
AER, RIT-D, August 2013, paragraph 10.
23
AER, 20 June 2010, RIT-T Application Guidelines, A.3. Available at: https://www.aer.gov.au/node/8865.
24
AER, 20 June 2010, RIT-T Application Guidelines, see example 24. Available at: https://www.aer.gov.au/node/8865.
AEMO 2014 12
The value of involuntary load shedding can be calculated using a locational VCR derived from the survey results
using the approach set out in Chapter 2. The cost of the increase in voluntary load curtailment is derived by
multiplying the increased quantity of voluntary load curtailment by the demand side participants value of the
curtailed electricity. The demand side participants value of the curtailed electricity can be assumed to be the
wholesale market price at which voluntary load curtailment occurs.25 The DSP forecast produced by AEMO
can be used as a proxy for changes in direct connect customer consumption for various wholesale market prices.
The DSP forecast is published annually as part of the National Electricity Forecasting Report (NEFR).26
Once derived, the VCR value can be applied to the USE modelled to occur each year to estimate the load
shedding cost. This cost is calculated for every reasonable scenario and investment option considered
in the RIT-T or RIT-D.
In calculating this cost, the USE may need to be adjusted to account for network losses, embedded generation,
and/or DSP as outlined in Section 3.2.2.
3.2.2 Accounting for losses

The VCR is measured at the customer premises whereas USE can be measured either at the connection point
or sent-out27, depending on the analysis undertaken. Therefore, in most instances the USE includes distribution
and sometimes transmission losses. Only USE experienced by customers should be valued by the VCR, so any
assessment of USE should be reduced by the relevant loss factor(s) as illustrated in Figure 4 and Figure 5.
Figure 4 Example of how losses observed at transmission connection point level relate
to the USE experienced by customers
25
AER, 20 June 2010, RIT-T Application Guidelines, A.3. Available at: https://www.aer.gov.au/node/8865.
26
AEMO. Available at: http://www.aemo.com.au/Electricity/Planning/Forecasting.
27
For the definition of sent-out demand, see AEMOs National Electricity Forecasting Report (NEFR)
available at http://www.aemo.com.au/Electricity/Planning/Forecasting.
AEMO 2014 13
Figure 5 Example of how losses observed at the generation level relates28 to the USE
experienced by customers
Adjustment for losses is further discussed in Appendix A.
3.2.3 Accounting for embedded generation

An outage causing loss of supply to an area will for safety reasons trip any local generation, including rooftop
photovoltaic (PV) systems. The resulting supply loss to end customers may therefore be larger than the amount
of energy served by the network before the outage.
For example, if half the local actual customer demand was met by local generation such as rooftop PV, when
an outage occurred, a calculated USE of 1 kWh at network level would lead to a loss of 2 kWh for customers.
The latter is the correct value to use when costing the USE for a RIT-T.
3.2.4 Accounting for demand side participation

Many direct connect customers have flexible processes, enabling them to turn off those processes when prices do
not justify continued operation. This demand response to a price signal is one type of demand side participations
(DSP). Smaller customers can also respond to price signals, although historically a larger proportion of observed
DSP in the NEM has been from direct connect customers, in particular from the metals processing industry.
If pre-contingent USE is calculated due to a supply shortfall, electricity market prices can be expected to be at the
market price cap, and a high proportion of DSP would likely already be called into service. In such instances, the
reduction in direct connect consumption due to DSP should be subtracted from demand before estimating USE29.
AEMO publishes an annual DSP forecast as part of the NEFR.30
28
As measured sent-out. For the definition of sent-out demand, see AEMOs National Electricity Forecasting Report (NEFR) available at
http://www.aemo.com.au/Electricity/Planning/Forecasting.
29
In practice, DSP is often taken into account in market modelling by scheduling DSP load blocks to reduce consumption during high market prices.
30
AEMO. Available at: http://www.aemo.com.au/Electricity/Planning/Forecasting.
AEMO 2014 14
3.3 Network replacements

With the decline in consumption growth and potential load reduction in parts of the network, any network asset
replacement proposal should be subject to economic assessment to determine whether like-for-like replacement
is efficient. This is particularly important in the current environment since the decline in consumption growth means
that most future network expenditure is likely to be focused on replacement rather than augmentation.31
3.4 Sensitivity analysis

In the Main Report, AEMO highlighted that developing a confidence interval around VCR values would
be a challenging exercise, requiring extra probabilistic modelling and an understanding of the standard errors
and confidence intervals associated with supporting data such as AERs RIN data, BREE data, and demand data.
It was also noted that, on the basis of the choice modelling results alone, the approximate confidence interval
for a VCR produced in this study is +/-30%.
Given the importance of the VCR in network planning, AEMO considers it prudent to undertake sensitivity analysis
when conducting RIT-T and RIT-D assessments, to test how sensitive investment decisions are to the VCR input.
Based on advice from academic advisors, a range of +/-30% VCR is considered reasonable for this purpose.
Should the sensitivity analysis highlight that the investment decision changes depending on the VCR value used
within that range, this would trigger further investigation of the VCR value to try to improve the accuracy.
Depending on the situation, this may mean using a more detailed VCR value (such as a locational VCR, an outage-
weighted VCR or a combination of both) or directly consulting with stakeholders to supplement the VCR with extra
local knowledge.
3.5 Using VCR values to guide network planning

standards
Historically, network planning in most NEM regions has been driven by deterministic planning standards.32
However, the AEMC has proposed that the VCR be incorporated into deterministic planning standards and targets
to ensure they better reflect customer reliability preferences.
This section outlines the potential for VCR values to be applied to the AEMCs proposed frameworks
for transmission and distribution reliability.
3.5.1 Application to the AEMCs proposed national frameworks for transmission

reliability
In 2013, the then Standing Council on Energy and Resources (SCER), now the Council of Australian Governments
(COAG) Energy Council, tasked the AEMC with developing national frameworks for regulating transmission and
distribution reliability in the NEM. The AEMC published the final reports for transmission reliability and distribution
reliability on 1 November 2013 and 27 September 2013 respectively.
31
AEMO, 2013 National Transmission Network Development Plan, 13 December 2013, Chapter 3.
Available at: http://www.aemo.com.au/Electricity/Planning/National-Transmission-Network-Development-Plan.
32
For an overview of network reliability standards in the NEM see Productivity Commission, 26 June 2013, Electricity Network Regulatory
Frameworks Inquiry Report, page 553, 589. Available at: http://www.pc.gov.au/projects/inquiry/electricity/report.
AEMO 2014 15
VCR application to proposed framework for transmission reliability

