“We’ve been caught out:” Switch to 5-minute settlement traps market turtles

The landmark switch to five-minute settlements only occurred a week ago, so it’s a bit early to make any strong conclusions.

But the early evidence is that it is having the impact expected – sending strong signals for fast-moving technology such as storage, and catching legacy fossil fuel plants that are too slow to respond to market movements.

It’s also caused some market volatility, with prices spiking above $15,000/MWh on several occasions in Queensland.

“We’ve seen a couple of market spikes to the maximum price in Queensland,” Alinta CEO Jeff Dimery told this week’s episode of RenewEconomy’s Energy Insiders podcast.

“We’ve got, you know, pretty efficient, open cycle gas at Braemar. But we’ve been caught out already a couple of times on those five minute price spikes,” Alinta said.

Under the previous regime of 30-minute settlements, slow moving machinery like gas and coal plants could start up or increase output when they saw a significant price spike, because they knew the price would be shared across six trading intervals, even if the scramble to cash in caused prices to plunge below zero.

“I guess it’s just the physical characteristic of our plant,” Dimery said. “If we’re not already in the market, and operating when that price event occurs, by the time that we’re able to start up our plant and sync to the grid, and be ready to generate … that price has disappeared.

Dimery says that is going to have several impacts. And it’s not just the inability to cash in on price spikes, it is also the exposure to price spikes from not generating at the time. This could lead to a change to the cap contracts and swap which dominate the market.

“So, if we’ve put in place contracts, whether it be cap products or swaps, then we’re on the wrong side of that, because we haven’t been able to generate to protect the downside,” Dimery says.

“So perhaps we’ll see a changing of those as we roll into next financial year, or even next calendar year, in the way that contracts are written, based on plant characteristics. You can’t recover it, like you used to be able to.”

So what does that mean?

Dimery says it means that Alinta – and presumably many other generation companies – will need to think about a big battery to ensure it has the speed to respond to those price spikes, and falls.

Most of the big utilities already have a big battery, or a contract with one, and have plans to build more. EnergyAustralia has contracts with the Gannawarra and Ballarat batteries in Victoria, and AGL has contracts with Dalrymple in South Australia and the new Wandoan facility in Queensland.

EA, AGL and Origin all have plans to build significantly bigger batteries, with longer storage, at the sites of their existing coal and gas plants.

One storage developer already eyeing the opportunities of five minute settlements is Genex Power, which is building the first pumped hydro plant in Australia’s main grid for nearly 40 years – a 250MW, eight hour facility in the old Kidston gold mine in north Queensland – and has also signed a contract to build a big battery in Queensland.

It released a presentation this week which illustrated how 5-minute settlements may increase the arbitrage gap between low and high prices, driving extra incentive for storage to buy low and sell high.

Alinta is also planning a pumped hydro investment – a 600MW facility at Ovens Mountain in NSW – along with some other big battery projects, although the ones announced to date are both in Western Australia, which is not connected to the main grid.

Dimery is concerns that if the price spikes continue in the long term, it could translate to higher costs to consumers. “It’s just a case of how does the market respond to that? And to ensure that that doesn’t end up being the case?” he said.

See also: Alinta plans massive 1GW offshore wind project, and the first wind farm in Pilbara