Open Letter calls for straightforward changes to fix ‘energy trilemma’

‘5-minute rule’ identified as key to immediate and responsible fix for peak-load issues.

The Australia Institute has today published an open letter to the Prime Minister calling for three market reforms to address the ‘energy trilemma’: security, cost and emissions.

The letter appears as a full-page advertisement in the Australian Financial Review.

Prominent signatories of the open letter include: Former Liberal Party leader John Hewson; Chair, Embark Australia, Simon Holmes à Court; Director, Australian Centre for Advanced Photovoltaics, Professor Martin Green AS FRS FAA FTSE; Chairman, GreenSync, Neil Gibbs; General Manager of Keppel Prince, Steve Garner; former Industry Commissioner, Emeritus Professor Tor Hundloe AM; Emeritus Professor, Barbara Pocock.

The letter proposes three quick measures:                                                                         

  • ‘5-Minute Rule’ to address demand peaks by changing market rules to allow very large consumers such as smelters to profit from demand management.
  • Proven software systems used in at least 12 countries around the world can aggregate large numbers of commercial and industrial consumers into ‘virtual peak plants’ that will provide safe and scheduled reductions in load, on commercially competitive terms.
  • The reliability of electricity frequency in our grid is maintained by ‘ancillary services’. Our system needs new markets for additional services to reflect changing demands and technology.

“While major new energy infrastructure can take years to finance and build there are several actions that Australian governments could adopt immediately and in the medium term that would lower costs, enhance security and reduce emissions,” Executive Director of The Australia Institute, Ben Oquist said.

“The government should take action before next summer when potential peaks in demand will arrive again.

“The Five Minute Settlement Rule has the backing of the Australian Energy Market Operator and the Australian Energy Regulator., as well as other key industry and energy experts.”

“It’s a straightforward change with wide-ranging benefits, most important of which will be create conditions to attract investment from fast responding energy technologies, such as batteries.

“High prices and retailer profit margins give governments the clear mandate to push the regulators to open up energy to competition, with faster markets, new frequency control technology and exciting  ‘virtual power plants’ that save energy,” said Mr Oquist.

‘5-Minute Rule’ explainer

Currently generators bid to supply energy in the National Energy Market (NEM) over 5 minute intervals, but are paid a price that is set over 30 minute intervals.

Currently, for every five minute interval bids to supply electricity are ‘stacked’ cheapest to most expensive. The most expensive successful bid sets the price for that 5 minute interval. However, the price actually received by generators for their successful bids is set every 30 minutes, as the average of the five minute prices over the 30 minutes.

The proposed 5-Minute Rule would change this and have prices set for each 5 minute interval. This means the price for wholesale power within a 30 minute interval can be pushed up by price spikes in one 5 minute interval.

Why does this matter? One of the many competitive advantages of batteries is that they can turn on and off very quickly, even faster than gas and far faster than coal. Batteries are uniquely well suited to jumping into the market on a short term basis, smoothing price spikes and reducing the capacity of incumbents to use strategic bidding to push up prices.

The National Electricity Market was created to use price signals and competition to efficiently allocate energy supply. The change to 5-minute sale intervals is a major opportunity to fulfil that goal.

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