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Garnaut slams AEMC move to delay 5-minute settlement switch

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The Australian Energy Market Commission has finally agreed to recommend a new rule that would change the  settlement period for the electricity spot price from 30 minutes to five minutes – a development that could underpin massive investment in battery storage in Australia.

But its decision to put off the implementation of the 5-minute until July, 2021 – at the earliest – has been slammed by leading experts, who say the decision will simply reinforce the position of the fossil fuel generators currently fleecing wholesale energy markets, and delay the entry of new technologies,

Professor Ross Garnaut, the eminent economist who is also chairman of Zen Energy, said the decision would cause an unnecessary delay in the introduction of modern technologies to stabilise the electricity market.

“The new technologies are required urgently in response to increasing rates of failure of conventional power systems, increased intensity of extreme weather events and increasing roles for intermittent generation,” he said in an emailed statement to RenewEconomy.

“Confirmation of the delay in introduction of 5-minute pricing would be a setback for energy security and low energy costs, and for timely transition to a low carbon economy.”

 The Australia Institute was even more damming.

“Battery technology and renewables are being deliberately hobbled by the incumbent’s vested-interest resistance,” TAI director Ben Oquist said in a statement.

“While it’s welcome that the AEMC has finally acknowledged that we need this important rule change, 2021 is an unacceptable delay. The Australian electricity market needs fixing now, and a 5-minute rule will help provide cheaper, more reliable energy.”

However, other participants suggested AEMC was justified in the delay, if only because it would have been impossible to unwind the significant hedging positions and contracts which make up the bulk of the wholesale energy market.

Numerous battery storage projects are ready to be implemented, but most need the extra income that could be gained from a change to the 5-minute rule to make the projects viable and increase the “value stack” of the product.

Some battery storage projects – such as the Tesla big battery in South Australia and another 30MW storage facility in the same state – are both being supported by federal or state payments, and are focused more on providing grid security services.

The announcement on the 5-minute rule from AEMC chairman John Pierce came after numerous delays from the main rule-making body since it was first proposed more than two years ago, and after huge resistance from the fossil fuel generators, who have used the 30-minute settlement system to manipulate pricing over the last 10 years.

“Price signals that align with physical operations lead to more efficient bidding, operational decisions and investment,” Pierce said in a statement..

“Over time, this flows through to lower wholesale costs, which should lead to lower electricity prices than in a market with 30 minute settlement. Wholesale costs make up around one third of a typical electricity bill.”

Pierce acknowledged that more accurate price signals would also encourage more efficient investment in flexible technologies such as aggregating distributed storage, new generation gas peaker plants and rapid demand response.

“These technologies, which can back up the system in real time when the wind stops blowing and the sun stops shining, are becoming increasingly important as more wind and solar generation enters the market and thermal generators retire.”

However, the AEMC has bowed to pressure from the fossil fuel generators and is proposing a gradual introduction, and says that a three and a half year timeframe is the shortest possible without posing risks to system security.

“Moving to five minute settlement would be a fundamental change to the way the wholesale electricity market operates in Australia, including the hedge market that operates alongside the spot market,” Pierce said..

He said this transition period allows time for most existing hedging contracts to roll off, while enabling new contracts to accommodate a future with five minute settlement. The market also needs time to make major upgrades to IT systems and metering.

AEMO also on Tuesday released an implementation plan setting out the technical changes which AEMO and the industry would need to make.

The rule change was pushed by Queensland-absed zinc refiner Sun Metals, which said it was sick of the price manipulation and rising costs of wholesale power. It argued that moving to a 5-minute settlement would remove the ability of big generators to manipulate prices.

That manipulation has been in full view given the recent Australian Energy regulator reports into pricing in the FCAS market, and by studies done by the likes of Schneider and others on the unnecessary lift in wholesale prices.

Prices have actually fallen in Queensland – by around 30 per cent – since the Labor government instructed the state-owned generation companies – who had vigorously opposed the change to 5-minute settlements – to change their bidding patterns.

The Sun Metals proposal won support from AEMO, COAG energy ministers, and of course from the battery storage and demand management industry, who said the old rules favoured slow-reponsind and clunky generators over super-fast modern technology to respond to demand swings.

Submissions on the Five Minute Settlement draft determination close on 17 October 2017.  

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  • brucelee

    Is it expected that energy storage investment will ramp up well before the 3.5yr deadline in a race to be the first to capitalise on the new market?

    • wholisticguy

      I doubt it considering the deployment time of batteries is less than 12 months, and probably as little as 6.

      This is the worst of both worlds.
      The large slow response generators see the end their market advantage (most profits are made in the high price events), so investment in those will decline immediately.
      Meanwhile new investment in fast response, dispatchable power will not be made until it can take advantage of the rule change, years in the future.

      So we will see further delays to fair, market driven, larger scale dispatchable generation investment, which is what is required to drive down power prices.

