When five minute settlement commences in less than two years’ time, the array of punchy offerings brought to the contest by Lyon’s solar peakers will quickly knock down gas peakers, the relatively sluggish, ‘one trick pony’ currently dominating peaking generation.

Under five minute settlement, the biggest winners will be the most valuable new energy supply: the fastest, most flexible power stations, that combine agile bidding strategies with fully integrated storage, self-forecasting generation and bi-directional digital accuracy.

This approach to settlement has been introduced to remunerate what Australia’s National Electricity Market (NEM) needs most as clean power generation replaces closing coal-fired plants: flexible energy resources.

The move to five minute settlement heralds a broader shift toward market settings that reward flexible energy resources on both the supply and the demand sides. Lyon’s solar battery power stations reflect our design philosophy that new generation should meet power system stability requirements and are well positioned to have the fastest hands in the ring when five minute settlement comes into effect in mid-2021. The importance of this rule change should not be understated. It is a key step in Australia’s digital energy revolution and it’s now less than two years away.

High definition pricing signals usher in a new era of competition and technology

It has been necessary for 20th century power systems to distort price signals and smear revenue settlement over slower, 30-minute blocks.

Current payment (settlement) sees the NEM dispatched in six, 5-minute blocks, with prices (and revenue for generators) averaged and settled each 30-minutes.

In short, this has insulated less-agile generators with slower, averaged price signals that linger while thermal generators ramp up over prolonged periods.

At the time of drafting the current settlement rules, technology lacked the ability and granularity required to do things any differently. We logged analogue demand-side data, chewing our nails to the knuckle watching thermal ramp-rate constraints that stretched into the minutes, not seconds.

At the time the NEM was developed it was dominated by a ‘baseload’ landscape yet to be disrupted by inverter-based generators, 30 minute settlement was the only option. But with the year 2020 almost upon us, this is no longer the case. We’re ready for high def pricing signals to usher in a new era of competition and technology.

Economic fundamentals ring true in the statement by the Australian Energy Market Commission (AEMC) that the market needs “price signals that align with physical operations [that] lead to more efficient bidding, operational decisions and investment”.[1] This position is supported by the International Energy Agency, which calls for agile, dispatchable, flexible and accurate generator investments in “markets that are moving towards ‘high definition’ pricing signals of shorter timeframes”.[2]

These settlement (payment) changes will take existing energy trader bidding strategies off the menu by causing:

  • increased pool price volatility, due to the intermittency of standalone solar and wind; and
  • reduced cap and hedging product liquidity, with some analysists estimating an approximately 830MW initial decrease, due to incumbent peaking generators being unable to respond to 5-minute price signals to defend their Caps positions.[3]

Figure 1 below is courtesy of the Melbourne Energy Institute’s Dylan McConnell and illustrates the current lost revenue opportunity for generators and traders that have inflexible dispatch constraints. This also highlights why 30-minute settlement has been required historically to compensate for inflexible ramping capabilities.[4]

Figure 1: Forecast revenue compared to unforeseen price spike. The blue line in Figure 1 tracks the expected trading price for a 30-minute trading interval, with an unanticipated price spike in a 5-minute dispatch interval.

The blue line in Figure 1 tracks the expected trading price for a 30-minute trading interval, with an unanticipated price spike in a 5-minute dispatch interval.

The 5-minute dispatch price is shown in red and extends to the market price cap of $14,000 at 7:20, while the expected 30-minute trading interval at a given time is shown in blue. Under a 30-minute settlements market, this volatility’s value is diluted, whereas under a 5-minute settlement market, this represents an opportunity to enter and exit the market according to more transparent pricing signals.

I would encourage anyone still in doubt to read the various submissions made from leading retail and energy trading firms to the AEMC on this topic, particularly warnings of illiquidity in the Caps Market.

Take one example from one of the NEM’s largest electricity generators, asserting that the 5-minute rule change will “destroy the ability of some generators to supply and deliver against cap contracts, resulting in a serious loss for hedging within the market”.[5]

The Australian Energy Council also forecast significant increases to Caps premiums, as shown in Figure 2, based on an assessment covering data from years 2012 to 2017.[6]

The question is: who will be fast enough to defend new Caps and claim this forecasted revenue premium?

Figure 2: Australian Energy Council – Estimated Premiums Caps Increase, from 1 July 2021

When low capacity factors upend a business model

The capacity factors of incumbent peaking generators are already low across most of Australia, in part due to recent high prices of gas in the East Coast Gas Market.

Further reductions in peaking generators’ capacity factors are likely to push incumbent peakers to exit the market sooner than expected.

This is evident when examining the portfolio of one of Australia’s largest fleet of peaking generators, with public data listing capacity factors even in today’s slow (diluted) 30-minute market averaging < 7%, with multiple peakers < 1.5%!

This already difficult set of numbers will soon be confronted by faster-responding new generation, such as Lyon’s solar battery power stations, which also do not suffer from fuel availability and cost risks.

Revenues must and will follow power system requirements

The AEMC has implemented a bold rule change that creates a high definition pricing signal for the market.

Power stations that we need in a 21st century power system – fast, flexible and dispatchable – will flourish. Less agile technologies will be left playing musical chairs, eventually reaching a ‘tipping point’ as capacity factors fall beyond an economic level, further opening up the market.

However, it remains the case that regulatory lag means that existing NEM markets still don’t allow flexible energy resources revenue commensurate with their value. But the Pantene Principal applies: “It won’t happen overnight, but it will happen” – starting 1 July 2021.

Flexible energy resources, on both the supply and the demand sides, are too important to a smooth energy transition for our energy institutions to fail us.

Revenues must and will follow power system requirements.

[1] https://www.aemc.gov.au/rule-changes/five-minute-settlement

[2] See International Energy Agency for investments required in ‘high definition’ markets with flexible ramping requirements https://webstore.iea.org/download/summary/1041

[3] https://www.aemc.gov.au/sites/default/files/content/ef348de3-3f5b-4a7e-8992-4158120fd93a/31-RuleChange-Submission-ERC0201-Australian-Energy-Council-170523-consultant-report.PDF

[4] http://climatecollege.unimelb.edu.au/files/site1/images/DM%20WP04.pdf

[5] See Hydro Tasmania on the Caps Market liquidity being “destroyed” by 5-minute settlements https://www.aemc.gov.au/sites/default/files/content/e66cb21f-af35-447b-a3b4-3ddfab0f17d5/6-RuleChange-Submission-ERC0201-CS-Energy-170505-consultant-report.PDF

[6] See submission to AEMC from Australian Energy Council regarding increased to Caps premiums, reduced liquidity and inability of incumbent peaking generators and Caps providers to defend current positions https://www.aemc.gov.au/sites/default/files/content/ef348de3-3f5b-4a7e-8992-4158120fd93a/31-RuleChange-Submission-ERC0201-Australian-Energy-Council-170523-consultant-report.PDF

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