Unbundling of essential system services – a look into the future

6 min read


The Energy Security Board’s (ESB) Post 2025 Market Design Options Paper provides a peek into a future where the system services required to ensure a stable and secure National Electricity Market (NEM) are unbundled; creating opportunities for market participants to capitalise on alternative revenue streams.

Key takeaways

  • In the future, owners of storage facilities, particularly utility scale batteries and pumped hydro facilities, could take advantage of multiple revenue streams outside the traditional energy and frequency control ancillary service (FCAS) markets available today.
  • Opportunities also exist on the demand-side, with large customers potentially having options to derive revenue from the NEM in addition to the current demand-side response arrangements.
  • Advances in technology will be central to the ability of the market to value and pay for ‘unbundled’ essential system services.

Background

In March 2019, the former Council of Australian Governments Energy Council tasked the ESB with advising on the required changes to the NEM to ensure it could accommodate an increasingly diverse and distributed generation mix, while ensuring ongoing reliability of supply.

The latest step in this process was the publication of an Options Paper on 30 April 2021, which broadly provides for four key reform directions.

One of these reform directions focuses on introducing new frameworks for the procurement of essential system services.

What are essential system services and why is there a problem looming?

‘System security’ refers to the ability of the power system to operate and remain stable when unexpected events occur. The ESB has identified four essential system services which are required to maintain system security:

  • frequency control;
  • inertia;
  • system strength; and
  • ramping capabilities/operating reserves.

Historically, these system services were provided as a by-product of the existence of large synchronous generators in the market such as coal-fired power stations, and were not separately valued in an economic sense. However, as more and more synchronous generators are retiring or approaching retirement and the penetration of renewable generation in the NEM is increasing, AEMO has needed to increasingly intervene in the market and procure system services from market participants. In the recent Health of the NEM report published by the ESB in January 2021, the ESB noted that AEMO issued more than 250 security-related directions to the market, up from 158 directions in 2018-2019.1 An example of such an intervention is the Reliability and Emergency Reserve Trader (RERT) regime under which AEMO maintains a panel of reserve providers that can provide reserve if and when required by AEMO. These types of interventions, and the increasing number of them, are not regarded by the ESB as an efficient approach in the long term.

Future revenue opportunities

Instead, the ESB notes that there is significant value in the ability of certain types of infrastructure to provide essential system services, and that incentivising market participants to provide these services (for value) should mean that they are ultimately delivered to consumers at the lowest cost.

Over the short to medium term, it appears most likely that the bulk of essential system services will continue to be procured using the current approach, but the intention is that, over time, the system will move towards a spot market-based approach to the provision of services (as is currently the case for energy and FCAS). As technology permits the unbundling of the four essential system services (and then possibly the unbundling of individual services themselves), new revenue opportunities arise on both the demand and the supply side of the market.

Explore the potential future revenue opportunities which may be introduced as part of the ESB’s new frameworks for the procurement of essential system services below.

Spot market arrangements for provision of Fast Frequency Response

The ESB is considering developing a spot market to procure a fast frequency response service. This service, which is part of a rule change currently being considered by the Australian Energy Market Commission (AEMC), would require a service provider to provide FCAS within two seconds after a contingency event (as opposed to the current response rate for ‘fast’ FCAS of six seconds).2

Fast Frequency Response can be offered by inverter-based technologies such as wind, solar PV, batteries and demand-side resources.
Primary Frequency Response incentive arrangements

In 2020, the AEMC introduced a mandatory requirement for all scheduled and semi-scheduled generators to respond automatically to small changes in power system frequency. This rule change aimed at addressing immediate system security needs but recognised the need for further reforms, including new market and incentive-based mechanisms, to appropriately value and reward the provision of these Primary Frequency Response services.

The current preferred position is to develop new FCAS arrangements for the provision of Primary Frequency Response during normal operation while retaining some form of mandatory Primary Frequency Response obligations as a safety net. The ESB is currently considering technical and economic advice in this space and aims to publish a draft determination by 16 September 2021.

Structured Procurement of System Security Services

The ESB is considering two structured procurement models for the provision of system security services:

  1. a unit commitment for security, which is a longer term procurement mechanism aimed at addressing system strength gaps by allowing AEMO to schedule resources ahead of time outside the spot market (ie through long-term contractual arrangements); and
  2. a system security mechanism, which is a shorter term procurement mechanism aimed at addressing system constraints on a particular day.

The AEMC is currently considering rule changes that would be used to implement these recommendations with a draft determination expected in September 2021.  
Ramping / operating reserves

The AEMC is currently considering a rule change that may result in the provision of operating reserves being valued separately from the energy and FCAS markets.

The AEMC has put four market options forward in its direction paper3, including:

  • holding capacity in reserve that is available to be dispatched in the next interval;
  • a commitment to offer additional capacity above current generation in the interval 30 minutes ahead of time;
  • holding capacity in reserve that can be called in the interval 30 minutes ahead of time; and
  • a commitment to provide 30 minutes of ramping capacity.

A draft determination on these market options is expected by 24 June 2021.
Inertia spot market

The ESB is considering a long-term goal of establishing a spot market to value and procure inertia. This idea is still in its infancy but will start with assessing the value of inertia through a structured procurement process (eg through the Structured Procurement of System Security outlined).

The success of an inertia spot market will depend, in part, on the evolution of technology as well as the evolution of our system as synchronous generation in the system declines and variable renewable energy increases.  
Integrated ahead market and energy trading

Another long-term goal of the ESB is to establish an integrated ahead market that could assist in delivering frequency control, system strength services and ramping capabilities/operating reserves (rather than through individual markets or the structured procurement mechanisms that are the focus of the short-term reforms).

Again, this long-term idea is in its infancy, with its design to be informed by the development of the market and system over the short to medium term. However, the ESB sees benefit in considering this idea as a way of coordinating and balancing the needs and demands of a system with the operational conditions on the day.