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Hornsdale Power Reserve earns record revenue in September 2019

The world’s biggest lithium-ion battery, the 100 MW/129 MWh Hornsdale Power Reserve in South Australia, has just earned its biggest monthly revenue from wholesale markets.

The ‘Tesla big battery’ as it is commonly known, was famously brokered via a deal on Twitter and has been operating in Australia’s National Electricity Market (NEM) since late 2017. We recently published independent analysis, which provides a deep dive into the operation, merchant revenue, and bidding strategies of the Hornsdale Power Reserve from January 2018 to September 2019. In this article, we look at just one of the many insights from the report.

Our analysis shows that the Hornsdale battery earned approximately $3.4 million from wholesale markets in September 2019 (see chart below). This is the highest monthly revenue that the battery has achieved. Note that this is inclusive of the cost of charging the battery. However, it does not include non-market revenue streams (such as the contract it has with the South Australian government), FCAS payments under the causer pays methodology, or any other factors which are private to the operator.

The overwhelming majority of revenue in September came from providing frequency control ancillary services (FCAS). Contingency services, which correct major frequency deviations in the grid, accounted for the highest share of revenue (55%). This was due to a strong rebound in contingency FCAS prices. In September 2019, the Australian Energy Market Operator (AEMO) made changes to how it calculates FCAS requirements. This has resulted in a higher volume of contingency FCAS being procured, which has contributed to the upward pressure on prices.

Operating batteries has a learning curve

At a high level, the revenue that a battery can earn each month and how this is split across various markets, depends on two factors:

1. Prevailing market conditions; and

2. The strength of the battery’s trading strategy.

The Hornsdale battery may have earned the single highest monthly revenue in September, but it also missed significant opportunities throughout the month. In our analysis, we compare the actual operation of the Hornsdale Power Reserve with our optimised operation model. This comparison shows that there was potentially more than $1.1 million of additional revenue available in the market in September. This highlights the complexities of operating batteries under real world conditions and uncertainties.

Batteries are unlike any other asset in the NEM. A generator, such as a coal or gas plant, can theoretically keep producing electricity as long as the fuel continues to be supplied. In contrast, a battery has a limited capacity to charge or discharge energy at any point in time. As a result, previous charge/discharge decisions can have a big impact on future revenue. There is still much to learn about how to operate batteries in the most profitable way.

Order the full report here

Author: Marija Petkovic, Founder & Managing Director of Energy Synapse
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Five minute settlement rule change: What to expect in the energy market

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.

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.

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.

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
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