A Change in market rules will help reduce wholesale energy prices

While the Coalition and the fossil fuel lobby has tried to use blackouts in South Australia as an excuse to go slow on renewables and abolish state-based targets, others are pushing for a rethink about electricity market rules and operations so the grid can embrace 21st technology and practices.

A new report has highlighted how a change in energy market rules could encourage more battery and other storage devices and help reduce wholesale energy prices.

One of the key issues is the current system of settlement periods in the wholesale electricity market. Generation is dispatched and priced every 5 minutes, but the market is only “settled” every 30 minutes.

A new study by the Melbourne Energy Institute’s Dylan McConnell argues that a 5 minute settlement period is critical to unlock the “full value” of battery and other storage, and will reduce the cost of “caps contracts” by around one third.

One of the criticisms of the 30 minute settlement periods, apart from the fact it exposes the market system to gaming by certain players, is that it is designed to advantage slow-response peaking gas plants, but does not favour instant-response technologies such as battery storage.

McConnell’s analysis and modelling shows that with a 5-minute settlement period, the potential revenue for battery storage installations could rise more than five-fold to around $617/hour for every kW of capacity, and twice that much on days of high volatility.

This would provide the revenue certainty to encourage battery storage installations to be built. Battery storage could also provide other network security services that could help keep the lights on if grids such as South Australia’s were battered by another super-storm with winds of up to 260km/h.

McConnell’s analysis also looks at the impact of “cap contracts”, a favoured hedging tool used in wholesale markets.

Under the 5-minute settlement rule, and with battery storage, McConnell’s modelling shows that cap contract pricing could fall by up to 30 per cent. That will have benefits to wholesale prices that will flow through to all consumers.

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Giles Parkinson