ENERGY SECURITY BOARD MOVING TO A TWO-SIDED MARKET - April 2020 - COAG ...
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
ENERGY SECURITY BOARD
MOVING TO A TWO-SIDED
MARKET
April 2020
Contents
Executive Summary ..................................................................................................... i
1 Introduction........................................................................................................ 1
1.1 Visibility of resources and a two-sided market .......................................................... 1
1.2 Approach to designing a two-sided market ............................................................... 1
1.3 Link with 2025 market design work ........................................................................... 2
1.4 Criteria for assessing market design choices ........................................................... 2
2 The move to a two-sided market....................................................................... 4
2.1 What is a two-sided market? ..................................................................................... 4
2.2 Why should we move to a two-sided market? .......................................................... 4
2.3 Benefits of a two-sided market .................................................................................. 6
3 Key concepts within a two-sided market design ............................................. 9
3.1 The system and the market....................................................................................... 9
3.2 Access to the system through the connection point ................................................. 9
3.3 Key entities ................................................................................................................ 9
3.4 Services................................................................................................................... 11
4 How parties participate in a two-sided market: scheduling and bidding ..... 13
4.1 Context .................................................................................................................... 13
4.2 Drivers of the need for change ................................................................................ 13
4.3 Key components and considerations ...................................................................... 14
4.4 Analysis of key components.................................................................................... 14
4.5 Recommendation for optimal design ...................................................................... 16
4.6 Next steps and key considerations ......................................................................... 16
5 Who would participate in a two-sided market? ............................................. 18
5.1 Drivers of the need for change ................................................................................ 18
5.2 Options for how to change ...................................................................................... 18
5.3 Description and analysis of options ........................................................................ 19
5.4 Recommendation for the optimal design ................................................................ 21
5.5 Next steps and key considerations ......................................................................... 21
6 Access, charging and integrating DER .......................................................... 23
6.1 Context .................................................................................................................... 23
6.2 Coordination of generation and transmission investment ....................................... 23
6.3 Access and charging ............................................................................................... 24
6.4 Distribution system and market operations ............................................................. 25
7 Interactions with ahead markets..................................................................... 27
7.1 Context .................................................................................................................... 27
7.2 Interactions between an ahead market and two-sided markets ............................. 27
7.3 Next steps ............................................................................................................... 29
8 Incentives for long-term reliability.................................................................. 308.1 Context .................................................................................................................... 30
8.2 Opportunity presented by a two-sided market ........................................................ 30
8.3 Next steps ............................................................................................................... 31
9 Consumer protections..................................................................................... 32
10 Conclusions and next steps ........................................................................... 33
A Abbreviations and technical terms................................................................. 34
B Building blocks of a two-sided market ........................................................... 35
Connection Points ............................................................................................................. 35
Services and trading .......................................................................................................... 35
Examples of potential trading relationships ....................................................................... 36
C Summary of DER trials and state based incentives ...................................... 37Executive Summary
Visibility of resources and a two-sided market
On 6 December 2019, the Council of Australian Governments (COAG) Energy Council tasked
the Energy Security Board (ESB) with investigating interim measures to preserve reliability and
system security in the national electricity market (NEM) as it transitions to the 2025 market
design. As part of this task, the COAG Energy Council requested the ESB to provide advice on
arrangements to give visibility of available resources and options to ensure their sufficiency,
and that be coordinated with, amongst other things, the longer-term market design for a two-
sided market.
The tasking letter requested that the ESB provide this advice on the preferred frameworks by
March 2020, with detailed analysis to be provided by the end of 2020, along with the final 2025
report.
This paper has been coordinated through the Australian Energy Market Commission (AEMC)
and the Australian Energy Market Operator (AEMO) on behalf of the ESB. It provides a high-
level discussion on the benefits and opportunities of moving to a two-sided market and
highlights how this work will be coordinated with considerations of an ahead market in the
NEM.
The case for change
Twenty years ago, when the NEM was developed, the designers envisaged it would eventually
share the characteristics of other commodity markets. That is, once technology was more
advanced, there would be active participation in the market from both the supply and demand
side. However, technology at the time meant the market needed to place a greater emphasis
on the supply side so generation could be dispatched to meet demand.