The AEMCs final report for transmission reliability proposed an economic assessment process to help set the
transmission reliability standard. The proposed framework comprises these three stages:33
1. Selecting a range of feasible reliability scenarios, which involves considering customer consultation
and advice from TNSPs on the costs and constraints of achieving different reliability levels.
2. An economic assessment process to evaluate how network capital and operating costs vary with different
reliability levels, and a comparison of expected capital and operating expenditure with the value
customers place on reliability for each selected scenario.
3. Selecting and publishing reliability standards for each TNSP.
Therefore, while transmission reliability standards are expressed deterministically in terms of network redundancy
and supply restoration times, they are set using an economic assessment process.
The AEMC recognised that the VCR values will form a key component of stage two of the proposed transmission
reliability framework.34 Separate VCR values will need to be developed by customer type for each NEM jurisdiction.
These are weighted to reflect the customer load composition at each connection point to derive the VCR for the
connection point. This connection point VCR value is then applied in stage two of the AEMCs transmission
reliability setting approach.35
The AEMC recommended that the AER be ultimately responsible for developing and updating future VCR values.
AEMOs VCR review methodology and review results can be used as a starting point36 that allows the AER to build
on AEMOs work.37
AEMO considers that if the proposed national transmission reliability framework is implemented, the VCR review
results can be used to help set transmission reliability standards. As outlined in Chapter 2, the residential,
business, and direct connect customer VCR values can (subject to the availability of load composition information)
be load weighted to derive connection point VCRs.
Application of VCR to proposed framework for distribution reliability

The AEMCs final report on the review of the national framework for distribution reliability proposed distribution
reliability be expressed as a reliability target in terms of the duration and frequency of unplanned interruptions.
For distribution, the AEMC considered the use of output-based reliability targets is preferable to input-based
reliability standards in providing flexibility for DNSPs to determine the most efficient way to plan and operate
their network to meet desired outcomes.38
Similar to the proposed framework for transmission, the AEMC recommended a three-stage framework to inform
distribution reliability target setting, comprising39:
1. Selection of a range of feasible reliability scenarios. This involves considering the outcomes of customer
consultation and advice from DNSPs on the physical and financial constraints of achieving different levels
of reliability.
2. An economic assessment process to compare expected capital and operating expenditures with the value
customers place on reliability for each selected scenario.
3. Selecting and publishing reliability targets for each DNSP.
33
AEMC, Final Report Review of the national framework for transmission reliability, November 2013, page 47.
Available at: http://www.aemc.gov.au/Markets-Reviews-Advice/Review-of-the-national-framework-for-transmission.
34
35
36
AEMC, Final Report Review of the national framework for transmission reliability, November 2013, pages 53-54.
37
38
AEMC, September 2013. Final report Review of the national framework for distribution reliability, page 31.
Available at: http://www.aemc.gov.au/Markets-Reviews-Advice/Review-of-the-national-framework-for-distribution.
39
AEMC, September 2013, Final report Review of the national framework for distribution reliability, page 40.
AEMO 2014 16
The economic assessment process could be supplemented by additional reliability measures needed
to accommodate specific areas of the distribution network, such as areas of high economic or social importance
that may not be adequately captured by the VCR.40
As with the proposed transmission framework, the AEMC recognises that the VCR is a key component of stage
two of the proposed distribution reliability framework.41 As part of the economic assessment process, it is intended
that VCRs are used to quantify the value of expected USE savings for each feeder type as reliability targets are
set at a feeder level. The VCRs used in this assessment process need to reflect a range of customers
and geographic locations in each distribution network.42
The AEMC considered that the AER would be responsible for developing the VCRs, but would be required
to use AEMOs VCR review methodology as a starting point. Further, AEMOs VCR results should be used
initially until it is considered that they need to be re-estimated.43
AEMO considers that the VCR review results can be applied as part of the economic assessment process
to set distribution reliability targets if the AEMCs proposed distribution reliability framework is implemented.
Using the approach set out in Chapter 2, feeder level VCRs can be derived by load-weighting residential
and VCR review results with the customer composition at the feeder level.
Implementation of the AEMCs proposed transmission and distribution reliability

frameworks
The COAG Energy Council ministers would likely need to request a rule change to implement the proposed
transmission and distribution reliability frameworks following their welcome acceptance at its 13 December 2013
meeting.44 At the COAG Energy Councils 1 May 2014 meeting, ministers asked officials to finalise a framework
document for consideration at its next meeting.45
40
AEMC, September 2013. Final report Review of the national framework for distribution reliability, pages 34-35.
41
42
43
44
SCER, 13 December 2013, SCER Meeting Communique, page 2.
45
COAG Energy Council, 1 May 2014, COAG Energy Council Communique, page 3.
AEMO 2014 17
4. OTHER VCR APPLICATIONS

Potential future applications of the VCR values, proposed in this chapter of the Application Guide, include:
Using the VCR as a cross-check on the wholesale reliability standard and settings (as recommended
by the AEMC)
Establishing the incentive level that might be offered on schemes that aim to maintain and improve network
reliability, such as the AERs Service Target Performance Incentive Scheme (STPIS)
Determining load shedding priorities in each jurisdiction
Determining the approximate upper limit of system restart ancillary services (SRAS) and network support
and control ancillary service (NSCAS) payments.
Supporting any economic justification for implementing special protection schemes to address high impact
low probability (HILP) events.
Facilitating preliminary design of customer demand response options, when used in conjunction with
interval and smart meters.
4.1 VCR and the reliability standard and settings

VCR values can help guide both reliability standards and reliability settings.
4.1.1 Reliability standard

