Garnaut slams AEMC move to delay 5-minute settlement switch

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.”

“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.