A substantial transition is under way across the energy sector, fuelled by new and advancing
technologies, and digitalisation:
• the generation mix is increasingly made up of a large number of smaller resources such as
rooftop solar and batteries which are geographically dispersed
• network companies are facing more dynamic and two-way network flows
• the nature of the 'consumer' is fundamentally changing.
Energy services in the future will be able to be bought and sold in a dynamic way, responding
to consumer preferences and price signals, and new technology such as battery storage and
electric vehicles will add another dimension to electricity usage.
The clearest opportunity from the energy transition is the development of a two-sided market. A
two-sided market can deliver benefits of improved efficiency and innovation, and customer
benefits including better prices and more choice.
However, the transition also includes challenges for security and reliability as supply and
demand becomes more variable and uncertain, and the industry transitions away from
generation that traditionally delivered security services (such as inertia and voltage control).
Any new market design needs to realise the benefits and mitigate the risks involved in the
transition.
This paper provides a high-level overview of what a two-sided market could look like and its
key foundations. The aim of this high-level design is to harness the benefits of available
technologies in such a way that promotes the long-term interests of consumers while enabling
AEMO to efficiently operate a secure and reliable power system.
iWhat is a two-sided market?
In simple terms, a two-sided market has all its participants responding to price based on their
cost and value preferences. The parties who participate in the market are exposed to its
outcomes, with buyers only supplied to the extent that they buy through the market and sellers
only supplying to the extent they sell through the market.
For the NEM, a two-sided wholesale market would be informed by quantity and price inputs
from both consumers and producers of electricity and would enable more efficient participation
in the market by even small consumers like homes and small businesses.
Technological advances and digitalisation mean that consumers will not need to monitor
electricity prices and decide how or when to participate. These decisions would be set up to
happen autonomously or in an agreed way via their retailer or aggregator.
Benefits of a two-sided market
The energy market should be dynamic, and consumers rewarded for buying and selling
energy, demand management and other services to the parties who value them the most, in a
way that benefits all consumers.
There are significant benefits from a two-sided wholesale market where customers with or
without distributed energy resources (DER) are actively engaged in the demand for, and supply
of, electricity, and technology can actively control the way in which they can reveal their
intentions in the market.
The high and growing penetration of variable and/or non-synchronous generation is changing
the nature of the dispatch problem, while new technologies provide a much greater potential for
demand-side response and engagement with the market. As the growth of variable and non-
synchronous generation creates new challenges for system reliability and security, increasing
participation by customers, large or small, with DER or not, can contribute to the prevention
and management of these issues while also improving market efficiency.
The ability to respond when prices are high and supply is scarce, creates incentives to change
behaviour and conserve electricity or to shift the timing of consumption. Conversely, when
supply is abundant and low cost there are strong drivers to change behaviours to make use of
that supply. Full participation in a two-sided market can support higher levels of flexible
capacity from both consumers and DER and facilitate greater innovation in services for
customers.
Greater flexibility through exposure to price for all participants can enhance the efficiency and
robustness of the market. A two-sided market could help address key system issues related to
the integration of DER. Over time, this creates significant opportunities to reduce system costs
and therefore, consumer prices.
Key features of a two-sided market
There are several considerations to be made when designing a two-sided market. In summary,
a two-sided NEM would:
• Maximise participation by requiring that all entities trading energy in the wholesale
market submit bids and be scheduled.
• Allow consumers to choose if and how they participate in the market or whether they
operate through someone who does (for example through a retailer or aggregator).
Technological advances and digitalisation mean that consumers will not need to
monitor electricity prices, or actively participate if they choose not to.
• Require that the party best placed to provide forecasts of quantity and price to do so.
ii• Place obligations on functions and activities, rather than participant categories or
technologies.
There is a spectrum of options that will move the market closer to the above objective and the
benefits, costs and trade-offs of how this will work need to be carefully considered.
The move to a two-sided market is a significant shift for the market and any market design will
include a transitional approach to maximise benefit while also minimising adverse impacts on
consumers and market participants. A transitional approach to support the move to a two-sided
market could include exploring different approaches to scheduling demand side participants
through the Wholesale demand response mechanism rule change and AEMO's Virtual Power
Plant (VPP) trials.
