AEMC backs five minute settlement

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The Australian Energy Market Commission (AEMC) has outlined the impacts of changing the settlement period for the electricity spot price from 30 minutes to five minutes in a new directions paper.

AEMC Chairman, John Pierce, said the proposed change would signal more accurately the value to consumers of fast response technologies, such as aggregating distributed storage, new generation gas peaker plants and rapid demand response, which are needed to support the increasing penetration of intermittent wind and solar generation in the sector.

A move to five minute settlement would align the physical electricity system – which matches demand and supply every five minutes – with the price signal provided by the spot market for that five minute period.

An efficient price signal will help drive investment in the range of technologies required to meet consumers’ future electricity needs.

“With more wind and solar generation, along with the retirement of thermal generators like Hazelwood, there is an increasingly important role for flexible and fast response generation and services,” Mr Pierce said.

“It’s essential that we have mechanisms that appropriately value the contribution of different generation sources to the long term interests of consumers, not only using the technologies of today – but the technologies of the future.

”We are now calling for public submissions to provide more detailed evidence on the costs and benefits of this fundamental change to the design of the national electricity market.”

The commission also notes that moving to five minute settlement is likely to lead to changes in bidding behaviour, which means historical patterns of five minute dispatch prices may not be a good guide for the future.

For example, five minute settlement may lead to less volatility than displayed in the current five minute dispatch prices, with fewer and lower price spikes, and therefore the revenues for fast response generation technologies may be less than expected.

It also notes it is essential to have clear, national, co-ordinated policy objectives, particularly in relation to the integration of emissions and energy policy, to provide the level of certainty needed for business and consumers to invest.

The directions paper identifies a number of significant implementation issues.

A change to five minute settlement would create one-off metering and IT system upgrade costs.

More importantly, it will disrupt wholesale contract markets which play an essential role in managing risk, reducing uncertainty, and lowering the barriers to entry faced by new competitors in the market.

A transition period would be needed to give contract markets time to adjust. The AEMC’s initial view is that a transition period of around three years would be short enough to capture the benefits of moving to five minute settlement, while minimising implementation costs and risks.

Stakeholders will be consulted in order to reach a more detailed understanding of costs and benefits before making a draft determination.

Submissions on the directions paper close on 18 May 2017.

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