4 minute read

The future of the energy market: the five-minute settlement

mike-stockley-021219
Mike Stockley
15 November 2019

Prior to the 1990s, electricity generation, transmission, and consumption was pretty straightforward. If you flicked on your electric kettle to make a cup of tea, electricity flowed from the power station and made its way to you via a series of large pylons, transformers, and the ‘poles and wires’ leading to your house. This infrastructure was owned by the State.

As we approached the turn of the century, this model had had its day. The wholly state-owned, model had been unbundled, and the system had been separated into today’s model of electricity generators, distributors, and retailers.

Enter the spot market


In this new world where supply and consumption of electricity is ‘contestable’ – that is, where participants can buy from and sell to whomever will give them the best deal – a new, critical piece of the puzzle was needed. In 1998, the National Electricity Market (NEM) was created.

The NEM is one of the more complex parts of the energy sector.

Electricity is not neatly defined as a parcel size; it’s more like a liquid. You can define the rate of flow, but to get a tradeable parcel, you need to define how long the liquid – or the electricity, in this case – flows for. This turns the kilowatts (kW) of electricity generated into kilowatt-hours (kWh) of electricity supply.

When the NEM was launched, the tradeable parcel was defined in 48 trading intervals across a day: generators offered parcels of electricity in the market in 30-minute blocks over the course of the day. In a slower world dominated by baseload coal and more predictable generation, this worked fine.

Today’s electricity market


In 2019, the exchange – now operated by the Australian Energy Market Operator (AEMO) – manages the dispatch and settlement of electricity across the NEM. AEMO matches the demand with supply, and dispatches electricity as needed every five minutes. Buyers and sellers pay and receive a price for electricity based on the average of the five-minute prices over 30 minutes, multiplied by the amount of electricity they consumer in that 30-minute period. This made sense in an age of lesser-power computers and basic meters, but times have changed.

Today the energy landscape is very different, driven in part by technologies which did not exist when the model was set up in the nineties – the mix of energy is transitioning rapidly to renewables, some coal-fired power stations have closed and more are slated for closure. Generation is distributed right across the grid and batteries are growing in popularity, increasing in capacity, and falling in price.

A major constraint which disincentivises a broader adoption of fast-response technologies is the way in which electricity is traded and settled – we are still using a model created based on rules which were set up to administer a less dynamic mix of generation, and limitations in metering and data processing.

With consumers increasing investment in fast-response energy resources, like home batteries, the opportunities to optimise value to battery owners (and indeed the greater NEM) are not being fully realised. The Australian Energy Market Commission (the NEM’s rule-making body) considers market development necessary to manage the integration of fast-response renewables.

Enter the 5-Minute Settlement


The 5 Minute Settlement (5MS) program is an industry-wide transformation which will change the way electricity traded on Wholesale Markets will settle. The AEMC has mandated the rule change, and it will go live in July 2021.

5MS means the whole market will bid on, dispatch, and settle electricity in five-minute blocks, rather than half-hourly. If you like, it means the market is moving from selling whole pizzas to selling by the slice.

What does that mean for the energy industry?


You can’t settle electricity in five-minute blocks if you can’t measure the usage with appropriate meters. Some large meters that are key to AEMO’s settlement processes will change by 2021, while others will transition over time.

For AGL, and other companies, systems which have been crunching the data of millions of customers in 30-minute blocks will need to change to process the more refined five-minute data. For us, this means impacts on more than 30 systems, including trading, analytics, billing, and risk management. Essentially: we need to store and process lot more data.

It’s a challenging task – but at the end of the road, AGL will have compliant and scalable system, as well as processes which are compliant with the new rules, with minimal operational and customer impacts.

What does this mean for our customers?


The intention of the rules is to lower wholesale electricity costs over time, and facilitate a more reliable power system, both of which will be good for customers.

The AEMC has stated that the benefits from 5MS for consumers should include lower wholesale electricity costs over time, a more reliable power system, and rewards for customers who respond to demand peaks.