Five minute settlement rule change: What to expect in the energy market

May 30, 2018

Five minute settlement rule change

From 1 July 2021, the National Electricity Market (NEM) in Australia will be settled every five minutes. At present, generators in the NEM are dispatched on a five minute basis. However, these five minute dispatch prices are then averaged (on a time weighted not volume weighted basis) to produce the 30 minute Trading Price, which is then used for settlement. When the NEM commenced in the 1990s, the limitations in metering and data processing at the time led to these different periods for dispatch and settlement.

In May 2016, Sun Metals Corporation, which owns a zinc refinery in Northern Queensland, first initiated the rule change request to move to five minute settlement. Their reasoning was that the mismatch in dispatch and settlement:

  1. Allows generators to game the market, thereby increasing prices for consumers; and
  2. Impedes entry for fast response generation and demand side response.

In this article, we will take a deeper look at these claims.

Electricity prices may not reduce as much as people had hoped

Aligning dispatch and settlement is logical and will make for a more transparent market, but the big question for many in the industry is how will the change affect wholesale electricity prices? Many are hoping that the five minute settlement rule change will be a magic bullet to reduce energy prices. As usual, reality is considerably more complex and nuanced.

This RenewEconomy article illustrates how generators are able to game the market under the current rules. It gives the example of a 30 minute trading interval that contains a price spike of $13,800/MWh in only one of the five minute dispatch intervals. This means that the price averages out to $2,350/MWh over 30 minutes. The important thing to note is that the generator in the example had very low output during the price spike, and only increased output after the fact. The averaging effect means that the generator is able to receive $149,000 for this 30 minute period under the current 30 minute settlement. However, under five minute settlement, the generator would receive only $15,000.

So just how much does this averaging effect distort the market as a whole? As it turns out, not much. We used NemSight, a software developed by Creative Analytics (part of the Energy One group) to examine the difference in settlement values across the entire NEM from 2008 to April 2018. We found that the cost to consumers under a five minute settlement would have been over $100 million higher than compared with 30 minute settlement. In fact, every single year produced a cost rather than a benefit as seen in Figure 1. Even on a state level, every state had a cost in every year.

NEM cost of 5 minute settlement

Although $100 million may seem like a large sum, it is only 0.09% of the total value transacted in the NEM. We consider this to be a negligible impact. However, the real life difference could be much greater. We anticipate that the bidding behaviour will change significantly under five minute settlement. In particular, we expect that most existing generation in the NEM will struggle to respond to five minute price spikes, especially when they are unexpected. This means that it will be largely up to fast responding technology, such as batteries, to regulate prices. Therefore, for consumers to benefit from the change, there will need to be enough fast responding technology entering the market to offset the reduced response from the incumbents.

Furthermore, when it comes to pricing outcomes, there is a much bigger elephant in the room – the high concentration of market power in the NEM. Regardless of whether settlement is calculated on a five or 30 minute basis, certain generators still have sufficient market power to raise prices by restricting output and will be significantly better off by doing so.

In Figure 2, we examined the market share of participants in the NEM by generated energy (rather than capacity) for the 12 month period from 1 May 2017 to 30 April 2018. In NSW, the three major gentailers, AGL, Origin Energy, and Energy Australia control 80% of the state’s generation. AGL with 38% has the largest share. AGL also has the highest market share in Victoria (40%) and South Australia (32%). In Queensland, the state owned generators Stanwell and CS Energy dominate 68% of the market. State owned Hydro Tasmania is essentially a monopoly generator in Tasmania except for the imports that come into the state via the Basslink interconnector.

NEM generation market share

In this context, we believe that consumers will benefit most from the five minute settlement rule change if new entry fast response technology is owned by parties other than the current major players. If the major players end up in control of the new entry, there will be little incentive for these assets to be bid into the market in a way that will ease pressure on prices.

Batteries will be the big winners

We have already touched on the fast acting nature of batteries being well suited for a five minute market. But there is another reason why batteries will be the big winners under the five minute settlement rule change. It has to do with capacity.

Table 1 shows a theoretical 30 minute period. It contains one price spike of $10,000/MWh while the remaining five minute intervals have a price of $100/MWh. Under five minute settlement, a 50 MW battery could discharge 50 MW during the price spike and stay idle in the remaining intervals to earn $41,667 for the half hour. Conversely, the averaging effect under 30 minute settlement means that the battery would need to be discharging at full power for nearly the whole 30 minutes to capture the same revenue. This means that a much smaller (and cheaper) battery could earn a similar revenue. In other words, each MWh of battery capacity will be able to capture more revenue under the five minute settlement rule change. This significantly changes the economic proposition of battery storage in the NEM.

