It’s time the energy market transitioned to a five-minute settlement period that better supports transformation of our energy system by recognising the value of new technologies like renewable energy and energy storage.
Five minutes may not sound like much time to do anything. But it is a very important stretch of time when it comes to keeping the lights on across the country. The power production of generators is controlled at every five minute interval, every day of every year.
Like the rest of the world, Australia is starting to move away from inefficient old fossil fuel power plants to a future where renewable energy and energy storage technology is the new normal.
But some fundamental changes are needed in order to fully realise the benefits of these new technologies in an energy system which was designed to make the most of the old ones.
One of these relates to the way those who supply electricity to the national market are paid.
A change from the current 30-minute settlement period to a five-minute settlement period would deliver lower power prices for consumers and reward the very fast responses that are possible with technologies such as renewable energy, battery storage and demand response (more on this in the section below).
The Clean Energy Council supports the change from the current 30-minute settlement period to a system where the price of power settles every five minutes so that actions in the market are immediately rewarded.
This change was one of 13 recommendations the Clean Energy Council made in the policy paper Charging Forward: Policy and regulatory reforms to unlock the potential of energy storage in Australia.
The Clean Energy Council also made a policy submission to the Australian Energy Market Commission (AEMC), which sets the rules for the electricity market and is currently considering whether to make this change. Early signs are promising.
This idea is explained in more detail in the following section.
What is five-minute vs 30-minute settlement?
The Australian Energy Market Operator (AEMO) is responsible for the operation of Australia’s electricity system.
Every five minutes AEMO matches the amount of power that is required across the country (demand) with the amount that is available from power plants (supply). The operators of power plants bid against each other to supply power as part of this process.
AEMO takes the lowest bid first and continues to accept bids until the demand for power is met.
Although this process of matching supply and demand happens every five minutes, the final payment that power generators actually receive is determined every half hour when the market “settles”. This payment is set by averaging the six previous five-minute prices.
This is known as the “settlement price” and it’s what is paid to every power plant for every unit of energy, or megawatt-hour of energy generated in the previous half hour period.
Why is change required?
One reason is that the current system is costing consumers more than it needs to.
If the price of power is significantly higher during one five-minute block of a 30-minute period, this substantially increases the price for power users during that whole time. This is because the final price is an average of each of these five-minute blocks across the whole 30 minutes.
There is evidence that some generators are strategically bidding in ways that increase the settlement price and using their market power to inflate the wholesale prices and consumer costs (AEMC 2017).
Another reason is that new technologies such as storage and demand response can act extremely quickly to meet sudden changes in the need for power that can save money across the system. However, the misalignment of bidding and settlement means we cannot make the most of these new opportunities.
When the market was designed, the 30-minute settlement period was chosen because we did not have the technology to properly respond in the five-minute timeframe. Generators at the time needed greater price certainty over a longer period. There are now more competitive fast-acting technologies available that mean these arrangements are no longer required.
In the words of the AEMC, the settlement “price signal is also not technology neutral, in that it supports the viability of existing incumbent generation at the expense of flexible fast response technologies that could better respond to the price spike. This is particularly important in considering how 30 minute settlement effects efficient innovation and investment over time.”
The change to five-minute settlement is a natural evolution for the market. It will not only lead to greater competition but also support the kinds of firm and flexible generation, storage and demand response needed as the energy market transitions towards more renewable energy. It would be good for innovation, and this is ultimately good for the prices consumers pay for their power.
What is the process from here?
Zinc refinery Sun Metals Corporation has proposed an electricity market rule change to the AEMC, which would alter the settlement period in the market from 30 minutes to five minutes.
The AEMC will consider all recommendations and publish a draft determination on 4 July 2017, with a final determination to be published in September this year.
AEMC, Five Minute Settlement, directions paper, 11 April 2017, Sydney, p. 26