The reliability standard for the generation and bulk transmission sectors is a planning standard used to indicate
to the market the required level of supply and demand adequacy for each NEM region. It is currently set by
the Reliability Panel in accordance with the NER.
The current reliability standard is expressed in terms of the maximum USE, or maximum amount of electricity
expected to be at risk of not being supplied to consumers, per financial year.
The Reliability Panel recommended in its 2014 reliability standard and settings review final report that: 46
AEMC or the Panel (as appropriate), in consultation with stakeholders and having regard to any VCR values
delivered by the Australian Energy Market Operator (AEMO) as part of its national VCR review, develop
a methodology to derive an appropriate estimate of VCR for use in determining the efficient reliability
standard. This work should take place prior to the next reliability standard and reliability settings review,
which is due to commence around 2017.
The results of the VCR Review are now available and have been discussed with AEMC officers. As part of the
Reliability Panel review, external consultants ROAM Consulting carried out modelling to investigate the suitability
of the current reliability standard from an economic perspective. Choosing the optimum level of the reliability
standard requires balancing the incremental cost of achieving any given standard with the incremental value
it delivers to customers.
46
Reliability Panel, 16 July 2014, Final Report Reliability Standard and Reliability Settings Review 2014, page iii. Available at:
http://www.aemc.gov.au/Markets-Reviews-Advice/Reliability-Standard-and-Settings-Review-2014.
AEMO 2014 18
On 20 December 2013, the AEMC published its final advice to the SCER, now COAG Energy Council, on linking
the reliability standard and setting with the VCR, the Commission recommended47:
that a single, VCR estimate be used in the process of setting the reliability standard and reliability settings.
Specifically, the VCR estimated for the customers most affected by a supply shortfall should be used
as a cross-check on the reliability standard to assess how well the prevailing standard reflects the value
customers place on reliability. This check would occur as the first step in the regular review of the reliability
standard, as required under the National Electricity Rules. If it was found that the prevailing standard no
longer reflected customers' reliability expectations, the reliability standard could be amended as appropriate.
The aim would be to determine a reliability standard consistent with minimising total costs to consumers.
The VCR review offers general information on the VCR for different customer groups although not directly
for customers would be most affected by a supply shortfall. The load shedding priorities are determined
by the Jurisdictional System Security Coordinator and are generally confidential.
4.1.2 Reliability settings

The reliability settings comprise the price mechanisms set out in the NER. The price mechanisms are:
the Market Price Cap (MPC) and Market Floor Price (MFP), which endeavour to ensure price signals provide
sufficient market incentive to deliver an efficient level of customer reliability (this level is the reliability standard
as defined above) consistent with the financial impact of interruption, and
the Cumulative Price Threshold (CPT), which limits the financial risk to market participants of extreme price
events, which ultimately increases costs for consumers.
It is a trade-off. Low settings will not ensure the reliability standard is met, while high settings will expose
participants and ultimately customers to undue financial risk and may lead to overinvestment in generation,
effectively delivering reliability above the cost of interruption.
The AEMC considered linking the MPC directly to the VCR of customers likely to be interrupted. This was
as an alternative to setting it indirectly by modelling against the reliability standard. Ultimately, the AEMC
recommended using the VCR only as a cross-check on the reliability standard and settings.48 The VCR review
provides information that might help such a cross-check. However, the data cannot be easily linked to the actual
VCR of those customers facing interruption in a supply inadequacy event, as these may be sub-regional shortfalls
with a different demand composition to the NEM average. If the MPC and the VCR are to be compared, it should
be the VCR for the class of customers most likely to be shed (that is, residential customers) and interruptions
of about 1 or 2 hours, which would be typical for load shedding during a generation supply shortfall.
47
AEMC, 20 December 2013, Final Report Advice to SCER on linking the reliability standard and reliability settings with VCR, page i.
Available at: http://www.aemc.gov.au/Markets-Reviews-Advice/Advice-on-linking-the-reliability-standard-and-rel#.
48
See AEMC, 20 December 2013, Final Report Advice to SCER on linking the reliability standard and reliability settings with the VCR,
http://www.aemc.gov.au/Markets-Reviews-Advice/Advice-on-linking-the-reliability-standard-and-rel#. See chapter 5 of this Final Report.
AEMO 2014 19
4.2 VCR and network regulation

The VCR may be used by regulators to establish the level of incentives that might be offered on schemes that aim
to maintain and improve network reliability. For example, the VCR currently forms an important component of the
AERs Service Target Performance Incentive Scheme (STPIS) for DNSPs.49 The incentive rates for some of the
STPIS parameters50 is calculated with reference to the VCR. It is important that the incentives offered by such
schemes to improve reliability are commensurate with, or consider, the customer value of reliability.
4.3 VCR and load shedding/restriction schedules

If there is a major supply shortfall in the NEM, AEMO must51 use involuntary load shedding to restore system
security. The NER and guidelines established by the Reliability Panel as part of the Power System Security
and Reliability Standards set out the load shedding processes. The Jurisdictional System Security Coordinator52
for each participating jurisdiction53 has responsibility to advise AEMO of the priority of load shedding for that
jurisdiction.54 Jurisdictional System Security Coordinators responsibilities also include advising
on mandatory restrictions.55
The VCRs determined in this review can be calculated for each connection point. This information may be a useful
guide to determining load shedding priorities.
4.4 Potential VCR application to non-market ancillary

services
AEMO expects there are further areas where the VCR may be applied, particularly as more detailed VCRs
are developed and processes in the NEM adapt. For example, in the VCR issues paper, it was considered
that the VCR could be used to procure non-market ancillary services (NMAS). In particular, it was considered
the VCR could cap system restart ancillary services (SRAS) and network support and control ancillary service
(NSCAS) payments.56
AEMO is required under the NER to procure primary and secondary SRAS from generators to facilitate a power
system restart following an event leading to black system conditions. The number and nature of services procured
under the scheme and the service prices paid are a trade-off procuring a higher level of restart services will result
in quicker system restoration and reduced customer impact in a system black incident. In procuring SRAS, AEMO
must use reasonable endeavours to acquire SRAS in accordance with the objectives in clause 3.11.4A of the NER.
This includes the obligation57 to minimise expected market costs of major supply disruption in the long and short
term, taking into account SRAS supply costs.
The probable length and severity of system black events may be predictable for a particular SRAS level.
The VCR may then help approximate the expected costs to the market from those predictions. Since 2006, AEMO
has procured SRAS through a tender process that determines the price paid. Using VCR to value the benefits from
acquiring particular services could help establish a falling cap on the prices that AEMO agrees to pay. Because the
VCR may not accurately estimate the impacts of widespread and/or prolonged outages58, additional offsets to the
VCR might be appropriate to estimate effects not captured through customer surveys.
49
Available at: https://www.aer.gov.au/node/7967.
50
Specifically the System Average Interruption Duration Index (SAIDI) and System Average Interruption Frequency Index (SAIFI) parameters.
51
As per clause 4.8.9 (i) of the NER.
52
Defined in section 2 of the NEL.
53
Defined in section 2 of the NEL.
54
NEL, section 110.
55
NER, clause 3.12A.2; mandatory restrictions is defined in chapter 10 of the NER.
56
AEMO, 11 March 2013, VCR Issues Paper, page 9. Available at: http://www.aemo.com.au/Consultations/National-Electricity-Market/Value-of-
Customer-Reliability-Issues-Paper.
57
NER, clause 3.11.4A(a).
58
VCR survey respondents are not expected to have a good understanding of the social and safety impacts related to widespread and/or prolonged
outages. Extrapolating survey results to cater for this kind of event might necessitate additional offsets due to the non-linear nature of a VCR over
time and space.
AEMO 2014 20
NSCAS procurement raises similar issues. However, as NSCAS is mainly supplied by network businesses subject
to economic regulation, the costs have not risen as dramatically as SRAS costs. As with the proposed application
of the VCR in SRAS, the VCR may be used to determine the approximate upper limit of NSCAS service costs.
In particular, this could be used where NSCAS tenders are not deemed competitive and AEMO must negotiate
for the supply of NSCAS.59
4.5 Potential VCR application to decisions to implement

