Are SA electricity prices set to spike today?

power_prices

Few issues loom larger for industry than energy costs. And for South Australian energy users, the next few days may prove to be something of a shock. 

So what’s happening?

The Australian Energy Market Operator (AEMO) has notified the market that the Heywood interconnector between South Australia (SA) and Victoria will be partly down for expansion work between 0700 hrs on 10 August 2016 and 1700 hrs on 12 August 2016.

Up to half of the interconnector’s capacity will be available, much more than during the July wholesale price event; the risks of another wholesale price spike should be lower, though the wrong combination of events could still create trouble.

However, AEMO has advised that during the planned outage it will purchase “Frequency Control Ancillary Services”, or FCAS, for South Australia from within the South Australian segment of the electricity market. There is a very high risk that without an intervention this will result in several million dollars of otherwise avoidable expenses for energy users.

It also appears that just-scheduled works on lines in Victoria (Moorabool-Tarrone line and Moorabool-Mortlake line) will similarly require SA to procure FCAS locally on 20, 21, 27 and 28 August.

What is FCAS?

Frequency Control Ancillary Services (FCAS) is a market through which electricity generators are paid to slightly raise or lower their output in order to keep the electricity system within its operating frequency of 50 Hertz +/- 0.1 Hz. The frequency drops when generation reduces or the load increases, and vice versa. It is usually a very cheap service: SA requires about 35 megawatts of FCAS, which is usually purchased from interstate suppliers for $1 per megawatt per hour (or $840 per day across the whole state). However, SA’s highly concentrated and isolated market creates the potential for enormous price spikes when FCAS cannot be procured from out of state.

In October 2015 the SA FCAS market price repeatedly spiked to the cap price of $13,000 per megawatt per hour while the interconnector was largely down for upgrade work and FCAS had to be procured within SA. The three local providers (AGL, Origin and Engie) bid extremely high prices to supply FCAS. Once prices exceed a high price threshold for 7 hours, AEMO is able to impose a lower cap of $300 per MW per hour for one week. Prices spiked, were capped, and spiked again repeatedly through October. The total cost of this episode, split across energy users and generators, was around $26 million – rather than the $25,000 FCAS would ordinarily have cost.

What can be done?

Based on the October experience, we would expect another spike in FCAS prices on each of the periods when the interconnector is expected to be constrained in August. Assuming that prices reach the cap, the total cost of these events could reach around $10 million, most of which will ultimately be borne by consumers:

  • 10-12 August $3.7 million

o   35 MW of FCAS at $13,000 per MW for 7 hours, followed by 51 hours at $300.

  • 20-21 August $3.3 million

o   35 MW of FCAS at $13,000 per MW for 7 hours, followed by 16 hours at $300.

  • 27-28 August $3.3 million

o    35 MW of FCAS at $13,000 per MW for 7 hours, followed by 16 hours at $300.

These costs should be avoided if possible.

At this point there is very little that most energy users can do themselves to minimise the costs if a price event occurs. A wholesale price spike like that in July directly affects a minority of businesses who buy straight from the spot market, and those businesses can limit their exposure by curtailing production – an extreme and costly step. For other users, wholesale costs and the impact of price events are smeared across their whole contract. Meanwhile, the total costs of FCAS will be spread to most energy users without reference to their own individual consumption during an event.

So what can we do?

Bringing more competition into FCAS provision would help reduce dependence on a small number of suppliers. Other generators could become providers and bid prices down, but while this is worth pursuing (and AEMO should seek out more providers) this would take months and the immediate risk is in just over a week.

Deferring the current expansion work until more FCAS providers can be brought in is unlikely to be practical. SA energy users need the interconnector upgrade to be completed well ahead of the summer demand peak in order to reduce the risks of further wholesale price events.

In the immediate term the impact on energy users is going to depend on the bidding behaviour of registered providers.