Battery operation under five minute settlement rule change

Demand response will be harder for many industrials

Large energy users have been responding to spot pricing since the commencement of the NEM. Through our own experience, as well as discussions with other industry experts like Paul McArdle of Global Roam, we believe it is likely that there are thousands of megawatts of demand response in the NEM from the large energy user sector.

Interrupting an industrial process, in particular, is inherently more complex than controlling a hot water system or air conditioning. Firstly, most industrials prefer to perform a controlled stop of their process rather than an emergency stop. This is because an emergency stop puts the machinery at a higher risk of damage. Secondly, most industrial processes require a safety check before being interrupted. Because of these reasons, many industrials will struggle to respond in a faster, more volatile five minute market. Industrials will need to think about whether they can make any further improvements with automation and will likely need to revise their curtailment strategies to account for the higher risks involved.

Author: Marija Petkovic, Founder & Managing Director of Energy Synapse
Follow Marija on LinkedIn | Twitter

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Four months in, SA Tesla battery is showing mixed results in energy arbitrage

April 5, 2018

Tesla battery in South Australia

Tesla’s big battery in South Australia was officially switched on in late November 2017. At 100 MW/129 MWh, it is the largest lithium ion battery in the world and signals the beginning of a new era in how we manage the electricity system. In this article, we take a look at how the battery has operated in its first four months.

Before we delve any further, it is important to note that the Tesla battery is really two systems:

  1. 70 MW/39 MWh is contracted to the South Australian state government for the purpose of providing grid stability services;
  2. The remaining 30 MW/90 MWh can be used by the Hornsdale operator to trade in and arbitrage the energy market.

The economic viability of large scale batteries is largely dependent on how much revenue they are able to extract from the wholesale energy market and the various ancillary service markets. In this article, we will focus on the economic performance of the battery in the energy market only.

We use a software called NemSight by Creative Analytics (part of the Energy One group) to analyse the operation and bidding behaviour of the Tesla battery.

Tesla battery is being heavily utilised

The Tesla battery is certainly not sitting idle in the market. Figure 1 shows the operation of the Tesla battery on a five minute basis from 1 Dec 2017 to 31 Mar 2018. As can be seen, the battery is being utilised very frequently. In fact, in 63% of the dispatch intervals, the battery was either being charged or discharged. Only 37% of the time was the battery not being used in any way. Furthermore, nearly 40% of these zero utilisation periods occurred in December while the battery was still being tested.

South Australia Tesla battery 5 minute operation energy market

From Dec 2017 to Mar 2018, the Tesla battery consumed an average of 116 MWh per day for charging. In contrast, it delivered an average of 94 MWh per day back into the grid. From this we can work out that the average efficiency of the battery has been 82%. As expected, the efficiency of the battery is lower under real world conditions than the spec sheet efficiency of 88%, which is calculated at 25°C.

Tesla battery made $1.4 million in the energy market, but is losing money 47% of the time

Figure 2 shows our estimate of the value that the Tesla battery received from selling electricity into the energy market versus the cost of buying electricity to charge the battery. We estimate the total net revenue from the energy market to be just under $1.4 million. The overwhelming majority of this came in January 2018 when the energy market experienced the highest volatility. In contrast, the Tesla battery barely made any money in December and March.

South Australia Tesla battery energy market arbitrage

When arbitraging the spot market, the aim of the game is the same as trading stocks: buy low, sell high. A crucial difference is that you not only have to sell at a price which is higher than your buy price, but you also have to cover the cost of the extra energy that is needed to charge the battery (because energy efficiency is less than 100%). Therefore, the days with the most volatile pricing offer the biggest opportunities for arbitrage. Figure 3 shows that the Tesla battery made 95% of its net revenue in just five (very volatile) days.

South Australia Tesla battery revenue

If we exclude these five days, the average net revenue for the battery is a measly $530 per day. In fact, on 57 days (47%)  the Tesla battery actually lost money in the energy market. The total losses over the 57 days add up to about $135,000.  As mentioned earlier, this analysis looks at the revenue from the energy market only. It does not include any of the revenue received from providing ancillary services. Nonetheless, our numbers do suggest that the operators of the battery will need to be careful to avoid needlessly cycling the battery for little financial gain. This is an important consideration because the lifetime of a battery is strongly related to how many times it is cycled.

Furthermore, “buy low, sell high” is not as easy as it sounds. The energy market is incredibly complex. In our experience, a successful bidding strategy needs to be underpinned by advanced predictive analytics and co-optimisation. Failure to do so can result in the asset significantly undershooting revenue expectations. Some food for thought as the race to build big batteries begins.


Author: Marija Petkovic, Founder & Managing Director of Energy Synapse
Follow Marija on LinkedIn | Twitter

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