Several factors are leading the Australian energy market to transform the way energy companies operate. The Australian Energy Market Commission (AEMC), the rule maker for the National Electricity Market (NEM), recently announced a move to five-minute energy settlement (5MS) coming into effect on 1 July 2021. This is owing to the fact that generators are scheduled to operate on a five-minute basis, but the settlement period still operates on a traditional 30 minutes basis, a time cycle practiced in the conventional meter age. This discrepancy contributes to disorderly bidding and inefficient pricing.
Additionally, Australia’s incumbent gen-tailers, or generators and retailers, are slowly coming to grips with the rapidly increasing share of wind and solar on the grid and a need to review market financial operations with new contracts.
With these new findings and actions comes the need to be prepared. Companies should ask themselves some relevant questions:
- Is the Australian energy system ready to embrace the necessary change within a couple of years as the countdown is already on?
- If yes then, what are they working on for that readiness, and what could be the shortfalls and outcomes?
The electricity market has gone through a number of changes in Australia since NEM and AEMC were formed in 1998 and 2005, respectively. Many of these changes were incremental, such as providing clarity on the definition of what constitutes a business day. Others were notable material changes, such as abolishing the Snowy Region. So far, none of these changes compares with the scale of the currently proposed five minute settlement change. The dispatch and settlement process is important for generators, as it delivers 95-99% of revenue. The current mismatch in the dispatch and settlement allows generators to game the market, thereby increasing prices for consumers and hindering entry for fast response generation and demand side response.
The idea of five minute settlement was first proposed by Sun Metals Corporation Pty Ltd, a zinc refinery and large energy user, in December 2015. The idea was to align the dispatch and settlement intervals in the National Electricity Market. The NEM is a gross pool market where all electricity supplied to the market and consumed by end users is transacted at the spot price. As it stands, market participants, including generators and market-responsive loads, are dispatched, or told their targets for operation, at five-minute intervals. The price they receive is settled on a thirty-minute basis, calculated as the average of the spot prices during the preceding six five-minute intervals. This leads to fluctuations in prices.
sinesses in the renewable energy sector have long advocated that this model creates inefficiencies in the operation and composition of the market, as it does not reflect the increase in intermittent generation of energy, such as through wind and solar.
In November 2017, the AEMC made a final rule change altering the settlement period to five minutes, aligning with the dispatch. It’s not just the 5MS the Australian energy industry must plan for. On 6 December 2018, the AEMC made a final rule that requires a move to a global settlement (GS) framework for the demand side of the wholesale electricity market.
The current market settlement framework, known as settlement by difference, has been in place since the start of the NEM. It was designed at a time when local retailers supplied electricity to all small customers. Under this approach, electricity within a distribution area is billed to the local retailer, except for the loss-adjusted metered electricity that is consumed by the customers of independent retailers within their local area. This means that the local retailer for an area bears the risk of all residual electricity losses in that area, known as unaccounted-for energy (UFE). UFE includes unaccounted for technical losses, commercial losses, and meter profiling errors.
Under a global settlement framework, every retailer is billed for the loss-adjusted metered electricity that is consumed by their customers within the area. The UFE is then allocated to market customers, mainly retailers, in the local area, pro-rated based on their accounted-for energy.
The full commencement of 5MS and the soft start of GS both begin on 1 July 2021. This aligns the development of systems and procedures for both changes, as well as for reducing implementation costs. GS will fully commence on 6 February 2022.
In order to support the overall progression of the 5MS Program, AEMO has established the Five-Minute Settlement Program Consultative Forum (PCF). The PCF provides an opportunity for all impacted participants and other related bodies to contribute to 5MS implementation program planning activities, facilitate risk and issue management, review relevant documentation, and provide oversight for 5MS working groups.
Below are the details of impacted parties and impact:
Generators need to be ready with systems and processes to:
- Submit five-minute offers
- Receive five-minute metering data in addition to existing data
- Receive five-minute granularity settlement reports
Large Customers need to be ready with systems and processes to:
- Receive five-minute metering data and settlement reports for wholesale customers
- Engage with their retailers on any requirements or impacts of five-minute metering, such as Type 1-3 (large customers)
Retailers need to be ready with systems and processes to:
- Receive five-minute metering data in addition to existing data
- Receive five-minute granularity settlement reports
Network Operators need to be ready with systems and processes to:
- Receive five-minute metering data (in addition to existing data)
Metering Coordinators need to engage with financially responsible market participants (FRMPs) and metering providers on the configuration/replacement of meters to five-minute
Metering Providers need to configure/replace meters to five-minute as arranged by metering coordinators, or Type 1-3
Meter Data Providers need to be ready with systems and processes to:
- Provide five-minute metering data in Metering Data File Format (MDFF) to AEMO
- Provide five-minute business-to-business metering data
- Moving to a five-minute settlement will align the market’s price signal with the physical electricity system. This means faster response times, especially with demand response technologies.