Members seeking further details or advice can contact Tennant Reed, Ai Group’s Principal National Adviser – Public Policy.

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Tennant Reed
Tennant is Principal National Adviser – Public Policy at Ai Group. He has worked heavily on climate and energy issues, advising Ai Group’s Leaders’ Group on Energy and Climate Policy and developing reports on natural gas supply, energy prices and energy efficiency. He also works on a range of issues related to manufacturing and innovation. Previously he was an adviser in the Department of Prime Minister and Cabinet, working on fiscal policy, stimulus and infrastructure.

9 Comments

  1. Tom Butler

    Hi Tennant,

    Good work on this blog. Worth clarifying that the total cost includes both raise and lower services. It’s actually 70 MW that is needed so the month’s bill could be closer to $20 million for the days listed above. Customers pay half, non-FCAS generators the other half.

    Also, a new series of market notices is up on the AEMO website. The 35 MW constraint is now listed to be invoked on:

    31/08/2016 7:00 31/08/2016 17:00
    1/09/2016 7:00 1/09/2016 17:00
    2/09/2016 7:00 2/09/2016 17:00
    6/09/2016 7:00 9/09/2016 17:00
    13/09/2016 7:00 13/09/2016 17:00
    14/09/2016 7:00 14/09/2016 17:00
    15/09/2016 7:00 15/09/2016 17:00

    Tom

    Reply
    1. Tennant ReedTennant Reed (Post author)

      Thanks Tom – and I understand that FCAS prices have indeed spiked today. We’ll see whether this is sustained.

      Reply
      1. Tom Butler

        Yesterday’s bill was around $8 million, prices are now regulated down to $300 / MW / hour. The constraint comes off this evening so will settle then.

        Reply
  2. Paul McArdle

    Thanks Tennant

    Coincidence that I was asked questions about FCAS in South Australia this morning, and so posted these comments on WattClarity earlier:
    http://www.wattclarity.com.au/2016/08/another-day-where-lor2-notice-issued-for-sa-what-does-it-mean

    Paul

    Reply
    1. Tennant ReedTennant Reed (Post author)

      Thanks Paul. I think quite a few SA users and other market participants are more sensitive to FCAS in the wake of the price event last October!

      Reply
  3. Ian Forte

    Hi Tennant, this is very interesting. But it annoys me that peak power costs are quoted per MWh rather than kWh that people can relate to. So in this case the cap is $13000 per MWh or $13.00 per kWh. That is nearly 50X greater than the average punter pays. By quoting kWh it puts it in perspective.
    Anyway, I will get on to more important things. Hope to see you at the next EEMS, Cheers, Ian

    Reply
    1. Tennant ReedTennant Reed (Post author)

      Thanks for your comment Ian – and you’re right, energy cost information is too often put in ways that are hard to understand or compare. Putting everything together on a common basis can help: http://cdn.aigroup.com.au/images/spike.png

      Reply
  4. Bruce Easton

    Just a comment from the margins – The State Government of SA should be congratulated for supporting SA Industry uptake of energy efficiency through the REES scheme. Whilst not of truly significant scale there will however be many hundreds of businesses appreciating the LED high bays and other lights that will reduce their exposure to the price spikes discussed in Tennant’s blog above.

    Reply
    1. Tennant ReedTennant Reed (Post author)

      Thanks for the comment, Bruce. Efficiency is a good strategy for individual users to minimise exposure to energy costs. It can also have system wide benefits – but there are challenges. As we’ve argued, one of the challenges facing our energy system is that renewable energy and energy efficiency are reducing minimum electricity demand much faster than peak demand. The resulting electricity market is one where inflexible ‘baseload’ generators have a harder time surviving. The loss of those generators and the inability of current renewables to ramp are contributing to the risk of extreme price volatility. To make a successful transition to high renewables we will need a much more flexible system overall, in terms of demand response, storage and interconnection and the rules and incentives to support them.

      Reply

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