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Five Minute Settlement: What Does it Mean for Energy Users

Written by Energy Action

There is a conceptually simple but practically significant change to the design and operation of the wholesale electricity spot market that will present new opportunities and risks for energy industry participants and consumers (large and small).

It relates to the introduction of Five Minute Settlement (5MS) on 1 October 2021, which 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 key market reforms.

There has been significant work effort and progress to date by the industry in preparing for 5MS.  The latest update is that on 22 March 2021, AEMO commenced the industry testing for the settlements platform.

Why make a change?

In November 2017, the Australian Energy Market Commission (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. There are also anticipated efficiencies in the wholesale market through more efficient bidding, better operational decisions, and more significant investment opportunities.

What are the potential market and customer impacts?

There are several areas impacted by the introduction of 5MS:

Metering and data storage

  • Metering databases and reporting systems will need to be updated to receive, store, analyse and report on metering and market data at a five-minute granularity. This will require a significant increase in storage and processing capacity in the supporting analysis and reporting databases and systems.
  • Some (older) electricity interval meters will need to be changed to enable them to measure electricity usage at a five-minute level.


AEMO market changes

  • The wholesale spot market will settle on a five-minute basis and AEMO will commence publishing data on a five-minute level.
  • Generators and other wholesale market participants will need to bid their supply or demand side participation at a five-minute level. In other words, participants will need to be able to submit 288 bids instead of the current 48 bids.


Wholesale pricing

  • The impact of 5MS on wholesale pricing is still somewhat uncertain. 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.
  • On 22 March 2021, the Australian Securities Exchange (ASX) commenced trading in five-minute cap products. It is still too early to confirm if cap prices will increase as a result of 5MS.
  • However, there is a view that at a minimum, cap prices will have upwards pressure 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 pricing

  • 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. These cost increases would most likely only occur from the commencement of a new retail contract rather than a change to an existing contract.
  • 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.


Network tariffs

  • Some electricity networks investigate the impacts and opportunities of potentially changing their maximum demand tariffs to be based on a customer’s five-minute maximum demand.
  • If introduced, the actual impact on any one customer is uncertain and will depend on their specific consumption profile.

 

If you have any questions or need advice on the impacts and opportunities of Five Minute Settlement on your business, please contact your Energy Action account manager on 1300 553 551.