April 12, 2023
Mitch O'Neill
Grids has submitted two rule changes: ERC0360 and ERC0359, to improve FCAS cost allocations and ensure central dispatch better manages these costs. Below is a quick summary.
Two facts about the national electricity market:
We procure too much contingency FCAS
We distribute the costs of FCAS in a bad way (which contributes to procuring too much FCAS)
This makes the electricity system operate less efficiently: from incentivising investments in the wrong type of generators to operating them minute-to-minute in silly ways. Ultimately, extra costs on the system flow through to consumer power bills, and power bills are quite expensive right now.
Currently our FCAS cost allocations result in strange outcomes. One is small solar farms curtailing output when contingency FCAS prices go high (which is the last thing we want to happen when there is a lack of FCAS supply). Another is developers and operators of very large generators or loads being able to avoid most of the additional FCAS costs that they may impose on the electricity system.
Additionally, the market operator doesn’t try to dispatch plants in a way that reduces the size of the largest contingency where it leads lower overall system costs. Some may think that NEMDE “co-optimises” wholesale and FCAS markets for a lowest cost outcome (I sure did up until a few months ago), but it only partially tries to achieve this.
We can fix these problems with a few simple tweaks to cost allocations and central dispatch that are widely recommended and already used by our friends in WA.
The improvements suggested in the rule changes are supported, and in some cases recommended, by previous FCAS determinations1, the reliability panel2, and the NER itself3. These changes have already been (or are being) implemented by AEMO in Western Australia, providing a real world example of how they influence the efficient operation of a power system.
These improvements probably should have happened many years ago.
Back in 2001 when the ACCC (before the times of the AEMC) set up the FCAS markets the arrangements were meant to be temporary. It was expected a second round of work would occur shortly after to improve these arrangements. From the ACCC on contingency FCAS cost allocation from 11th July 2001:
“The LECG report to NECA mentions that spreading these costs over as broad a base as possible, until more sophisticated mechanisms are implemented, should minimise distortions to decision making during the transition. Substantial progress is envisaged in the second phase toward a structure where costs are borne by entities that can act to reduce the costs of these ancillary services.
Allocating contingency FCAS costs on a better causer pay basis is not technically possible at this stage…” – NEC - Ancillary Services Amendments Determination 11 July 2001 pg 34
That second round of work was never carried out, and ultimately forgotten about. We still largely have these temporary arrangements.
22 years later we will take up the baton to implement, as they say: a more sophisticated mechanism to allocate contingency FCAS on a better causes pays basis, which is now technically possible.
Thanks to everyone that has helped out so far. And thanks for reading.
Links
ERC0360 - Allocating contingency FCAS costs
ERC0359 - Optimising contingency size in dispatch
Footnotes
“Substantial progress is envisaged in the second phase toward a structure where costs are borne by entities that can act to reduce the costs of these ancillary services.” NEC - Ancillary Services Amendments Determination 11 July 2001 pg 34
“The Panel considers that it could be in the interests of consumers for the Commission to consider implementing an explicit co-optimisation of marginal FCAS costs and increasing contingency sizes, as done in the WEM in Western Australia. By dynamically allocating the costs of ancillary services to facilities generating higher quantities and those with a poor reliability history, NEMDE would automatically allocate costs to those most suitable to bear them thereby resulting in an optimal outcome for consumers.” Reliability Panel Review of the FOS 6 April 2023 pg 39
“where arrangements require participants to pay a proportion of AEMO costs for ancillary services, charges should where possible be allocated to provide incentives to lower overall costs of the NEM…” NER 3.1.4(8)