Link with ahead markets
While a two-sided market facilitates the evolution of the NEM to take advantage of
digitalisation, it is important that the system has the appropriate resources available to ensure a
secure and reliable system. AEMO has identified several challenges that the system will face in
maintaining system security in the next few years, particularly with issues such as inertia
response, primary frequency control, voltage control and system strength.
The aim of the high-level design of an internally consistent two-sided market is to harness the
benefits of available technologies in such a way that promotes the long-term interests of
consumers while also enabling AEMO to efficiently operate a secure and reliable power
system. An ahead market could provide benefits to the two-sided market solution. A broader
assessment of the merits of an ahead market for energy markets and consumer benefits will be
considered in the next phase of work.
Recommendation and next steps
The ESB recommends that it continue to develop a framework for two-sided markets as soon
as possible for COAG Energy Council’s consideration by the end of 2020. This will build on
current projects, as well as carry out economic analysis of options, look at international studies
where relevant, assess options against an agreed assessment criterion and consult with
industry where possible.
A critical part of this work will be determining the transitional pathway for what will be a
significant change to the market.
There are several projects and trials underway that will assist in the development of a detailed
market design for a two-sided market including:
• the Wholesale demand response mechanism rule change
• Open Energy Networks project and AEMO’s VPP trials
• the Coordination of Generation and Transmission Infrastructure project
• the Electricity network economic regulatory frameworks - Grid of the Future review.
The outcome of these projects and trials can provide important learnings in the development of
such a market. It will be important to develop a plan of the current and future projects that
interact with the two-sided market project to ensure a coherent and efficient market design.
Over the coming months, the ESB and market bodies will continue to concurrently develop the
ahead and two-sided market designs, evaluating the various options to identify a
recommended design by the end of 2020. This work will be informed by and coordinated with
the 2025 project, and other workstreams being carried out by the market bodies.
iii1 Introduction
1.1 Visibility of resources and a two-sided market
Twenty years ago, when the national electricity market (NEM) began, the designers envisaged it
would eventually share the characteristics of other commodity markets. That is, once technology
was more advanced, there would be active participation in the market from both the supply and
demand side. However, technology at the time meant the market needed to place a greater
emphasis on the supply side so generation could be dispatched to meet demand.
A substantial transition is under way across the energy sector:
• the generation mix is increasingly made up of a large number of a smaller resources (both
renewable and batteries) which are geographically dispersed
• network companies are facing more dynamic and two-way network flows
• the nature of the 'consumer' is fundamentally changing.
Parts of Australia are world leading in terms of their wind and solar penetration. On 10 November
2019, South Australia's operational demand reached an all-time low of 458 MW while rooftop PV
output was over 830 MW. 1
These changes in the market, including advances in technology, are now removing some of the
constraints faced by the original market design. This provides an opportunity to continue to
develop the wholesale market and increase how consumers can engage in that market.
On 6 December 2019, the Council of Australian Governments (COAG) Energy Council tasked the
Energy Security Board (ESB) with investigating interim measures to preserve reliability and
system security in the NEM as it transitions to the 2025 market design. As part of this, the COAG
Energy Council requested the ESB provide advice on arrangements to give visibility of available
resources and options to ensure their sufficiency, and that be coordinated with, amongst other
things, the longer-term market design for a two-sided market.
The tasking letter requested that the ESB provide this advice on the preferred frameworks by
March 2020, with detailed analysis to be provided by the end of 2020.
This paper has been coordinated through the Australian Energy Market Commission (AEMC) and
the Australian Energy Market Operator (AEMO) on behalf of the ESB. It provides a high-level
discussion on the benefits and opportunities of moving to a two-sided market. The paper will also
highlight how this work will be coordinated with considerations of an ahead market in the NEM.
1.2 Approach to designing a two-sided market
Out of the tasking letter from COAG Energy Council, the aim of the high-level design of a two-
sided market is to harness the benefits of available technologies in such a way that promotes the
long-term interests of consumers while also enabling AEMO to efficiently operate a secure and
reliable power system.
