Getting ready for five minute settlement – sending better signals for investment in fast response technologies like batteries, new generation gas peaker plants and demand response

By Prabpreet Calais, Senior Adviser - Retail and Wholesale Markets

Behind the scenes quietly, a lot of work is going on to implement a fundamental redesign of electricity wholesale market. Both the market operator, AEMO, and many industry participants are completely revamping their IT systems to prepare for this change, which will underpin a future-ready power system.

AEMO is leading working groups of industry and market body representative to coordinate and prepare for the change in settlement period for the electricity spot price from 30 minutes to five minutes, starting in 2021. It’s a radical reform and a long, hard, detailed process of change – and it will produce the outcomes that people want.

The change will help reward fast responders, like batteries; new generation gas peaker plants; and demand response providers. With more wind and solar generation entering the market there’s an important role for fast response generation and services to plug the gaps when the wind isn’t blowing and the sun isn’t shining.

It’s been 18 months since the AEMC made the historic five minute settlement rule change in November 2017. Since then, AEMO has taken charge of the implementation process and is working with industry to prepare for the fundamental changes that will come into effect on 1 July 2021.

Three dedicated five minute settlement working groups have been created to engage with industry and market bodies on procedure updates, system updates and industry readiness.

The three working groups are

  1. Procedures – working with industry to review and where required implement changes to over 17 detailed procedures
  2. Systems – responsible for the design, development, testing and implementation of IT and metering systems to support the changes
  3. Readiness – responsible for ensuring all participants are prepared for the transition and commencement of the rule

In addition to the three dedicated working groups, AEMO has established a program consultative forum and an executive forum to provide an opportunity for market participants to contribute and to provide oversight of the whole implementation process.

While the AEMC’s formal role may have ended with the making of the rule, we are still in close consultation with AEMO through the implementation process.

Commission staff who managed stakeholder engagement on the five minute settlement project and who prepared the final determination were seconded to AEMO to help with implementation. Other AEMC staff are participating as members of working groups which are preparing the national energy market for its crucial transition to the future.

Aligning the physical needs of the system to structural reform

Aligning the physical operation of the electricity system – which matches demand and supply every five minutes – with the price signal provided by the market for that five minutes will result in lower electricity prices that more accurately reflect the needs of both the system and consumers.

Improving the accuracy of the price signal will also encourage efficient investment and innovation to enter the market. Each year the energy sector sees more new energy service providers offer consumers greater control over their energy generation and use. The five minute settlement changes will help consumers better reap the rewards of an increasingly agile energy market.

Changing the way we operate the power system will encourage:

  1. Efficient investment in new technology like batteries which can back-up variable generation like wind and solar
  2. Efficient consumer participation in the market through demand response
  3. Efficient responses from generators of all types

Lower wholesale electricity costs and a more reliable power system

Over time improved price signals should lead to more efficient decisions by generators – lowering wholesale costs which make up around one-third of a typical power bill; creating a more reliable power system that facilitates investment in fast response and flexible technologies which back up the system in real time; and rewarding customers who respond to price peaks and reduce their consumption accordingly.

Background on the five minute settlement rule

In December 2015, the AEMC received a proposal from a large zinc refinery in northern Queensland to fundamentally change how the national electricity market operated. The proposal was to move to financial settlement of the electricity market every 5 minutes, instead of the current 30 minutes which is calculated by the average of the six 5 minute periods that make up each 30 minute interval.

The current 30 minute settlement interval reflects the limitations in metering, data collection and IT systems that existed at the beginning of the national electricity market in 1998. Twenty years on we have access to far more sophisticated equipment, systems and energy services which have the capability to support financial settlement of the market every 5 minutes.

While this change seems relatively small and straightforward, numerous processes – including financial transactions, data collection and IT systems – have all been designed around the traditional 30 minute settlement period.

The change to the market rules impacts existing operational behaviour, IT systems and investment incentives for the industry, which means implementation has considerable costs. However, these costs are balanced with significant, long-term benefits for the transitioning energy sector. It was a change that could invigorate the national energy market, and prepare it for a more dynamic and agile future.

Similar changes to the settlement period have been considered in international markets such as New Zealand and some US markets and it has taken considerable time to work through the issues associated with such a change.

Working with stakeholders on fundamental market change

To fully consider the implications of such a significant change to the fundamental frameworks that underpin how electricity is bought and sold, the AEMC undertook an extensive consultation process. The Commission worked closely with industry, market bodies, and new entrants that represented the increasing range of innovative new energy services in the NEM. The aim was to develop a policy that would be in the long term interest of consumers.

Critical to the success of the five minute settle rule change was the relationship with AEMO, the market operator, who provided detailed support and expertise in most of the technical areas and is now project managing implementation and industry readiness in preparation of a July 2021 start date.

The AEMC undertook three formal rounds of consultation, held over 110 stakeholder meetings, held a public forum attended by close to 100 stakeholders which included nine presentations by industry and consumer representatives and four presentations by Commission staff, and considered 114 written submissions.

In the end, the Commission opted to go ahead with the rule change, allowing for a three and a half year transition period to minimise implementation costs – keeping the costs of transition as low as possible for consumers.


AEMC Executive General Manager David Feeney and Senior Adviser Prabpreet Calais (at right) collaborating on the implementation of five minute settlement with AEMO Stakeholder Engagement Specialist Monica Morona, AEMO Chief Strategy and Markets Officer Peter Geers and AEMO Analyst Austin Tan.