      Solar and wind will continue to deploy thankfully.

    • Greg Hudson

      What I’m waiting for is for Tesla to come in with some smart blockchain software to join all their PowerWalls together into one giant virtual power plant. THAT would set the cat amongst the pigeons!

  • Chris Drongers

    Turnbull’s predeliction for extending the life of existing coal power stations (Liddel) by a modest 5 years seems a reasonable compromise between a quicker change to renewables and the need to assure grid stability. Gives more time to build interconnectors, stabilize the technology on storage from batter to Snowy Scheme 2 scales and get FCAS plans established.

    Transitioning to 5 minute settlements will be a significant test of LNP will. As soon as it is announced and rules emplaced the market will cease issuing new contracts based on 30 minute intervals thereby hastening its death.

    We await Joanne Nova and Judith Sloan from the Australian’s comments tomorrow. Bet they focus on extending coal, not preparing to accomodate more variable generation.

    • Goldie444

      AGL have released a statement 12 hours ago, that they are still going to close Liddel in 2022, even after Turnbull’s statement in Parliament.

      • Patrick Comerford

        Perhaps Trumble should have written a letter to AGL CEO about extending the Liddell power stations life instead of mouthing it off in question time. I mean after all he fixed the exorbitant cost of retail prices by getting the power companies to send a letter to consumers didn’t he?

        • Joe

          …you’ve forgotten about those ‘magic barcodes’. that Joshie F is banging on about.

          • Greg Hudson

            Just in case anyone was watching, the moron said barcode when what was displayed was a QR code. Not the same thing.

          • Joe

            that then makes those ‘magic barcodes’…even more magical !

      • Joe

        AGL issue statements including to The Stock Exchange that Liddell is closing and yet last night (6/9/17) on ABC Lateline there was Joshie F. arguing with presenter Emma Alberici that AGL have made ‘no firm’ commitment to close Liddell. If you can believe Joshie F. then AGL’s Andy Vessey is speaking with two tongues. Me thinks it is our pollies that constantly speak with two tongues…and Big Mal has the biggest two tongues of the lot.

      • Greg Hudson

        They need to not just close it, but to implode the joint. IMO

    • Joe

      Judith Sloan was on The Drum ( ABC TV ) last night, 5/9/17. As always nothing kind to say about RE.

    • Mike Shackleton

      Engineering doesn’t compromise though. A 5 year extension to Liddell is akin to the design and construction of a temporary structure in my profession (Civil Engineering). As in, the difference between a temporary fix (5 year extension) and a more permanent fix (new plant designed to run for 50 years) is not that great. You still have to design to current industry and safety standards, the loads and serviceability requirements will still be the same for the 5 year works as is for the 50 year works.

      As AGL have stated, they want to use the interconnect at Liddell to intergrate renewables technology into the national grid – that will include wind, solar and storage. They can start building the new tech in the period leading up to Liddell’s closure and progressively switch over the interconnect to tech that will last a lot longer than the proposed 5 year extension.

  • George Michaelson

    What obligation to supply vests in the 5min bid? what duration of contract, continuing until what rebid window? It feels like there has to be a ‘forcing function’ quality, for the 5min bid rule to have real change, otherwise providers could sit back, drain the capacity of the 5min bidder, and then re-play the price war.

    • Chris Fraser

      Perhaps not quite. If a bidder has a generator spinning up, its likely they would wish to participate in every 5 minute period. Otherwise it seems they would acting in spite of their own interest.

      • George Michaelson

        I’m hopeful 5min bids do work, but I am trying to understand if there is a bad-behaviour model, which makes them not work. I don’t want this outcome, but it would be really good if there was built-in pressure not to do it. If (for instance, following your model) the *cost* of spinning up demands you commit to some window to avoid loss, then the system has ‘hysteresis’ and bidding into a 5min window, means you committed to running for eg 2h or 3h or some time period, before you could economically withdraw without self-punishing (losing money)

        But.. what if you do e.g. collusive behaviour? What if some group of generators decide to both not bid, and not supply, and then the battery stack is forced to drain, has no ability to bid, and removes itself from bidding, leaving the colluders to re-bid at inflated prices?

        • Chris Fraser

          In my view a positive mechanism is that having discrete independent periods to bid on removes rebidding, the cause of the rorting. Fresh bids at 1 minute intervals would also be pro-competition, but at some point this becomes unworkable. Other market mechanisms still apply. Within any one State not all participating generators should belong to just one investor group. Bidders should be flexible and each be prepared to use both generators and storage. Competition bets on these things happening.

          • Andy Saunders

            It’s not so much the rebidding (coming in low-priced in later periods following a price spike), but the artificially constrained bidding in the high-priced period that is the cause.

            I agree on the concentration. IMHO the regulator should be looking at the HH index in each state.

