It started as a simple suggestion to the AEMC, but the alignment of energy dispatch with financial settlement turned into a monster task that couldn’t stay in the too-hard basket any longer, writes Jeremy Chunn.

There is often the complaint in the local energy scene that the rule-makers are about as responsive as three sleepy snails who have woken into daylight after a hard night decimating the lettuce patch. Nothing will get done in much of a hurry today, so maybe come back tomorrow.

Approaching from over the horizon, however, is a very big change to the rules that sent the Australian Energy Market Commission into conniptions for about three years: the shift to five-minute financial settlement from 30-minute settlement, so that financial settlement is aligned with five-minute dispatch.

The new system will come into effect on July 1 next year. Those on the demand side and many on the supply side of the sector are quietly hopeful the rule change will bring an end to a market that was always tilted against them, where expensive forms of generation too often cast their shadow over bidding. With five-minute settlement it is hoped distortions will be removed and any chance suppliers had of gaming the system will be shot through.

The clock is ticking.

In early March energy entrepreneurs organisation Spark Club hosted a panel in Sydney to discuss how and why the changes were written, what they mean for all stakeholders and how implementation is expected to go. The night was moderated by Grant McDowell, cofounder of Spark Club and cofounder and head of commercialization and strategy at Enosi Australia, who kept the panelists on the rails so that the audience left with a fair grasp of the flow on effects for the first grid in the world to introduce a five-minute settlement market.

First time around

Kris Funston remembers how the current mismatch of five-minute dispatch and 30-minute settlement came about in the beginning. “We ended up with five-minute dispatch, and the challenge at the time in terms of settlements in relation to metering and IT systems was that they just couldn’t handle the level of information and data that was required to actually manage five-minute settlement,” said Funston, formerly executive general manager markets at the Australian Energy Market Commission and currently a partner with Deloitte Access Economics Competition and Regulation.

That was back in 1998, when the decision was made to have five-minute dispatch and 30-minute settlement. “In theory and in an ideal world we would have had five-five,” he says, but the technology available at the time made it impossible.

Time passed and the market made do with 30-minute settlement until a rule change was suggested by Queensland-based zinc refinery Sun Metals. The company had noticed price spikes in the state in the last period of the 30-minute window, so that energy users would end up paying a higher average price than would have been anyone’s reasonable prediction. Sun Metals had pointed to a prickly problem that was affecting all energy users, and so the can of worms was opened.

Sun Metals lodged a “bidding in good faith” rule change, designed to stop price-swinging bids in the last period to force the price up. After consultation with the AEMC, it decided a request for five-minute settlement would be the best approach.

This one has merit

Funston remembers it as a seismic event at the AEMC. Around the end of 2016, only months into his tenure at the commission, a working group was established to hear concerns from affected parties. “We didn’t know if we were going to make the rule change, but we could see the merit,” he says. “We were also aware of some of the risks and costs.” The cost of adapting a system that was by then almost 20 years old was estimated to be in the hundreds of millions. Still, the benefits of removing distortions in the market was plainly evident, he says.

The AEMC conducted analysis that identified distortions in Queensland and South Australia, with an upward trend apparent in NSW. “You were effectively going to have generation coming in 25 minutes after it was needed by the system,” Funston said. “That was a key concern.”

The energy market is heading into a long period of extreme gyrations, as renewable generation sources wind and solar are connected to a grid designed for huge power stations and a mentality almost of central command. It’s going to be a mad couple of decades as coal plant is retired. A more dynamic and responsive marketplace is required as an absolute certainty.

“As you move to an environment with more variable generation you now need to change the equation even more dramatically, so you’ve got more responsive demand to match when supply is readily available,” said David Havyatt, senior economist and CEO secretariat at Energy Consumers Australia. “This is not going to work for 30 years, so you have to make this change sometime.” Five-minute response, Havyatt said, is clearly needed in a transitioning market.

Fast-starter’s dilemma

Still, with the Australian Energy Council estimating implementation costs of $250 million, switching to five-minute settlement is no trivial matter. Speaking for Engie, which jointly owns gas generation and peaking assets, head of regulation Jamie Lowe said it should be remembered when 30-minute settlement was adopted the NEM relied on technology that wasn’t as fast to come online as what’s available today. “There was an expectation that people would respond to 30 minutes because they were protecting customers on the other side who were exposed to 30-minute settlement prices themselves,” Lowe said.

“The point is, when is the right point to transition? Because you have to acknowledge the existing kit you have on the ground … Your ability to capture high prices will go down.”

Lowe admitted towards the end of the panel that Engie is concerned about the impact of the rule change to its South Australian gas assets, which are Pelican Point and Synergen. “The implementation timeline became something of great interest to us,” he said. “Even last year there was some hope among the generators that we would get more time.” The rule provided a transition period of three years and seven months.

Highly anticipated is the impact of the rule change on the market for cap contracts, hedging instruments that protect the buyer against price spikes.

For and against

Mulling the rule change was a long process, Funston recalled, involving more than 100 stakeholder meetings before the AEMC even got to a first draft. “It was a really useful process, to understand key concerns,” he said, with market impact costs high among them and plenty of useful input from the networks. A direction paper in April 2017 preceded a public forum. Finally, it was decided the benefits of a rule change outweighed the costs, with a timeframe of three years.

“There was still strong opposition,” Funston said. “I would have been worried had they not had strong views, given the likely financial impact it was going to have on their businesses.”

The time had come for five-minute settlement, “whether the engineering and physics backed it or not,” said Engie’s Lowe. It even earned bipartisan support in Canberra. “I remember the Senate couldn’t agree on almost anything that year,” said Funston, “but the one thing they did agree on was that the AEMC should make the five-minute settlement rule change.” It was a new high-tide mark for the politicization of boring old energy in Australia, whether that’s a good or a bad thing.

Before Funston left the AEMC for a role at Deloitte in October 2018, the commissioner suggested he return on July 1, 2021, the start date of five-minute settlement, to make sure the NEM hasn’t exploded.

Hopefully it won’t.