emergency control schemes
TNSPs are required under the NER to consider whether high impact-low probability (HILP) events could potentially
endanger power system stability.60 Since the AEMCs Review of the Effectiveness of NEM Security and Reliability
in light of Extreme Weather Events61, there is increased focus on developing special protection schemes
to manage HILP event impacts.
When developing special protection schemes to manage a HILP event, an assessment should take account
of implementation costs balanced against the potential cost to customers if the HILP event were to occur.
HILP events typically result in severe, widespread and/or prolonged outages. While the VCR survey asked
participants about their willingness to pay to avoid HILP events of up to a weeks duration, the responses could
not be reasonably extrapolated for longer outages. Moreover, the survey definition of a severe outage was
qualitative (i.e. one that impacted on a few blocks) that respondents could easily comprehend. In hindsight,
this definition was difficult to apply. Without a more specific definition, it was not possible to source underlying
outage data to support the weighting of this variable in the resulting VCR values. Consequently, the severity
variable was not included in the VCR values62.
In light of this limitation, care needs to be taken if solely relying on the VCR values to provide economic justification
for implementing special protection schemes to address HILP events. When evaluating such schemes, extra
information may need to be sought to fully appreciate such an events prolonged and/or widespread consequences.
This may require assessors to directly question customers about their perceived value of specific HILP events.
There may also be a need to research international experiences of city wide disruptions, and consider expert
opinion to supplement the VCR values.
4.6 Potential VCR application to develop demand

management options
The VCR review results provide a rich dataset of residential and business customer outage attribute preferences.63
This information could be used in the preliminary design of customer demand response options, particularly when
combined with the use of interval and smart meters. This could allow for development of preliminary demand
response options earlier in the regulatory network planning processes, enabling such options to be better
compared against network solutions.
59
NER, clause 3.11.5(h).
60
NER, schedule 5.1.8.
61
Available at: http://www.aemc.gov.au/Markets-Reviews-Advice/Review-of-the-Effectiveness-of-NEM-Security-and-Re.
62
See section B.4 of the Main Report Appendix.
63
Detailed VCR review results are available in Appendix A and B of the Main Report Appendix.
AEMO 2014 21
5. ANNUAL VCR INDEXATION

This chapter outlines AEMOs approach to annual indexation of the VCR values, and explains why AEMO does
not consider it appropriate to include any transition period prior to adopting the new VCR values from this latest
review.
5.1 Indexation approach

To help maintain the currency of VCR values over time, AEMO considers it is appropriate to apply an annual
measure of indexation. Historically, differing indexation methods have been applied to the VCR values used
in network planning. Some methods maintained the real value of the VCR, while others attempted to predict
the likely change in the underlying value of the VCR between surveys.
Between 200809 and 201112, VENCorp (now AEMO) applied an income/economic growth methodology
to index the results of its 200708 Victorian VCR study.64 VENCorp adopted this methodology after a review
by NERA Economic Consulting that recommended the income/economic growth methodology over alternative
approaches.65 A key rationale was that when the 2002 Victorian VCR study results were escalated to 200708
numbers using this methodology, it was the best predictor of the 200708 Victorian VCR study results relative
to other escalation approaches.
In 2011, AEMO commissioned Oakley Greenwood to derive VCRs for all NEM states using the 200708 Victorian
VCR study results, and it reconsider the approach to indexation. In its final report on valuing reliability in the NEM66,
Oakley Greenwood concluded that the income/economic growth indices were flawed, as they ignored the effect
of changes in population and energy use.67 To better account for these factors, Oakley Greenwood proposed
incorporating the escalation factors gross electrical energy consumption in the residential, agricultural,
and commercial and industrial sectors.68 Alternatively, where gross electrical energy consumption data
is unavailable, Oakley Greenwood recommended using per capita measures rather than the aggregate
measures of income growth recommended by NERA.69
In the National Value of Customer Reliability (VCR) final report,70 which was accompanied by Oakley Greenwoods
Valuing Reliability in the NEM final report, AEMO considered but rejected Oakley Greenwoods proposed
escalation factors. New survey approaches could result in VCR values being either higher or lower than the
indexed extension of the previous measures. In future, indexation should use a non-changeable price index such
as the Consumer Price Index (CPI).71 While this approach will help maintain the real value of the VCR surveys,
it cannot predict underlying changes in VCR values.
AEMO still maintains the position set out in the National Value of Customer Reliability (VCR) final report. The
previously proposed escalation methods have not successfully predicted changes in the VCR between surveys.
As such, AEMO thinks it appropriate to index VCR values between surveys using the CPI to assist in maintaining
their real value. It is acknowledged that this approach may still lead to a step change in VCR values when new
survey results become available.
64
VENCorp, The value of customer reliability for the electricity transmission network methodology for extrapolating VCR between surveys 2008/9
2011/12, 15 April 2009. Available at: http://www.aemo.com.au/Electricity/Policies-and-Procedures/Planning.
65
VENCorp, The value of customer reliability for the electricity transmission network methodology for extrapolating VCR between surveys 2008/9
2011/12, 15 April 2009, page 5. Available at: http://www.aemo.com.au/Electricity/Policies-and-Procedures/Planning.
66
Oakley Greenwood, Final Report Valuing Reliability in the National Electricity Market, March 2011. Available at:
http://www.aemo.com.au/Electricity/Policies-and-Procedures/Planning/National-Value-of-Customer-Reliability-VCR.
67
Oakley Greenwood, Final Report Valuing Reliability in the National Electricity Market, March 2011, page 34. Available at:
68
69
70
AEMO, 19 January 2012, Final report National Value of Customer Reliability (VCR). Available at: http://www.aemo.com.au/Electricity/Policies-
and-Procedures/Planning/National-Value-of-Customer-Reliability-VCR.
71
AEMO, 19 January 2012, Final report National Value of Customer Reliability (VCR), p. 6. Available at:
http://www.aemo.com.au/Electricity/Policies-and-Procedures/Planning/National-Value-of-Customer-Reliability-VCR. See also AEMO, 11 March
2013 VCR issues paper, page 17. Available at: http://www.aemo.com.au/Consultations/National-Electricity-Market/Value-of-Customer-Reliability-
Issues-Paper.
AEMO 2014 22
5.2 Annual CPI adjustment

