Full steam ahead for day ahead markets?

The energy security board (ESB) has just released discussion papers on two potential major reforms to the NEM: System services and ahead markets and Two sided markets. The latter will be covered in a blog later this week.

The system services and ahead markets flags up a potential change to one of the most notable features of the NEM compared to many other wholesale electricity markets – real time gate closure. The NEM allows generators to change their bids for each five-minute period right up to the period in which they are dispatched (at which time they must comply with the market operator’s dispatch instructions). This means that the mix of generation at any given time is the most efficient (because generators are dispatched based on how low a price they have bid) because it incorporates the most up-to-date information.

Until recently the process of bidding and rebidding simply involved a shuffling of the pack of a set of synchronous generators (i.e. with actual spinning turbines), whether coal, gas or hydro powered. Each generator could be ramped up and down by their operator. This made system security relatively easy to manage (outside of sudden events such as extreme) as most generators could contribute to the required voltage and frequency control. Also, if there was a sudden loss of generation because a unit tripped, say, there were always other generators to take up the slack.

This is no longer the case with the increase in variable renewables. These are connected to the grid using power electronics and can’t inherently contribute to the strength and stability of the system. Also, they are usually running at their maximum available output based on the weather, and so cannot contribute more output if there is a sudden demand spike or loss of other generation.

In south Australia, this is already creating a situation whereby the market operator has to direct gas generators to run when they wouldn’t otherwise based on the dispatch price, so that they can provide these essential system services. Lower cost renewable generation sometimes has to eb curtailed in such situations – i.e. if South Australia is already exporting the maximum amount of surplus electricity. This happened as recently as Sunday, which was a  sunny and windy day but with low demand. Even though wind and solar were producing 120 per cent of South Australia’s demand and prices were below zero for much of the day, there were still two gas generators running.

AEMO forecasts that this scenario will spread to other regions of the NEM over the next five years or so as renewables penetration increases. One solution is to do what many other wholesale markets do and decide on the mix of generation required 24 hours in advance. This allows plenty of time to ensure there are enough synchronous generators turned on that can provide system services (non-generator resources, such as synchronous condensers, flywheels or batteries may be part of this mix too). Since demand forecasts and variable renewable output will change over the ensuing period, there will need to be some balancing adjustments too. There are also intermediate options that focus on ensuring there are enough resources committed to provide system security while still allowing the energy market to be dispatched in real time:

The other side of ensuring there are enough resources for system security is to pay an appropriate amount. Several services, such as system strength, inertia and operating reserves are currently effectively provided for free. Whether they get paid for in competitive dispatch or by a longer-term contract (potentially with regulated pricing) will depend on the characteristics of the service, such as whether it’s susceptible to marginal pricing, whether competition to supply the service is feasible and how frequently the service is required.

Either way there are some new costs on the way for consumers. However, these may turn out to be lower than the additional costs they currently pay for when AEMO has to direct generators on.