          • George Michaelson

            the HH index is a crude tool in this. Its been applied to telecommunications and consistently show ‘good competition’ even though we all know its a functional duopoly at best in most economies (more than four big competitors is rare)

            I think its worth doing, but don’t be surprised if it says “nothing to see here” because thats how the economists have been trained to interpret its signals.

          • Andy Saunders

            Aww, I suspect (as long as it’s capacity-weighted) the HH index will show useful results. Telco is a natural monopoly whereas generation really isn’t (it’s just concentrated that way by the vagaries of path-dependency of privatisation and acquisition (and to some extent, the opportunites for coordinated bidding!). A telco environment with three decent players becomes quite competitive. Might be similar in generation (as long as the market is well-defined – interconnector-constrained states effectively (at the margin) island themselves at some point from the NEM when constrained. If there are three or four large generators (separately owned) then the uncertainty of knowing what all the other generators will bid means each should bid “sensibly” (i.e. at close to marginal cost).

        • Andy Saunders

          Yes, that’s a possibility. A smart trader would be trying to figure out the remaining charge in the grid-connected batteries and trade accordingly.

          What the move to a 5-min rule means is that the free-ride caused by a high price early in the 30 min period that allows generators to pile in for later 5-min periods guaranteed a price of $thousands (because the 30-min price received is the average of the 5-min intervals) is lessened – there’s no more averaging.

          It doesn’t fix every opportunity for collusion, just reduces one they’ve been making hay with recently. And by “collusion” I also mean non-coordinated simultaneous activity, whether a result of market signalling or completely innocently. I recall talking to a trader a long time ago in the Latrobe Valley who said his best trading tool was a pair of binoculars (so he could see the stacks of the other brown-coal generators).

          • George Michaelson

            Lets say a battery has a 5min bid capacity, and a 20min recharge time (this is fictive. Its just for the arguments-sake). In this model, any battery which bids into a 5min window and wins and sets the price defines the price for everyone but the next four 5min windows, its out of the race.

            So in this model, to defeat collusive behaviour you’d need to segment into 5 5min window batteries, and bid distinctly in each (or bid 1/5 of your actual capacity)

            On the other side, lets say a spinning-rust generator has to run for 30m at least, to break even bidding into a 5 min window (I suspect its longer, but lets go close to 20min)

            On that basis, if they bid 1-for-1 to supply power, the battery can re-gen inside the window, and can rebid. So the collusive power of a generator and a battery appear to me to couple in their power size, and time-window, and re-generation window(s)

            This is a demand-free model. So if the spot-price peak only extends over a 30min window, there is no demand, and the rusty rotator loses the bet. So the other dimension is the duration of demand at peak load.

            If a market regulator can require people to bid, and then meet the market price (ie, if this is a regulated demand-driven market and the bidding is price-setting not CFD or anything fancy) then I would hope, the only remaining profit is in sensible bidding to sustainable business.

            But I’m not very devious. I always lost at poker, and “risk” and “monopoly” with my family so I suspect I’d be fleeced in this industry.

          • Andy Saunders

            Spinning rust? Ha! I like it!

            Not sure a regulator can really routinely “require” someone to bid. There’s too many ways to get around that anyway – “the thronomister is unstable with it’s wollymometer in the current temperature range in the psychobubble” should do it.

            Your scenario is correct, I think. But don’t forget that the battery will have either kept prices well down in the first period (or maybe made out like a bandit instead), so it has delivered a benefit, even if it can’t immediately repeat it. Actually it can re-bid (at smaller capacity) in say the 3rd and subsequent periods, if it has managed to partially recharge (which it won’t of course, if it’s a high-price peak).

            But it’s only one battery, and doesn’t have to be required to solve all the NEM’s problems. There will be others (and other generators).

          • Greg Hudson

            Just a thought, but couldn’t battery farms simply jump on the current 30 minute rule, and make a motza already ?

        • Cooma Doug

          That is what happens in markets. But long before your victim is destroyed by your tactic the market response eliminates the problem.

  • Chris Harries

    The article doesn’t seem to mention where decision making on this lies. Is the AEMC opinion regarded as being pivotal to a decision? Where and when does a decision get made and by whom? And is that organism lobbyable?

    • Chris Fraser

      Yes, AEMC lends an ear to all State Energy Ministers at COAG.

  • Jon

    It seems like there is false hope in 5min bidding. Ultimately it is about reducing the peaks and hence th revenue pool of the capacity market. How does a battery proponent expect to earn a return if the revenue pool is reduced and there are more players in it. There is no business case for batteries at the moment and I can’t see how the 5min rule will improve iy

  • DJR96

    The 5-minute settlement rule here will be obsolete before it is even fully implemented. As in the whole market model will need to be scrapped and a complete ground up new design implemented. All these bureaucracies and politicians just need to get out of the way and let some fresh blood do the job. Power Ledger.