One small gain for battery storage, one big win for fossil-fuel industry

By Giles Parkinson, reneweconomy.com.au

Australia’s principal policy maker for the energy markets has waved through a rule change that could accelerate the use of battery storage to provide grid stability as more renewables enter the market. But the rule maker has shocked participants with another decision that may reinforce the dominance of the big fossil fuel utilities.

The Australian Energy Market Commission late last week made two rulings that it was first asked to consider way back in 2012 (such is the glacial pace of change in Australian regulatory circles) but which seen as critical as more wind and solar enter the market and old fossil fuel generators are phased out.

One of the rulings was good news and largely expected: The AEMC said it would allow ‘unbundling’ of ancillary services for the grid – which provide fast-acting balancing responses following a ‘contingency’ event, usually the unexpected loss of a large thermal generator.

This means that these services, known as FCAS, can now be more easily provided by more players, and not just the big generators, which currently control the supply (and thus the price) of FCAS services. Allowing new players like batteries and demand response loads should increase the supply of FCAS, and lower market prices.

That ruling was largely uncontroversial and expected, with any opposition by incumbents lukewarm at best.

The second ruling, however, has stunned some participants in the industry, because it effectively limits the amount of battery storage and new ideas – such as aggregating power plants in homes – by leaving it in the control of the major players.

The proposal was to create a ‘demand response’ mechanisms in the spot market to respond to times of high load, and high electricity prices, as were experienced in South Australia and other states in recent months, and which used to be frequent years ago, and may well become regular again as gas prices rise.

In effect, this would allow demand response or a battery storage to react to spot price spikes much the way a non-scheduled generator does today. In responding to a spot price spike with demand response, the high price can be ‘knocked out’ in the next dispatch interval.

The idea was to throw the market open, allow large energy users to be paid the spot price for not using their energy, rather than paying a dirty diesel generator, for instance, to switch on to meet the rising demand. And it could provide another role for battery storage and ‘aggregators’ like virtual power plants.

It makes sense. Overall, it should mean lower prices, and less pollution. Demand response, battery storage and other measures are considered by every independent analysis as a critical piece of the tool kit that is needed to a lower carbon grid.

Everyone, that is, apart from the energy incumbents, who stand to profit from their market power and the current system, and who fought hard against the rule. Already, they had managed to have some of the proposals watered down – to the extent that the setting aside of the rule change request , which came from COAG energy ministers, came as no great surprise.

What did stun the industry was the reasons for it: The AEMC said there was no need to change the rule because the market was working fine, there were plenty of demand response options available to customers and that no reform was needed.

‘The Commission has not found evidence of a relevant market failure that would justify mandating retailers to incur the costs from implementing the DRM,’ it wrote in its report. AEMC chairman John Pierce said in his statement: ’There are no barriers to the continued proliferation of demand response that has taken place to date.’

That, said some market participants and observers, is ridiculous. ‘That to me was shocking,’ said one industry insider.

‘Participating in demand response schemes in the NEM can be quite complex and generally only the largest commercial and industrial loads are participating today. And even then, in most cases you need your retailer to agree to let you participate.

‘More demand response would bring greater competition in the NEM, so I’m surprised the AEMC considers that the status quo is good enough.’

The submissions to the demand response rule change – like those for the other key rule before the AEMC at the moment, the proposed shift to 5 minute settlements to match the dispatch interval – typifies what’s at stake for the market, between the incumbents and the new disruptive technologies.

Those that opposed the ruling – as they did the five-minute settlement – included all the big coal and gas-fired generation companies, who want to retail their market dominance, and their ability to profit from the market.

The big generators – AGL, Engie, Origin Energy, EnergyAustralia and Snowy Hydro and their lobby groups – said introducing demand-side response into the spot market would be costly (they have to change some their systems), cause market distortions and ‘favour other technologies’.

It was interesting to note that the supposed ‘cost’ of the mechanism – $112 million over 10 years – compares to the ‘super profits’ of more than $190 million in the two weeks that the major generators gamed the market in South Australia in July.

They got a sympathetic hearing from the AEMC, the policy maker makes clear in its notes.

The rulings by the AEMC – rejecting the demand response proposal, and kicking the 5 minute ruling down the road for another year – reinforces the view in many quarters that Australia’s regulators are simply too slow, and too beholden to the incumbents to act quick enough to hasten the transition.

That view was reinforced last week when the Australian Competition and Consumer Commission said it saw nothing wrong with the market behaviour of the big generators to exploit their market power and extract high prices in the South Australian market.

That market power has been reinforced this past week with many of the same generators extracting the maximum price when the Australian Energy Market Operator controversially offered to pay them for market services while the main connector was upgraded.

That decision has been criticised by the Clean Energy Council – which questioned why the AEMO wanted to buy 35MW of FCAS from local generators only, effectively delivering them a windfall at a cost to renewable energy generators and consumers.

The new rule on FCAS may not avoid a similar situation in future, because that was a market decision by AEMO. But it should avoid the sort of situation last year when South Australia experienced a major black-out because those generators failed to follow instructions.

Opening up more competition means more battery storage, and more options for the market operator to deal with ‘low inertia’ and high levels of renewable energy. This will occur as more renewable energy enters the market and more fossil fuel generators exit the market.

It was previously thought that thermal coal plants (gas and coal) were the only ones that could provide system security, but this is now rejected. In the US,. Germany, and the UK, market operators are holding major auctions to provide battery storage to meet grid security issues.

In its submission, the South Australia government said increasing competition in the provision of ancillary services through unbundling will provide the market with increased and various suppliers and therefore assist AEMO with its role of ensuring a secure and reliable electricity system.

It, and the rest of COAG, however, have only gotten half of what they wanted. The AEMC has allowed some new technologies into the market with the changes to the FCAS ‘unbundling’, but kept any changes in check by refusing the demand response rule change, effectively keeping that market in the hands of retailers, to help protect the generation assets they own.

And it will likely make it harder for aggregators of demand response software and business models – those bringing together ‘virtual power plants’ that pool the resources of solar and battery storage installations in households and businesses – to push through their proposals with the direct imprimatur from the big retailers.

And it will prevent some demand side consumers from investing in demand response.

Addendum: The rejection of the demand response rule change may make it easier for the big generators to push for so-called ‘capacity’ mechanisms, effectively another subsidy to ensure that thermal plant is available to ensure system supply and security.

Although these payments have been rejected as just another fossil fuel subsidy, companies like AGL are promoting them furiously.

It has been said that the argument for a capacity market is often predicated on the absence of demand side response, and demand side participation. So AGL and other big generators will be pleased with the AEMC decision.

Not only that, having demand response would remove the need to have price caps, which critics say have become a ‘focal point for tacit collusion’. A strong demand side market and more competitive scarcity prices and no price cap may result in a more efficient outcomes for participants on the NEM.