Marginal loss factors (MLFs) in Australia’s National Electricity Market (NEM) account for losses on the electricity network. They can vary significantly from year to year and within the same state, impacting battery energy storage revenues.
This article briefly outlines the rationale for MLFs, the factors that affect them, and their key effects on batteries.
What are marginal loss factors?
The NEM has five price regions, and every location in the same region receives the same spot price. However, each state is large and has different network dynamics throughout. Both fossil and renewable generators can be in remote rural areas, and their energy needs to travel long distances on the transmission network to energy consumers concentrated in a few areas.
Some energy flowing through transmission lines is lost, and as more power flows down a line, the proportion of energy lost grows. Marginal loss factors (MLFs) represent those losses to incentivise building generation and demand in locations where they would minimise network losses.
A low MLF (i.e. 0.85) indicates that an extra MW of energy injected into the grid causes a lot of network losses. This happens in areas already crowded with generation, with the lower MLF penalising generators there.
Conversely, a higher MLF, such as 0.98, indicates that the generator will not cause significant network congestion issues. They will receive a higher multiplier to its revenues, an incentive for building generation there. MLFs can even exceed 1, which indicates that additional generation at a particular location would reduce total network losses.
The settlement price that a generator ultimately receives for energy, or the cost that a demand node must pay, is the regional spot price times the relevant MLF.
Generation and load profiles, as well as location, affect marginal loss factors
MLFs for a unit are defined by the network losses between the unit’s transmission connection point and the state's regional reference node (RRN). (At the state RRN, MLFs are exactly 1.)
The Australian Energy Market Operator (AEMO) calculates forward-looking MLF annually based on each generator or load's location and power profile. They do this by projecting the generation and demand profiles for locations in the NEM for the next financial year. Most batteries are bidirectional units with two different MLFs for export/generation and import/load.
MLFs are calculated based on power profiles as well as location on the network. As a result, two generators (including batteries) near each other on the network may have very different MLFs if their different profiles impact network losses differently.
If a generator exports at the same time nearby generators do, it will generate when the network is highly congested and cause more losses, leading to a lower MLF. Conversely, if the generator avoids feeding into the grid when congestion is high, it can receive a higher MLF than other nearby generators.
This means that batteries can receive favourable MLFs when located near generators with very different power profiles, such as solar farms.
MLFs can have significant and unpredictable impacts on battery revenues
Marginal loss factors can have a material impact on the revenue a battery receives from generation. For example, for the 2024-25 year ending June, Wallgrove BESS in Western Sydney received an export MLF of 1.001. Broken Hill BESS in far west New South Wales received an export MLF of 0.8423, over 15% lower.
Since the settlement price that a generator actually receives is the state spot price times the export MLF, Broken Hill would receive 15% lower value from exports than Wallgrove if they shared the same dispatch profile.
As value earned for exporting power can be significantly greater than the cost of charging, export MLF has a higher impact on overall battery revenues.
MLFs for all assets, including batteries, can change by multiple percentage points from year to year. This can be due to changes in the asset's projected generation/load profile and nearby generation, load, and transmission.
An example is the 60 MW/120 MWh Riverina 1 BESS located in southwest New South Wales. Its export MLF decreased by 4.26% from financial year 2023-24 to 2024-25.
Other nodes in southwest NSW have also seen their marginal loss factors drop. According to AEMO, this is due to reduced congestion in the area, leading to relaxation of network constraints. This allowed for increased local generation output, thus increasing flows and losses between the area and the RRN.
As MLFs are calculated through AEMO modelling, changes in the modelling methodology can also affect them. AEMO has identified that its current methodology does not capture all drivers behind battery energy storage behaviour, meaning that they could change the methodology in the future and so future expectations of MLFs are uncertain.