In 2021 some significant changes were introduced to the way electricity is priced in the energy market. Thanks to a decision by the Australian Energy Market Commission, the energy industry has moved from 30-minute settlement to 5-minute settlement periods for the electricity spot price. As this explainer puts it, this means “the whole market will bid on, dispatch, and settle electricity in five-minute blocks, rather than some parts of the process being half-hourly”.
With questions rolling in from ever curious Amber customers, we thought we’d share a five minute read on five minute settlement: why it’s happening, how it relates to price spikes, and what it does and doesn’t mean for Amber customers (spoiler alert: not a lot).
How did things work before?
Since the start of the National Electricity Market 1998, there’s been a subtle but crucial distinction between “dispatch prices” and “settlement prices” in the energy market.
Settlement prices, set every 30 minutes, controlled how everyone in the market either paid for electricity (as a customer) or earned money for electricity (as a generator). These settlement prices determined what Amber customers pay. For their usage in each half hour period, customers would be charged the 30 minute settlement price for that period. This is the same for everyone buying wholesale electricity throughout the market.
However, underlying each 30 minute settlement period were six individual “dispatch” periods, each five minutes long. Generators would provide price bids for each five minute dispatch period, and then the market operator (AEMO), would set the prices such that all demand in the market is met at the lowest cost way the bidding generators. This resulted in a dispatch price for that five minute period.
At the end of a 30-minute block, the six individual five minute dispatch prices would be averaged to create the 30-minute settlement price. All generators would receive that 30-minute settlement price for power they produced during that time (regardless of which five minute blocks they generated power in). Likewise all customers pay for energy consumed within that 30 minute period.
The price you see in our app is constantly being calculated and updated using this mixture of the 30-minute estimate and a rolling average method over the course of the 30 minutes. For this reason, you are likely to see some price variability if you look at the Live Price a few times during a 30 minute period and then at the final price at the end of the 30 minute period.
So what’s changing with the introduction of five minute settlement?
As of October 1 2021, there’s been a significant rule change from 30 minute settlement prices to five minute settlement prices (known as 5 Minute Settlement or 5MS for short). Under this new rule energy generators will be paid the five minute price for anything they generate during that five minute period, instead of being paid the average 30 minute price that they received under the previous rules.
Likewise, retailers will also be charged for their usage based on the price in each five minute block.
Why is this a big deal?
The biggest impact of this change in the short term is going to be on the generation side, and relates to how different types of generators are able to benefit. Generators that are flexible and able to provide rapid power with short-notice (especially batteries) are going to be big winners from this change, as it means they can respond rapidly to faster changing five minute prices. Likewise, the big losers from this change are going to be slower-responding generators like big coal plants, that can’t respond as rapidly to changes in the price every five minutes. Previously these generators didn’t need to react rapidly, as a high five minute period would translate to a high 30 minute settlement price, so they could just generate anytime in that 30 minute period and benefit. But now if they can’t respond in five minutes, they won’t be able to benefit from a higher price for the energy generated.
These changes also reduce some of the power that large fleets of generators had over the market that often caused price distortions. One common pattern in the market (especially prevalent in Qld over 2021) was one very high price five minute period (often as much as $15/kWh), followed by five negatively priced five min periods (at -$1/kWh), would combine to create a still very high 30 minute settlement price - over $3/kWh. This was often caused by generators withdrawing supply for one five minute period (causing a price spike, as the NEM tried to get more generators to come online). The same generators would then bid back in at very low prices to provide energy for the remaining five minute periods. This meant they could benefit from a high 30 minute price, even though they were the ones who caused the price spike by withdrawing supply for five minutes.
Ok, so now the whole market has moved to 5 minute settlement, but prices in the Amber app are still shown in 30 minute blocks - what’s going on?
All generators are now being paid based on five minute periods. But for consumers it’s still a bit more complicated as it depends on the granularity of data from their smart meters.
At the moment, many residential smart meters in the market only provide data in 30 minute blocks. For this reason, we will still be billing you based on your usage in 30-minute increments and so continue to show prices in our app based on 30 minute periods,.
That said, we are looking to show five minute prices in the app in the future. You can fetch five minute prices via the API if you are curious.
How does Amber work out the 30-minute price it changes customers?
We are keeping it simple for the moment: we are just taking the average price of all five minute intervals during that half hour period.
Will this change affect my bills or my experience as an Amber customer?
No - you are still billed on 30 minute prices and will be until your meter has been updated and we switch to more granular billing.
When will my smart meter get updated to reflect my usage every five minutes?
The short answer is: we don’t know. It’s up to the networks and metering companies to decide when they roll out the updates that will enable five minute readings. Currently we expect them to start rolling the updates from the beginning of 2022, with these staggered over an 18-month period.
There is some mixed news for Victorian customers. On the plus side, you were the first in the country to receive smart meters way back in the mid 2000s, which has meant you have been able to get up and running with Amber as soon as you are connected whereas others had to wait for the installation of a smart meter at their property. However, if your meter was installed before 2017, it doesn’t support five minute reporting and won’t until the time comes around for the meter to be replaced.
So what’s the takeaway?
Five minute settlement is a pretty big change for the market, and will help keep Australia accelerating towards newer technologies and away from slower moving generators like coal stations - which we think is pretty awesome. It also helps remove some of the games that large generators have been able to play and make the market fairer for everyone.
As a customer, there’s no real change to your Amber experience at the moment as a result of this shift. But if your meter supports five minute blocks then we hope you’ll be able to start experiencing five minute prices sometime during 2024. And if you’ve got a slightly older 30 minute meter then you’ll just continue getting the same great 30 minute prices that you’re used to.
If you have any questions, get in touch! You can reach us at firstname.lastname@example.org.