Fast response energy – directions paper for five minute settlement

11 April 2017

In a directions paper released today, the Australian Energy Market Commission has outlined the impacts of changing the settlement period for the electricity spot price from 30 minutes to five minutes.

AEMC Chairman John Pierce said the proposed change would signal more accurately the value to consumers of fast response technologies, such as aggregating distributed storage, new generation gas peaker plants and rapid demand response, which are needed to support the increasing penetration of intermittent wind and solar generation in the sector.

“With more wind and solar generation, along with the retirement of thermal generators like Hazelwood, there is an increasingly important role for flexible and fast response generation and services,” said AEMC Chairman John Pierce.

“It’s essential that we have mechanisms that appropriately value the contribution of different generation sources to the long term interests of consumers, not only using the technologies of today – but the technologies of the future,” Mr Pierce said.

”We are now calling for public submissions to provide more detailed evidence on the costs and benefits of this fundamental change to the design of the national electricity market.”

A move to five minute settlement would align the physical electricity system – which matches demand and supply every five minutes – with the price signal provided by the spot market for that five minute period.

An efficient price signal will help drive investment in the range of technologies required to meet consumers’ future electricity needs.

The Commission also notes that moving to five minute settlement is likely to lead to changes in bidding behaviour, which means historical patterns of five minute dispatch prices may not be a good guide for the future. For example, five minute settlement may lead to less volatility than displayed in the current five minute dispatch prices, with fewer and lower price spikes, and therefore the revenues for fast response generation technologies may be less than expected.

It is also essential to have clear, national, co-ordinated policy objectives, particularly in relation to the integration of emissions and energy policy, to provide the level of certainty needed for business and consumers to invest.

The directions paper identifies a number of significant implementation issues. A change to five minute settlement would create one-off metering and IT system upgrade costs. More importantly, it will disrupt wholesale contract markets which play an essential role in managing risk, reducing uncertainty, and lowering the barriers to entry faced by new competitors in the market.

A transition period would be needed to give contract markets time to adjust. The AEMC’s initial view is that a transition period of around three years would be short enough to capture the benefits of moving to five minute settlement, while minimising implementation costs and risks. We will consult with stakeholders to get a more detailed understanding of costs and benefits before making a draft determination.

To facilitate stakeholder input on the directions paper, a public forum will be held on 4 May in Sydney. It will also be webcast live and a recording will be made available later. Stakeholders can register their interest in participating at www.aemc.gov.au

Submissions on the directions paper close on 18 May 2017. The AEMC intends to publish a draft determination on 4 July 2017.

Media: Bronwyn Rosser  0423 280 341 or (02) 8296 7847

 

Background

The five minute settlement rule change proposal was submitted by Sun Metals Corporation, a zinc refinery and large energy user. Under the National Electricity Rules, any individual, group or organisation can lodge a rule change request or submission with the AEMC.

A working group including generators, retailers, new technology providers, consumer groups, financial institutions, large energy users, the market operator and regulator, has been helping the AEMC assess this rule change proposal. The directions paper has been prepared in response to the group’s request for additional consultation on implementation issues and timeframes.