From the 201516 financial year, AEMO proposes that the VCR review results should be indexed each financial
year by national CPI to help maintain their real value. AEMO prefers this approach to one where the VCR values
are separately indexed for each state using capital city CPI values, which can result in unnecessary complexities
and, over time, lead to differences in the real value of the NEM-wide business sector VCR values between states.
As the VCRs are typically adjusted towards the start of the financial year, the Australian Bureau of Statistics (ABS)
March-to-March CPIs72 are generally the most appropriate.
CPI adjustment is achieved using the following CPI escalation formula:
VCRt = VCRt-1 x (CPIt-1/CPIt-2)

Where:
VCR = value of customer reliability customer class value

t = time period/financial year
CPI = the March ABS consumer price index all groups, weighted average of eight capital cities
5.2.1 Worked example

It is the start of the 201516 financial year and the VCR values need to be adjusted to maintain their real value.
Assume the March 2015 CPI is 106.573 and the March 2014 CPI is 105.4. The Victorian residential VCR for
2014-15 is $24.76/kWh.
Using these CPI values, the Victorian residential VCR would be indexed for 201516 as follows:
Victorian residential 201516 VCR = 24.76 x (106.5/105.4) = $25.02/kWh
The same escalation is applied to adjust the business sector VCR values or aggregated NEM and state VCR
values. As the numbers are indexed using the same CPI values, aggregate NEM and state VCR values can
be directly indexed. That is, for the purposes of indexing the aggregate VCRs, it is not necessary to index the
individual customer class VCRs and then recalculate the aggregate VCRs. Using the CPI values example above,
the aggregate Victorian VCR, including direct connect customers, is calculated as:
32.62 (106.5/105.4) = $32.96/kWh
5.3 Transitioning to new surveyed VCR values

Soon after the VCR review, AEMO started using the new VCR values, and reassessed all identified investment
needs not yet committed. AEMO recognises that large step changes in VCR value from one survey to the next may
reduce investor certainty and create planning challenges. Identified investment needs could be potentially delayed
or brought forward after adoption of new surveyed VCR values if changes in the values are significant.
While changes from one survey to another are likely to reflect changes in consumer sentiment, differences
in survey methodology or sampling error can also contribute to variations in the value.
Nonetheless, AEMO does not consider merit in applying smoothing techniques74 to VCR values to dampen
any step-change impact. An aim of any future NEM-wide VCR survey would be to gauge changes in consumer
sentiment. Smoothing the transition between VCR survey results will distort and delay any network planning
response to these changes in consumer sentiment. Changes in other parameters, such as annual demand
forecasts or investment costs, which can potentially have a larger impact on investment decisions, are not
generally smoothed. By using the most up-to-date forecasts, network planners are making decisions
on efficient, long-term infrastructure investment based on the latest information available, to ultimately
benefit electricity customers.
72
At the start of the financial year, the March CPI of the previous financial year is the latest CPI data available.
73
This number is not real. At the time of publication of the draft report, the ABS had not published the March 2015 CPI.
74
One such approach is adoption of a moving average VCR, whereby some weighting could be applied to previous NEM-wide VCR survey results.
AEMO 2014 23
AEMO prefers to encourage consistency, transparency and replicability in the VCR survey methodology where
possible, to minimise VCR variations that may be driven by a change in methodology rather than a change
in consumer sentiment.
In its letter to the COAG Energy Council, AEMO suggested a NEM-wide VCR survey be conducted once
every five years. Smaller scale targeted surveys may be conducted periodically between these major reviews
if changing circumstances give cause to believe that the VCR values for a particular customer class or region
may have varied significantly.
AEMO considers that a five year update strikes a balance between the costs involved in undertaking the survey
and the consumer insights obtained from updating the values more frequently. The current survey took about
18 months to complete, and was labour intensive. It would not be practical or cost effective to undertake such
a survey more regularly. Moreover, consumer sentiment is not expected to vary significantly from year to year,
and changing the VCR frequently might adversely impact investor confidence.
AEMO 2014 24
6. CONSULTATION
AEMO values the feedback it received from stakeholders during the Application Guide consultation process
and acknowledges their contribution in advancing the consistent application of VCR values to National Electricity
Market (NEM) planning and operations.
In developing this Application Guide, AEMO consulted with key stakeholders through workshops and informal
discussions, and sought formal submissions on the draft Application Guide, published on 13 October 2013.
AEMO thanks the following eight organisations for their formal submissions:
ActewAGL75
Energy Supply Association of Australia76
GreenSync77
Grid Australia78
Major Energy Users Inc.79
Networks NSW80
United Energy81
Victorian Electricity DNSPs82
AEMO also received helpful feedback from the AER and AEMC.
This final VCR Application Guide incorporates many of the recommendations received during the consultation
process, and has been updated to reflect the following sentiments:
VCRs should not solely be relied on to assess high impact or prolonged widespread outages.
Network planning should rely on a VCR that is weighted to reflect the outage conditions most likely to result
in load shedding, where appropriate.
Local VCR knowledge may supersede regional VCRs where appropriate.
Application of the 30% uncertainty threshold should be clarified.
When determining a locational VCR, the location can be defined as broadly or as narrowly as required to best
suit the needs of the assessment.
The inherent difference between VCR and MPC should be clarified.
As soon as practical, the newly established VCRs should be used, rather than the former indexed VCRs.
Appendix C paraphrases the feedback provided, and states the degree to which each recommendation was
adopted by AEMO. Some stakeholder recommendations have not been included in the body of this report
as AEMO considered them to be outside the scope of the document and/or review.
75
ActewAGLs submission is available at:
http://www.aemo.com.au/Electricity/Planning/~/media/Files/Other/planning/VCR%20Planning/ActewAGL.ashx
76
Energy Supply Association of Australias submission is available at:
http://www.aemo.com.au/Electricity/Planning/~/media/Files/Other/planning/VCR%20Planning/Energy%20Supply%20Association%20of%20Austr
alia.ashx
77
GreenSync submission is available at:
http://www.aemo.com.au/Electricity/Planning/~/media/Files/Other/planning/VCR%20Planning/GreenSync.ashx
78
Grid Australias submission is available at:
http://www.aemo.com.au/Electricity/Planning/~/media/Files/Other/planning/VCR%20Planning/Grid%20Australia.ashx
79
Major Energy Users Inc.s submission is available at:
http://www.aemo.com.au/Electricity/Planning/~/media/Files/Other/planning/VCR%20Planning/Major%20Energy%20Users%20Inc.ashx
80
Networks NSWs submission is available at:
http://www.aemo.com.au/Electricity/Planning/~/media/Files/Other/planning/VCR%20Planning/Networks%20NSW.ashx
81
United Energys submission is available at:
http://www.aemo.com.au/Electricity/Planning/~/media/Files/Other/planning/VCR%20Planning/United%20Energy.ashx
82
Victorian Electricity DNSPs submission is available at:
http://www.aemo.com.au/Electricity/Planning/~/media/Files/Other/planning/VCR%20Planning/Victorian%20Electricity%20DNSPs.ashx
AEMO 2014 25
APPENDIX A. LOSSES
A.1 Adjustment for losses
Customer VCR estimates, measured at the customer premises, should be adjusted for any losses incurred serving
the customers between the end-use itself and the part of the network supplying them.
When applying the VCR, consideration of network losses should be taken into account when calculating USE,
as VCR estimates are measured at the customer premises rather than at network level. This adjustment scales
down USE as measured in the network to USE experienced by customers, to ensure the losses associated with
supplying customers are not also costed into the VCR. Figure 6 provides an example of the adjustment of USE
to account for losses.
Figure 6 Electricity supply chain adjustment of losses
Losses may occur at both transmission and distribution level and both, if relevant, should be accounted for.
For example, if USE is calculated at regional level it is typically measured sent-out from the generator connection
point. In this instance, both transmission and distribution loss factors should be applied to the level of USE before
applying the VCR. On the other hand, if USE is calculated at the transmission connection point, only distribution
loss factors should be applied.
A special case is USE affecting direct connect customers rather than supplied through the distribution network,
as these are not affected by distribution losses.
For distribution level application, only adjustment for losses incurred at feeder level may be appropriate, particularly
if applied at high-voltage distribution level.83
Overall, when considering materiality, typical average distribution losses of around 5% may appear insignificant
to the error margin of the VCR estimate itself, but distribution losses in rural areas may be substantially higher.
Also, when doing studies at the transmission level, it is relevant to adjust USE by losses through to the end
customer given that there will be more losses to account for. In particular it is important to maintain the correct
relativity when comparing options at distribution level with options at either transmission level (additional losses)
or options affecting reliability directly at customer premises, such as residential storage systems.
83
Sometimes referred to as sub-transmission level.
AEMO 2014 26
A.2 Sources of information on network losses

