Abstract
Australia’s National Electricity Market is undergoing a major change in its settlement process after AEMC announced the 5 MS rule change in November 2017. This rule change will eliminate any kind of unfair pricing, caused by the current settlement process in the wholesale market.
Currently, the dispatch of electricity happens every 5 minutes but the settlement price is determined for every 30 minutes. Due to this, there can be inefficiency in determining the prices and it might lead to an unfair bidding process. Once the five minutes settlement rule change is implemented, the settlement price determination will take place for every 5 minutes.
The 5 minutes settlement rule change is possible due to technological advancement as well as the shift to renewables and fast generators. Most utilities players are seeing it as NEM v2.0 with a more effective bidding and pricing mechanism. This paper talks about the rule change, its impact on trading and its benefits.
About Five-Minute Settlement
The Math Explained…
AEMC has explained the mathematics as to how the 30 minutes settlement is calculated and how it leads to unfair pricing: The dispatch price is set by the price of the highest cost generator required in the five-minute interval. For the six intervals in the graphic, the dispatch prices are: $40, $80, $80, $100, $100 and $80.
This averages to $480/6 = $80 which is the spot price for the half-hour trading interval. Due to this averaging of the price, the generator bidding at $40 receives double the amount of what the bid was, whereas the generator with dispatch price as $100 incurs a loss.
The difference in time-period (dispatch at every 5 minutes and settlement at 30 minutes interval) was primarily due to historical arrangements prior to market start, including limitations on metering and data communications.
The technological advancements such as smart meters, enhanced metering infrastructure, analytics for better forecasting and fast generators in place, it has now become possible to dispatch and determine the spot price for every 5 minutes.
Let us now understand the impact of this rule change on the utilities value chain, trading and short-term trade life cycle.
(Source: AEMC Fact sheet: How the spot market works)
Impact of Five-Minute Settlement
Impact on Utilities Value Chain
With the change in the settlement time from 30 minutes to 5 minutes, various areas of the value chain will be impacted. The figure below depicts the changes corresponding to each of these areas.
Let us now understand the impact of this rule change on the utilities value chain, trading and short-term trade life cycle.
1. Generation:
2. Transmission and Distribution:
3. Retail/Supply:
Impact on Trading
There would be a considerable impact on the trading business due to the rule change. The figure below depicts the changes corresponding to each aspect of the trading business, from forecasting till risk management.
Impact on Short-Term Trade Life Cycle
NEM is a wholesale market which is a pool or a spot market. The rule change will therefore impact the short-term trade life cycle. The various areas that are impacted as part of the short-term trade life cycle are:
The rule change will have a considerable impact on trading business as well as the complete value chain. However, it brings a number of benefits to the various players in the utility industry. The next segment of the paper talks about the various benefits associated with the rule change.
5-Minute Settlement – Benefits
Every industry undergoes a change in due course. Five-minutes settlement is one such change that the utility industry is set to embrace. This rule change brings numerous benefits to the industry such as:
Technological advancement has made it possible to implement and support the 5-minutes settlement rule change. The ETRM industry will see newer opportunities due to this change, and the Australian utility industry will derive benefits from the 5-minutes settlement rule change, making it a level playing field for all players.
References
Kapil Gupta
Global Head- Energy & Commodity Trading Business, Wipro Ltd.
Kapil has 19+ years of extensive global experience, complemented by sharp business acumen, a hands-on management style and a strong foundation in on-time, on-budget delivery within the ETRM ecosystem. He has built large, culturally diverse teams, globally. At Wipro, as Global Head of the Energy & Commodities Business, Kapil is responsible for growing the Energy & Commodities business globally. He is also responsible for building the global consulting organization and value-added services for industry, both in traditional as well as transformational solutions with a deep focus on getting clients ahead in their Digital journey. Kapil has a Masters in Business Information Technology from Middlesex University, London and Post Graduate Diploma in Business Administration from University of West London. He can be reached at: Kapil.gupta11@wipro.com
Upasana Singh
Business and Digital Transformation Consultant-Energy and Commodity Trading
Upasana Singh is an ETRM Consultant at Wipro. She is a Management Graduate in the field of Energy Trading from the University of Petroleum & Energy Studies with a total of 6 years of experience. Upasana has an in-depth understanding of the Energy Industry. She has played multiple roles while working for various Oil & Gas majors, leading Midstream Service Providers and Utilities giants across US, Europe & Australia. She has worked as a Business Analyst/ Domain Expert, for custom Energy and Commodity Trading application development engagements as well as a Functional Consultant, for Application Support engagement. She has been transforming herself as a thought leader and been working on various points of view in the field of Energy Trading Transformation and Digital Solutions. Upasana has a deep understanding how businesses are transforming due to multiple factors attributed to newer technologies, change in regulatory structure and new ways of doing business. She can be reached at: upasana.singh4@wipro.com