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Wholesale electricity prices expected to drop under new 5-minute trading interval

Wholesale electricity prices in Australia will be traded at an interval of 5 minutes as from 1 July 2021, replacing the current 30-minute interval system.

The Australian Market Commission said that the new rules will drive down wholesale electricity prices and increase competition as well as opening the doors wide open to battery storage facilities.

In a statement, the AEMC said that the move will increase transparency and give a boost to renewable energy generators trading in the National Energy Market. The move will allow more responsiveness during peak hours by getting more power into the grid swiftly.

Wholesale electricity prices expected to drop – AEMC Chairman John Pierce

AEMC Chairman John Pierce

AEMC Chairman John Pierce said: “Wholesale electricity price signals that align with physical operations lead to more efficient bidding, operational decisions and investment. Over time, this flows through to lower wholesale electricity costs, which should lead to lower electricity prices than in a market with a 30-minute settlement. Wholesale electricity costs make up around one-third of a typical electricity bill.”

The change has been made official but was first brought up in an AEMC strategic review earlier this year after a rule change proposal was submitted by Sun Metals, a zinc refinery and large energy user. Under the National Electricity Rules, any individual, group or organisation can lodge a rule change request or submission with the AEMC.

The AEMC said that if the change yields as little as a 50 cent per megawatt-hour reduction in average wholesale electricity prices, it would result in nearly $100 million in savings annually in energy costs, and lower retail prices for consumers.

Elon Musk
Source: Tesla

“With more wind and solar generation entering the market, along with the retirement of thermal generators, there is an important role for fast response generation and services to plug the gaps when the wind isn’t blowing and the sun isn’t shining,” Mr Pierce said.

This will benefit battery storage technology due to its ability to quickly turn on and off in response to demand, particularly in South Australia and it’s new Tesla battery.

Federal Energy Minister Josh Frydenberg welcomed the new energy trading rules saying: “The rule change is positive as it will lead to a more efficient mix of generation assets leading to lower supply costs. It will also act as an incentive for much-needed storage for renewables to enter the market.”

 

Gas and coal-fired plants could be affected by cold start response time

The AEMC said the new trading interval could affect the ability of gas and coal-fired energy generators and market participants to manage risk through energy contracts through the reduction in the supply of “cap” contracts, a risk management product used by retailers and large energy users to protect against high spot prices.

Gas-fired peaking power generators – which are the typical sellers of cap contracts – need more than five minutes notice to respond to changes in the market if they are not fired up at the time, and with these “cold starts” would not be able to defend contracts settled on five-minute pricing intervals.

“This could damage competition in the retail market and lead to higher prices for consumers,” the AEMC said. However, the AEMC’s study stated that the five-minute settlement period will still allow for hedging and risk management.

On the other hand, the move could encourage gas-fired generators to keep the turbines going, meaning that more supply would automatically be on the market, driving prices down further.

2021 introduction of the rule will give industry time to adapt to the change

Mr Pierce said the 2021 implementation date will provide the industry enough lead time to adapt to the rule, which will affect existing spot and contract markets, and metering, allowing energy generators and market participants to update their IT systems.

The AEMC stated that this time frame will provide the benefits of the five-minute settlement period against transitional costs and risks.

“It also gives the industry a timetable for building and developing new fast response generation and technologies in preparation for the change in three years’ time – so this investment can start happening now,” the AEMC said in a statement.

Grattan Institute Energy Director Tony Wood

The announcement was largely welcomed. Grattan Institute Energy Director Tony Wood said: “There was nothing logical about the 30-minute settlement period. This will provide extra value for battery storage.”

Mr Wood said consumers would not likely see a big impact, but the changes would make the energy market more efficient as a whole.

Consultancy Firm ACIL Allen’s executive director Jeremy Tustin said: “We are cautiously optimistic it’ll lead to positive outcomes for both sides of the market.”

The Green Party welcomed the move but was forthright in saying that the AEMC should not wait until 2021 to implement the rule change. Spokesman Adam Bandt said: “The national electricity market is broken and the ‘five-minute rule’ is an important step towards fixing the problem because it will incentivise new technologies such as battery storage.”

“This change should be happening next year, not in 2021. The Council of Australian Governments should overrule the AEMC and act to accelerate this reform,” he said.

The AEMC said that the Australian Energy Market Operator will work closely with players in the energy industry to develop an implementation plan while the Australian Energy Regulator will monitor and report on the effectiveness of its introduction.

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