Data on network losses is publicly available from various sources, including:
Distribution loss factors approved by AER under clause 3.6.3 of the NER.84
Loss factors & regional boundaries published by AEMO. 85
The National Electricity Forecasting Report published by AEMO.86
For example, Table 9, sourced from the AER87, shows how average losses incurred in distribution vary between
customers connected at sub-transmission level, intermediate voltages, or low voltage (LV) lines for Ergon Energy,
which serves customers across Queensland with the exception of south-east Queensland. Losses in the LV
network in western rural areas are much higher than in the eastern coastal region. These losses can be close
to 20% on average and higher at time of peak.
Table 8 Ergon Energys distribution loss factors to be applied in 2014-15

DLF applied in 2013/14 DLF to apply in 2014/15
East West Mount Isa East West Mount Isa

Sub-Transmission. Bus 1.007 1.060 1.002 1.005 1.055 1.001
Sub-Transmission. Line 1.012 1.091 1.005 1.011 1.086 1.005
22/11kV Bus 1.014 1.098 1.008 1.015 1.093 1.007
22/11kV Line 1.033 1.132 1.036 1.034 1.127 1.035
Low Voltage Bus 1.073 1.173 1.057 1.079 1.174 1.056
Low Voltage Line 1.078 1.184 1.087 1.094 1.184 1.060
In most instances, it is appropriate to use average rather than marginal distribution losses, either by state
or DNSP. Average distribution losses by state were estimated by AEMO as part of its 2013 NEFR88 and are
shown in Table 9. These are generally based on recent losses reported to the AER by DNSPs as part of the
annual Distribution Loss Factor approvals process. Standardising the reporting of distribution losses by DNSP
would improve the ease with which aggregate regional distribution loss factors can be sourced and applied for
this purpose.
Table 9 Estimated distribution losses in Australia (% of transmitted energy)

NSW QLD SA TAS VIC
4.8% 5.4% 6.1% 5.4% 5.2%
Where losses are used to adjust regional USE estimates to USE estimates measured at the customer premises,
regional average transmission and distribution loss estimates should be applied.
AEMO reports historical and forecast transmission network losses in the forecasting data accompanying the annual
NEFR. From this information, annual average regional transmission loss factors can be derived.
84
Available at: http://www.aer.gov.au/taxonomy/term/1120. See also Distribution Loss Factors published by AEMO, available at:
http://www.aemo.com.au/Electricity/Market-Operations/Loss-Factors-and-Regional-Boundaries/.
85
Available at: http://www.aemo.com.au/Electricity/Market-Operations/Loss-Factors-and-Regional-Boundaries.
86
Available at: http://aemo.com.au/Electricity/Planning/Forecasting/National-Electricity-Forecasting-Report-
2013/~/media/Files/Other/planning/NEFR/2013/Forecast%20Methodology%20Information%20Paper.pdf.ashx.
87
AEMO, July 2014, Distribution Loss Factors for the 2014/15 Financial Year, page 5. Available at: http://www.aemo.com.au/Electricity/Market-
Operations/Loss-Factors-and-Regional-Boundaries/
88
Available at: http://aemo.com.au/Electricity/Planning/Forecasting/National-Electricity-Forecasting-Report-
2013/~/media/Files/Other/planning/NEFR/2013/Forecast%20Methodology%20Information%20Paper.pdf.ashx.
AEMO 2014 27
APPENDIX B. REWEIGHTING VCR VALUES

