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Five-Minute Settlement rule takes effect in the National Electricity Market from 1 July 2021

Five-minute settlement rule changes

A substantial change is set to take place to the cost structures of generator dispatch and retailer consumption, with the launch of the Five-Minute Settlement rule in 2021.

The Five-Minute Settlement rule seeks to resolve pricing anomalies that have existed since the start of the National Electricity Market (NEM). Currently generators bid and are dispatched on a five-minute basis, however they are paid on their half-hourly dispatch volume multiplied by the half-hourly average spot price. The time difference was born from limitations in metering and communications that existed in 1998 but have since been largely overcome.

On 1 July 2021, the new Five-Minute Settlement rule will ensure that all generator dispatch and retailer consumption will be settled on a five-minute basis, thus removing the averaging effect.

What will the Five-Minute Settlement rule potentially affect?

For retailers and customers, any consumption used in high-priced five-minute periods is likely to come at a greater cost, particularly during high demand periods where load has surged. In theory, prices should be more volatile, being higher during high demand periods and lower in low demand periods when compared to that of the 30-minute averaged market and this change is likely to be reflected in retail pricing offers.

Customers can also expect to see an increase in costs in the short to medium term as a result of this rule change for several other reasons. Some of the peaking generators in the NEM – such as gas, hydro and liquid fuel generators – aren’t currently designed to respond to short time periods and are expected to be less likely to bid their units at the low prices previously seen due to these dispatch constraints. Those that are capable, will face higher operational costs associated with potentially shorter dispatch periods, which they may seek to recover through their contracting and bidding strategies.

As the dispatch economics change for the peaking generation fleet, the costs of hedge products such as $300 price caps will likely increase, both through scarcity of supply and through the increased risks that the sellers of these products will face in the future.

The broader market will also be impacted by anticipated costs incurred in supporting necessary changes to metering, prudentials and bidding processes. The Australian Energy Market Operator (AEMO) has indicated a cost in excess of $120m over ten years to adapt to the new settlement rules. Retailers and generators specifically will also incur operational costs to cover upgrades of billing, settlement, accounting and risk management software.

In deciding to implement a Five-Minute Settlement rule, the Australian Energy Market Commission has indicated that there will be a benefit to customers from the implementation of a Five-Minute Settlement rule.

Here at ERM Power, we anticipate that many of these cost benefits are not likely to be realised until the back end of the ten year period at the earliest, when fast-response technologies such as battery storage reach a high level of penetration due to predicted reductions in the cost of production.

 

If you have any questions, please contact your account manager, otherwise get in touch with us.