Benefits for Customers
Lower wholesale electricity costs:
Over time, improved price signals will lead to more efficient decisions by generators, lowering wholesale costs which make up around one-third of a typical bill.
Rewards for customers who respond to demand peaks
For example, factories that invest in smart IT can switch off machines quickly to avoid high spot prices. Homes with smart batteries can earn a high spot price by providing a boost of power when the system needs it.
A more reliable power system
Investment in fast response and flexible technologies will back up the power system in real time during times when conditions limit the effectiveness of wind or solar power.
To implement the 5MS and the GS rule changes, AEMO has established the 5MS Program comprising the following workstreams:
Procedures: Defining the required changes to market procedures
AEMO is working with the industry to implement procedural changes required for the rule changes. AEMO also sees benefit in engaging with the industry early to develop process to identify any potential areas of concern or contention, as well as identifying areas of opportunity to improve outcomes.
Systems: Designing, developing, testing, and implementing changes to AEMO’s market systems
AEMO’s Systems workstream is responsible for the design, development, testing and implementation of systems to support the changes to rules and procedures. The workstream will produce the required technical documentation to facilitate participant changes to systems.
Readiness: Coordinating, assisting, and preparing AEMO and the industry for the transition
The Readiness workstream is responsible for:
- Registration and accreditation
- Industry testing and market trial
- Participant training
- Participant readiness monitoring
- AEMO operational changes and readiness
- Industry cutover
Experts and participants have reacted with concern on various aspects of the implementation strategy:
The decision to put off the implementation of 5MS until July 2021 at the earliest has been criticized by experts. These experts believe the decision will delay the entry of new technologies that are required urgently in response to increasing rates of failure of conventional power systems due to intense extreme weather events. However, other participants suggested AEMC was justified in the delay, as it would have been impossible to unwind significant hedging positions and contracts which make up the bulk of the wholesale energy market.
Many consider the rollout period for this significant change to data collection process in the NEM is short. However, the Commission believes that the transition period of three years and seven months reflects an appropriate time to enable market participants and AEMO to manage the significant implementation risks, such as the large IT system changes.
Market participants also have concerns about the extent of the costs and timelines for making the required changes to support the 5MS implementation. However, these are largely significant one-off costs which appear to be large but are relatively small when compared with the ongoing annual NEM transactions.
The AEC expressed concerns that there is a high risk of failure during implementation, because of the complexity of the system changes and the need for new systems to work effectively together. The consequences of such a failure could be significant and affect the secure and reliable operation of the power system.
In order to evaluate market readiness, an interim readiness survey was sent out by AEMO on July 2019 to 44 organisations in the readiness working group. The report provided a generalised snapshot of the declared readiness of respondents. A total of 34 organisations responded with 45 submissions, representing a response rate of 77%. Some organisations responded with multiple submissions to represent different participant types.
While there is strong management awareness of 5MS requirements and participants have commenced activities to establish 5MS, few have well-established programs. Almost all respondents are in the early stages of developing project plans, and are commencing activities to establish a project team.
Here are results of some key questions from the survey:
Q. What is the overall status of your organisation’s program, taking into account planning, budget, resourcing, issue and risk management, and governance etc. for 5MS
- 80% of respondents reported at least neutral or good progress on their overall 5MS program status. Only 20% reported either low or very ow progress on their 5MS program.
- MSPs are slightly less progressed, with 63% reporting neutral to good progress, compared to an average of 84% for other categories. This could be a result of metering procedures package #2 (MP2) still being in the consultation phase, or the scope and complexity of the required changes relative to other participant types.
- Generators are the most progressed participant type. This could be a result of the scope and complexity of the required changes relative to other participant types.
Q. How prepared is your organization to participate in industry testing and market trials for 5MS?
- Many respondents are still not ready to participate in industry testing and market trials, with only 36% somewhat prepared for 5MS testing.