In order to calculate a reweighted VCR which reflects the characteristics of a specific part of the network,
the approach below can be applied. The approach is outlined through an example calculation.
Step 1: Based on actual historical outage data of the network being investigated, the VCR outage tables
are revised. A hypothetical outage profile for the scenario in section 2.3 is given in Table 10.
Table 10 Revised outage probabilities

Outage duration (hours) Off-peak Peak Off-peak Off-peak Peak Off-peak
weekday weekday weekend weekday weekday weekend
winter winter winter summer summer summer
0 to 1 1% 10% 2% 1% 21% 2%
1 to 3 4% 11% 2% 4% 39% 2%
3 to 6 0% 0% 0% 0% 1% 0%
6 to 12 0% 0% 0% 0% 1% 0%
Step 2: The probability of each outage time is multiplied by the corresponding VCR for that time
(shown in Table 11). Please note the VCR values by event have not changed.
Table 11 VCRs by event for Victoria residential ($/kWh)

Outage duration (hours) Off-peak Peak Off-peak Off-peak Peak Off-peak
weekday weekday weekend weekday weekday weekend
winter winter winter summer summer summer
0-1 8.6 28.14 8.6 8.6 28.14 8.6
1 to 3 36.79 36.02 36.79 36.79 36.02 36.79
3 to 6 26.17 24.12 26.17 26.17 24.12 26.17
6 to 12 18.79 16.54 18.79 18.79 16.54 18.79
Mathematically this can be described by:
= , ,
,
Where:
P is the array of outage probabilities,

Q is the array of VCR values,
is the number of event classes in the P and Q vectors (e.g. Off-peak weekday winter)
is the number of outage durations in the P and Q vectors (e.g. 0-1 hours)
The result of this calculation is a residential VCR of $32.08/kWh
AEMO 2014 28
APPENDIX C. STAKEHOLDER FEEDBACK

The following table provides a summary of the stakeholder feedback received in response to the draft
Application Guide and includes AEMOs response to the feedback.
Table 12 Stakeholder feedback on Draft Application Guide

Comment Proposed by AEMOs response
VCR surveys should be GreenSync, Grid AEMO has included a new Section 5.3 to discuss this.
more frequent Australia and United
Energy
The outcomes of VCR GreenSync, United AEMO has included a new Section 5.3 to discuss this.
surveys should be applied Energy, and the
with a moving average Victorian Electricity
DNSPs
Elaborate on transitioning Grid Australia AEMO believes that the newly established VCRs should be applied
from indexed VCRs to as soon as practical and has stated that it intends to apply the range
newly established VCRs of VCR values in carrying out its national and Victorian transmission
planning functions, effective immediately. AEMO has included a new
Section 5.3 to discuss this.
VCRs should not be used Energy Supply AEMO acknowledges that the VCR survey respondents might not
to assess high impact or Association of have a good understanding of the social and safety impacts related
prolonged widespread Australia, Grid to widespread and prolonged outages. While the VCR survey asked
outages Australia, Networks participants about their willingness to pay to avoid High Impact Low
NSW, and the Probability (HILP) events of up to one weeks duration, the responses
Victorian Electricity could not be reasonably extrapolated for longer widespread outages.
DNSPs In light of this limitation, the VCR values developed are not intended
to be solely relied upon to provide economic justification for
implementation of special protection schemes to address HILP
events. In evaluating such schemes, additional information should
be sought to fully appreciate the widespread consequences of such
an event.
See Sections 4.4 and 4.5 for further discussion.
Provide for the calculation Victorian Electricity AEMO agrees that there may be instances when it is appropriate
of specific VCRs that DNSPs, GreenSync to reweight the outage scenarios to target outages most likely to lead
reflect the outages and United Energy to load shedding. See section 2.3 and Appendix B for an example
scenarios that are most of how this might be considered in practice.
likely to drive the need for
network investment
A lower VCR discourages GreenSync and AEMO acknowledges that a lower VCR has the potential to defer both
non-network investment United Energy network and non-network investments and reduce reliability. AEMO
and reduces reliability believes that the latest VCR figures reflect the current consumer
sentiment to reduce rising network charges.
AEMO should address GreenSync and Not addressed in the body of Application Guide as it relates to the
variables that were not United Energy survey rather than the application of VCR.
deemed statistically As explained in the Value of Customer Reliability final report, only
significant variables with a minimum of 99% significance were included in the
development of the VCR $/kWh values. This was to ensure strong
statistical robustness of results and minimise the likelihood of false
inferences that could have a sizable impact on the final VCR values.
However, in the interest of transparency, the coefficients for other
outage variables have been provided in the tables included in the
VCR final report appendix, along with the statistical significance of
each variable.
In some instances, outage variables were not statistically significant
but intuitively were expected to have had an impact on the VCR
value. For example, several stakeholders expected seasonality and
severity to be statistically significant but this was not supported in the
survey results. AEMO recommends that future VCR surveys target
questions around these outage variables to better understand
whether the unexpected outcomes are due to statistical uncertainty
or challenge our conventional thinking on drivers of VCR.
For a regulatory Grid Australia AEMO considers that any decision relating to the process
investment test, the VCR of a regulatory investment test should be made by the AER,
should remain fixed after a and does not believe that an opinion should be promoted in the
PADR VCR Application Guide.
AEMO 2014 29

