Five minute settlement: a fundamental change to the national electricity market design

This rule change request proposed changing the settlement period for the wholesale electricity spot market from 30 minutes to five minutes.

It was considered against the background of market transformation, where a greater proportion of generation is being supplied by low emissions technology and there is an increasing range of new energy services on offer.

A move to five minute settlement will 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.

A more accurate price signal will provide incentives for efficient investment in the range of technologies required to meet consumers’ future electricity needs.

The project

The AEMC published a directions paper in April 2017 which outlined the Commission’s initial view that the adoption of five minute settlement is in the long-term interest of consumers.

The paper set out a proposed design of how five minute settlement could work so that stakeholders could provide comments.

We received more than 40 submissions in May and June that raised substantive new issues affecting the costs and benefits of the proposed rule change and required additional analysis.

Stakeholders also argued that the AEMC give greater emphasis to the risks when determining the appropriate length of time for any transition period if the rule change is made.

Our public forum in May 2017, featured presentations by a diverse range of stakeholders and offered an opportunity for stakeholders to provide feedback on the AEMC’s analysis and the proposed three year transition period.

In his introduction, AEMC Chair John Pierce highlighted the importance of considering the impact of five minute settlement on hedge markets in the context of the important role they play in underpinning the reliability of supply.

The AEMC published a draft determination on five minute settlement in September.

On 28 November 2017, the Australian Energy Market Commission made a final rule to change the settlement period for the electricity spot price from 30 minutes to five minutes, starting in 2021.

The international experience

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

The Federal Energy Regulatory Commission in the United States took two years to make a final decision to align dispatch and settlement. Following this decision, the timeframe for implementing the change was close to two years.

Changes to settlement arrangements in the New Zealand electricity market have been under consideration by the NZ Electricity Authority since 2013 and an implementation proposal is expected in July 2017. New Zealand’s implementation is anticipated to take four years.