Q. For the below areas, to what extent has impact assessments been done
- The majority of participants have commenced impact assessments on internal business processes (96%), standing data/meter transition (91%), commercial operations and agreements (84%), and market procedures (96%).
- Impact assessments on market procedures are well advanced compared to other categories, with 56% of respondents already reasonably considering impacts, compared to 36% for other categories.
The change from 30 to five-minute settlement is one of the most significant modifications the market has seen since it was formed in the 1990s. Organisations should keep monitoring outputs from the various working groups. Even though some rule changes have been finalized, there are many changes that can be done to further develop metering, dispatch, and settlement stages. Things can change over time, and companies need to remain up to date on plans and understand how these changes may impact their own processes and systems.
As with any business disruption, there are challenges associated with the upcoming 5MS in the Australian energy market.
ACCURATE FORECASTING NEEDS: A major challenge includes the need for forecasters to increase the speed and sensitivity of the process for accurate price predictions in shorter intervals. They are already attempting to rework the systems to accommodate batteries, solar panels, and other variables to match the rapidly evolving pro renewable push market. Contemplating the five-minute settlement rule on top of all that can be a daunting prospect.
Without accurate forecasting, energy retailers risk buying too much and having to sell back at a loss, or purchasing too little and needing to pay an expensive price for the remainder. Such mistakes can hamper profits. Essentially, it will more accurately reward those who can deliver supply or demand side responses exactly when they are needed by the power system. To solve this problem, many utilities are looking to supplement their internal forecasting efforts with help from analytical services organizations. In short, the best algorithm wins.
MATERIAL RISKS AND ADD-ON COMPLEXITIES: There are also material risks, as the generators are speculated not to earn sufficient revenues to meet contractual financial commitments. Further, there may be a need to revise the needs of parties involved to allocate risks and encourage market liquidity, resulting in a demand to form revised contracts. The rule change proposal has been exhaustively debated on this point, as many existing market participants are concerned that generators may limit the contracts available to the market.
Forming new contractual arrangements that efficiently allocate risk, minimise risk capital, and encourage market liquidity is a key implementation challenge.
Given that both the contract market and end users are active at least three years into the future locked-in period, the development of appropriate contract arrangements is a pressing issue.
Another possibility is better matching dispatch and spot markets could lead to more conservative bidding habits. This would mean flexible resources like solar could be called on less, reducing the revenues they might be expected to earn in shorter gate closure timings.
TECHNICAL AND DATA MANAGEMENT UPGRADATION: Large metering upgrades are necessary. As per AEMO, meter data providers will need to ensure their meter fleets are capable of recording data at five-minute intervals, and that their meter data collection, processing, and publishing systems are all capable of handling the shorter interval while still meeting data delivery SLAs. All this would clearly come at a cost.
For larger users, metering upgrades will be required to collect usage data at five-minute increments. For these large consumers, it should be expected that the products offered in the retail market will adjust to reflect the opportunities of price responsive demand, and behind changes such as meter battery storage.
End users entering longer term retail contracts or power purchase agreements will have to make themselves aware of commercial terms in contracts that post July 2021 might prematurely set down or force the parties to renegotiate terms in tune with the new financial dynamics and complexities introduced by 5MS.
Further, utilities will be impacted by an upsurge of the amount of data received, which will be six times more for customer or sites equipped with a smart meter. This, in turn, will demand configuration changes in backend IT systems to store more granular data. Also customer portals and apps may need to be adjusted and updated to match background IT upgrades and market communications. The network load will increase for consumers wanting to view their usage data via digital channels such as web and mobile.
Further, technological developments and government policies have enabled the entry of new players in the market and disruptions to existing competitive frameworks, structures, and patterns of demand and supply.
The Australian energy industry is facing significant challenges in meeting commitments to customers and regulators. The impending move from 30 to five-minute settlement would impact systems, trading and billing. An increase in the volume of data that will need to be processed and stored would additionally put pressure on managing costs.
However, organizations that are prepared and conduct a review of changes at metering, dispatch and settlement levels will remain up to date on plans and understand how these changes will impact their processes and systems
For a smoother implementation of the five-minute settlement process, companies are advised to:
A. Expedite Smart Metering Programmes:
Australia is behind the smart metering curve. There are roughly 3.3 million smart meters installed across the NEM out of a total 13.6 million meters, accounting for less than a quarter of the country. Only Victoria has successfully implemented its mandatory AU$2.24 billion, 2.8 million meter rollout, the country’s first advanced metering infrastructure project. Nationwide, state-led programmes were implemented by the country’s energy regulator in December 2017. Uptake in other states across the NEM has been significantly slower, with almost 400,000 smart meter users in NSW, South Australia, Queensland, and Tasmania installing them as part of a wider solar rooftop panel installation for owners who want to sell energy back into the grid. Estimates say that the national programme should be completed by 2023, but upgrading to the new technology is optional for consumers.