Local VCR knowledge ActewAGL AEMO accepts that local knowledge may more accurately reflect
should supersede regional consumer sentiment in a specific location, and could perceivably be
surveys substituted for regional VCR values when backed by sound evidence
of equal or greater quality, accuracy and statistical validity than the
AEMO approach. A new Section 2.4 has been included to discuss
this.
VCR may understate the Grid Australia AEMO considers the calculation of VCRs based on detailed local
impact of outages in the knowledge or customer specific information is appropriate in certain
CBD and for certain direct situations, such as for a direct connect customer. A new Section 2.4
connect customers has been included to discuss this.
Address the estimation Grid Australia and Given the importance of the VCR in network planning, AEMO
error and elaborate on the Victorian considers it prudent to undertake sensitivity analysis to test how
application of the 30% Electricity DNSPs sensitive investment decisions are to the VCR input. Based on advice
uncertainty threshold from academic advisors, a range of +/-30% VCR is considered
reasonable for this purpose. A new Section 3.4 has been included
to discuss this.
CPI escalation implies a Major Energy Users CPI escalation corrects the VCR for inflation, and AEMO considers
level of exactness that is Inc. there to be no justification for allowing VCR values to fall in real
simply not there and terms. Assuming a CPI growth rate of 2.5%, after five years, if no CPI
makes the assumption that escalation occurs the VCR value would be 13.1% lower in real terms
the VCR will rise than it is today.
For application of a Major Energy Users The intention for a locational VCR is that a location can be defined
locational VCR, Inc. as broadly or as granularly as required for an assessment.
clarification is needed with Clarification has been included in Section 3
respect to how a "location"
is defined
A new class should be Major Energy Users This recommendation relates to the determination of VCRs rather
added for direct connects Inc. than their application. AEMO held an extensive period of consultation
to the sub-transmission prior to the development of VCRs to seek feedback on the approach
network for developing VCRs. The classes of customers targeted in VCR
surveys is not within the scope of the VCR Application Guide, but
may be considered in future reviews of the VCR approach.
AEMO should reinforce the Major Energy Users AEMO believes that the limitations of the VCR development process
limitations inherent in the Inc. were well described in the Value of Customer Reliability final report89
development process used and do not need to be restated in the VCR Application Guide.
for assessing VCRs
Because of the shortfalls Major Energy Users During consultation and development of the VCR survey
in surveying, other tools Inc. methodology, the pros and cons of surveying were discussed
should be used (where extensively and contrasted with other tools available. On balance,
available) to assess the stakeholders agreed that a survey would be the most appropriate tool
needs of customers for developing VCR values.
Nonetheless, AEMO acknowledges that the VCR survey results may
be supplemented by local knowledge where applicable to more
accurately reflect consumer sentiment for a subset of the community.
Additionally, as already noted, for widespread and prolonged outages
other tools may need to be applied to determine the most appropriate
VCR value.
Section 2.4, 4.4 and 4.5 for more discussion.
State that a VCR could be Networks NSW AEMO believes that VCR Application Guide should focus on the
combined with a minimum application of a VCR within an economic planning approach, and
service standard approach should not attempt to detail the planning standards and requirements
for network service providers.
VCR and MPC are Energy Supply AEMO has modified the text in Section 4.1.2 to make it clear that the
inherently different Association of AEMC recommendation was not to link the VCR and MPC but rather
Australia to use the VCR as a cross-check on the reliability standards and
settings. It is also noted that, in selecting the most appropriate VCR
for comparison, consideration should be given to the type of customer
likely to be impacted and the type of outage most representative
of generation supply shortfalls.
89
AEMO. Available at http://www.aemo.com.au/Electricity/Planning/~/media/Files/Other/planning/SAAF/VCR_final_report__PDF.ashx
AEMO 2014 30

AEMO's application guide Energy Supply AEMO does not believe that there is value in reproducing content
should make it clear that Association of from the AEMCs report on reliability standards and settings90 in the
the VCR is one of eight Australia VCR Application Guidelines.
factors considered by the
Reliability Panel in setting
the Reliability Standards &
Settings
Clarification is needed to Networks NSW This recommendation relates to the scale of VCRs rather than their
explain the VCR difference application, which is currently under consultation. It is difficult to make
from the AEMC survey a comparison between the outcomes of two entirely different survey
approaches, nor was it part of AEMOs scope to do so.
90
Reliability Panel AEMC, Reliability Standard and Settings Review 2014. Available at: http://www.aemc.gov.au/Markets-Reviews-
Advice/Reliability-Standard-and-Settings-Review-2014#
AEMO 2014 31

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make no representation or warranty, express or implied, as to the currency, accuracy,

2. DERIVING REPRESENTATIVE VCR VALUES 6

3. APPLICATION TO NETWORK PLANNING 10

4. OTHER VCR APPLICATIONS 18

5. ANNUAL VCR INDEXATION 22

APPENDIX B. REWEIGHTING VCR VALUES 28

1. OVERVIEW OF VCR REVIEW RESULTS

1.1 VCR review results for different customer classes

Table 1 Residential VCR review results ($/kWh)

Table 2 Business VCR review results ($/kWh)

1.2 VCR values by NEM region ($/kWh)

Table 4 Aggregate VCR values for NEM and states ($/kWh)

2. DERIVING REPRESENTATIVE VCR VALUES

2.1 Demand weighted locational VCRs

Distribution level (Level 1, as indicated in Figure 1).

Transmission Use for

Figure 2 Weighted VCR calculation at distribution level example

Transmission connected Agriculture 5% 47.67

Table 5 Example comparison between Victorian state-level and locational demand-weighted

2.2 Basis for demand-weighting VCRs

2.2.1 Weighting using maximum demand or annual energy

2.2.2 Weighted VCR based on the type of USE involuntary or voluntary

2.2.3 Weighted VCR based on USE type targeted or untargeted

Targeted8 VCR based on mix of demand likely to be shed:

2.3 Re-weighting outage probabilities for

2.4 Local knowledge can be applied if appropriate

3. APPLICATION TO NETWORK PLANNING

3.1 Application by AEMO as Victorian and national

Table 6 Locational VCR in assessing USE

Table 7 Aggregate VCRs used in valuing USE

3.2 Using VCR values directly in network planning

3.2.1 Regulatory investment test

What type of involuntary load shedding has been identified?

Involuntary load shedding Involuntary load shedding

Locational value of electricity derived by Aggregate state VCR(s) used to represent

3.2.2 Accounting for losses

Adjustment for losses is further discussed in Appendix A.

3.2.3 Accounting for embedded generation

3.2.4 Accounting for demand side participation

AEMO publishes an annual DSP forecast as part of the NEFR.30

3.3 Network replacements

3.4 Sensitivity analysis

3.5 Using VCR values to guide network planning

3.5.1 Application to the AEMCs proposed national frameworks for transmission

VCR application to proposed framework for transmission reliability

Application of VCR to proposed framework for distribution reliability

Implementation of the AEMCs proposed transmission and distribution reliability

4. OTHER VCR APPLICATIONS

4.1 VCR and the reliability standard and settings

4.1.1 Reliability standard

4.1.2 Reliability settings

4.2 VCR and network regulation

4.3 VCR and load shedding/restriction schedules

4.4 Potential VCR application to non-market ancillary

4.5 Potential VCR application to decisions to implement

4.6 Potential VCR application to develop demand

5. ANNUAL VCR INDEXATION

5.1 Indexation approach

5.2 Annual CPI adjustment

CPI adjustment is achieved using the following CPI escalation formula:

VCRt = VCRt-1 x (CPIt-1/CPIt-2)

VCR = value of customer reliability customer class value