Over the next few years there are a number of significant changes to the design and operation of the wholesale electricity spot market that will present new opportunities and risks for energy industry participants and customers. Two of these changes are the introduction of Five Minute Settlement (5MS) and the move to Global Settlement (GS) and market reconciliation for the demand side of the wholesale market.
The Australian Energy Market Operator (AEMO) is currently working with the energy industry to implement the changes required to the wholesale market systems and procedures to implement these market reforms.
The targeted commencement for 5MS and a ‘soft start’ for Global Settlement was 1 July 2021. However, there is currently a rule change being considered by the Australian Energy Market Commission (AEMC) and the Council of Australian Governments Energy Council (COAG EC) to delay the commencement of these reforms by 12 months to 1 July 2022. The reason for the delay is to provide more time for the energy industry to address the immediate priorities of hardship and energy affordability arising from COVID-19. The final decision on the delay is expected to be made in the coming weeks.
Five Minute Settlement: Overview and implications for large energy consumers
In November 2017, the AEMC made a final rule change determination to alter the settlement period for the wholesale electricity spot market from 30 minutes to five minutes. The rationale was that a five minute settlement period would enhance the price signals and investment opportunities in areas such as batteries and other fast response technologies, demand response and also better balance supply and demand. In addition, there are also anticipated efficiencies in the wholesale market through more efficient bidding, better operational decisions, and greater investment.
The impact of 5MS on wholesale and retail pricing is still somewhat uncertain, however most industry participants believe there will be little impact on wholesale swap prices, but some believe there may be short term increases to cap prices. The cap price impacts may arise from reduced liquidity in the wholesale market as some gas peaking generators are unable to respond in five minutes and may therefore not continue to sell cap products.
Retail prices are also likely to be relatively unimpacted for large customers with flat electricity profiles, for customers with more peaky electricity profiles there may be some cost increases. However, there are also likely to be increased opportunities for customers to capture new value streams and potentially offset any possible price increases. Examples include investing in new technologies such as batteries and also to provide demand response.
Global Settlement and Market Reconciliation: Overview and implications for large energy consumers
In December 2018, the AEMC made a final rule change determination to amend the demand side of the wholesale electricity market settlement and move towards a ‘global settlement framework’. The current market settlement framework is known as ‘settlement by difference’.
In the current framework the local or host retailer within a distribution area:
- is billed for all the electricity consumed in that area less the loss-adjusted metered electricity consumed by customers of other retailers in that area, hence the term ‘settlement by difference’; and
- assumes all the cost and risk for any residual electricity losses in that area — known as Unaccounted For Energy (UFE). UFE includes items such as theft of electricity, metering errors and any differences between the assumed distribution loss factors (DLF) and real loss factors.
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 calculated by AEMO and allocated to retailers and other direct market customers in the local area on a pro-rate basis using their market share. Depending on the materiality of any UFE related costs incurred by retailers, these may then be on charged to customers in addition to any existing loss factor related charges.
The AEMC decided to move to a global settlement framework for three main reasons:
- Improved transparency in settlement.This should lead to fewer disputes, enhance the ability for AEMO to report on UFE and therefore identify any actions to reduce UFE (if required) over time.
- Competition on equal terms between local or host retailers in an area and all other retailers. This will reduce the hidden costs and inefficiencies in the current market design.
- Improved risk allocation driving enhanced incentives. By allocating UFE to retailers there will be an increased incentive for them to reduce UFE where possible which will reduce the costs for all consumers over time.
If you have any questions or need advice on the impacts and opportunities of Five Minute Settlement of Global Settlement on your business please have a look at the links provided below for more details on these proposed changes.