Electricity market “step change” will pay fast, flexible technologies to smooth bumpy grid

A new rule will reward electricity market participants that offer “fast and flexible” services to smooth bumps in grid frequency, in a move towards a carrot and stick approach to balancing an increasingly volatile grid.

The Australian Energy Market Operator (AEMO) on Tuesday announced the introduction of frequency performance payments (FPP) – is a deeply technical alteration to a deeply technical part of the National Energy Market (NEM) that has been years in the making.

The new frequency control ancillary services (FCAS) mechanism will play a role in ensuring that the grid frequency – the rate at which the alternating current (AC) in a power system oscillates – stays at or near 50 hertz.

The traditional method of managing frequency wobbles – a task has become increasingly challenging for AEMO as bigger and bigger shares of variable wind and solar power join the grid and as ageing coal plants become less reliable – is what’s called “causer pays:” the costs are passed on to those behind the disturbances.

For example, a coal generator going offline or a wind farm generating much more than forecast, as happened several times over the last week, will pay a share of the costs based on how ‘bad’ their negative impact has been.

The new rule, however, means that from July 08 it will become a two-way street: generators and participants that have a negative effect on the grid still have to pay, but anyone who can jump in to help fix it will get rewarded for their services. 

The incentives and penalties are now also based on real-time factors, calculated across five-minute periods and reported daily. 

“The implementation of FPP marks a step-change in how we incentivise helpful frequency performance in the NEM,” said AEMO executive GM of operations Michael Gatt.

“It brings real-time accountability, promotes market balance, and strengthens the case for fast, flexible technologies that are essential to maintaining grid stability as traditional generation retires.”

Gatt says the new way of doing business will recognise and value emerging technologies like batteries and other kinds of responsive loads, such as a commercial chiller or an electrolyser, and align their behaviour with NEM needs.

What it won’t do is directly influence developer decisions because most generator and storage income is made from energy prices, says Gridcog CEO Fabian Le Gay Brereton. 

“Batteries will be the net winners of the new regulation, but it’s not going to change the fact that the vast bulking of the value captured by batteries will come from energy price arbitrage,” he told Renew Economy. 

“The value of energy traded each day in the NEM is roughly ~$80 million, but the value of redistributive payments under FPP is probably only ~$120,000 each day. So I think this is more about making the market more efficient and it isn’t really going to be a game changer for batteries or VPPs.”

Others believe it could help to tidy up a corner of the NEM that has become a little rubbery over time. 

The Australian Energy Regulator was concerned that under the ’causer pays’ system, some generators are deliberately over- or under-forecasting their electricity dispatch for commercial reasons. 

The theory, as explained here by the team at Watt Clarity, was that participants would game the system for lower causer pays costs, resulting in poorer forecasting by AEMO.