Accurate and timely data from smart meter delivers wider efficiencies to settlement parties through shorter settlement timeframes and reduced credit cover. It also allows innovation to support the smart charging of electric vehicles, vehicle-to-grid services, local energy markets, and time of use tariffs. Additionally, these advances include prosumer offerings that capture demand-side response and behind-the-meter generation and storage at household and smaller business sites.
The rollouts, led by publically-owned distributors, have met with large amounts of controversy and limited success. Victoria’s rollout success hinges on customer benefits like reduced metering charges and support for new technologies, but cost savings from energy monitoring have been non-existent.
It is the time now to learn from the past and get back on track. Distributors and retailers need to help the customers to overcome the consumption data visibility challenge, which will speed up the smart metering implementation. This will in turn will enable market participants to make 5MS a success and to maximise its benefits.
B. Readiness of Information and Communication Technologies:
The move from 30 to five-minute settlement is arguably the most significant change. Organisations will have to review their systems and processes end-to-end by looking at processes delivered manually and determine what needs to be automated. The quantity of data involved is going to increase exponentially, and manual processes are a potential point of failure. Databases need to be examined to make sure they can cope with data volumes, and any process that is time-dependent needs to be evaluated to ensure that they can still complete within the required time frames. Market communication methods will also change, with new options such as APIs becoming available for bid and offer submission.
The organisations involved in the generation and trading of electricity will experience a six-fold increase in the volume of data, with around 70 different industry procedures affected. Therefore, market participants will require more computational power and advanced modelling software to run models at an increased time granularity.
C. Data Analytics:
As mentioned earlier, one of the impacts of five-minute settlement on utilities will be the increase in the amount of data they receive. Proper data analytics would allow real-time management of the grid infrastructure and facilitate the development of new energy business models and services.
Generally, data is easily available but not particularly transparent for analysis due to it being unstructured. This prevents data analytics from offering smarter solutions. Forecasting activities like predicting changes in power flow, making long-term investment decisions, and modelling consumer behavior all rely on the availability of both good data and data analytics.
In settlement, data analytics will help speed up the process of allocating metering data to the responsible market parties. This will be crucial in dealing with the increasing volumes of data from smart meters. Moreover, data analytics will help drive new business opportunities, such as smart contracts, energy management across organizational boundaries and will support high frequency energy trading. Data analytics provides better insights into asset management, resource planning and dispatch for renewables, and demand forecasting.
D. Engagement and Onboarding Participants:
Engagement between AEMO and the industry is crucial for the successful execution of the 5MS program. All stakeholders, such as generators, aggregators, and a cross-section of retailers, should be brought on board to effectively engage in discussions on 5MS. Throughout this process, feedback from stakeholders can help in making correct decisions.
Taking a leaf out of Southwest Power Pool’s integrated market rollout, the Australian market can implement engagement learnings.
- Publishing a monthly newsletter that will focus on key deliverables within the program, along with the latest progress and near-term actions.
- Launching a learning center for courses that help participants familiarize themselves with information about the 5MS change.
- Conduct outreach programs to ensure market participants are provided education and support to bridge the gap between the participants’ needs and successful go-live.
Another area where major changes may be required to implement five-minute settlement is the information systems and processes of market participants and the market operator. Here, AEMO needs to engage with stakeholders to ensure awareness of escalations and issues while providing consultation on changes to process and procedures.
Reference Links and Reference Documents:
https://www.oxfordenergy.org/wpcms/wp-content/ uploads/2018/11/Electricity-Sector-Transition-in-the-National- Electricity-Market-of-Australia-Managing-Reliability-and- Security-in-an-Energy-Only-Market-EL-31.pdf
AUSTRALIAN ENERGY MARKET COMMISSION SUPPORTING FAST RESPONSE ENERGY FIVE MINUTE SETTLEMENT FINAL DETERMINATION 28 NOVEMBER 2017
RULE DETERMINATION National Electricity Amendment (Five Minute Settlement) Rule 2017
NEM five-minute settlement and global settlement Interim industry readiness reporting: Round #1 results