This paper will provide an overview of key design elements of the optimal two-sided market, note
areas that require further consideration, and suggest potential transitional paths towards a two-
sided market. To do this, the structure of this paper is as follows:
1 AEMC analysis of NEOpoint data, 13 November 2019
1• Chapter 2 looks at the vision for a two-sided market, including the opportunities to
empower consumers.
• Chapter 3 presents the fundamental building blocks underpinning a two-sided market.
• Chapter 4 and 5 note the key considerations for participation in the buying and selling of
energy, and the process by which participants should provide information to the market.
• Chapter 6 looks at access, charging and distributed energy resources (DER) integration.
• Chapter 7 considers the interaction between a two-sided and ahead market.
• Chapter 8 notes the impact of a two-sided market on the way we deliver adequate levels
of generation to meet the reliability standards demanded by customers.
• Chapter 9 looks at how consumer protections will need to be addressed in future stages
of work.
• Chapter 10 provides some conclusions on this work and recommend the potential next
steps required for this work program.
1.3 Link with 2025 market design work
Alongside this work on developing a two-sided market, the COAG Energy Council has tasked the
ESB with developing advice on a fit-for-purpose market framework to be in place for 2025. The
ESB needs to recommend the necessary changes to the market by the end of 2020.
This paper will focus on the features of the design of a two-sided market that would yield the
greatest consumer benefit in a digitally connected and enabled energy world. This will be
informed and coordinated with the 2025 work program, and other workstreams with the market
bodies. The interaction between a coherent market design for a two-sided market and the other
related workstreams is outlined in Figure 1 below.
1.4 Criteria for assessing market design choices
A critical part of the work developing a two-sided market is the assessment framework that will be
used to evaluate the options for each of the design elements. This assessment framework will be
confirmed in the next phase of work, but will be around the benefits and risks each design
element creates in terms of:
• its ability to deliver a reliable system and support system security
• competition and market signals
• appropriate risk and cost allocation
• competitive/technology neutrality
• information asymmetries
• cross-market integration
• regulatory and administrative costs.
The ESB is consulting on a range of potential assessment criteria for the 2025 work program.
Any final assessment framework for a two-sided market will be consistent with those developed
for the 2025 project.
2Figure 1: Interaction between the two-sided market design and other related workstreams
32 The move to a two-sided market
A two-sided market is a market model that promotes direct interaction between suppliers and
customers. Most traditional markets are two-sided such as commodity and agricultural markets.
There is currently an opportunity for the NEM to shift away from being like a one-sided market
and move towards being a two-sided market. This chapter will outline:
• what is a two-sided market
• why the NEM should move to such a market and the change making the move possible
• the benefits of a two-sided market for end users (customers), trade, the market and for
network operation.
2.1 Is the NEM a two-sided market now?
The current NEM scheduling process matches generation with forecast demand, which is closer
to a one-sided market. This is because generators provide prices indicating their willingness to
generate varying volumes, while demand is taken as a ‘given’, being based on forecasts made by
the power system operator. This is rather than the purchasers of electricity in the wholesale
market providing prices at which they are willing to consume varying volumes that can be
matched with that of generators.
In simple terms, a two-sided market has all its participants responding to price based on their true
cost preferences. The parties who participate in the market are exposed to its outcomes, with
buyers only supplied to the extent that they buy through the market and sellers only supplying to
the extent they sell through the market.
In the context of the supply and purchase of electricity, consumption of energy occurs only when
its cost of supply is less than or equal to the price at which it is valued by the party seeking to buy
it. Under such an arrangement, an incentive is provided for participants to consume energy from
the system when the cost of supply is significantly less than its value to the end user (for example
at times of high wind or solar production). The converse is equally true: where the cost of energy
is higher than its value to the end user, the end user will reduce its consumption, or shift the
timing of its consumption, of energy from the system.
This paper presents the case for the development of new trading arrangements which support a
two-sided market at the wholesale level – one that is informed by quantity and price inputs from
both consumers and producers of electricity. This specifically seeks to enable more efficient
participation in the market by small end users.
2.2 Why should we move toward a two-sided market?
When the NEM was established, electricity generation was provided by a relatively small number
of generators while demand was distributed and costly to measure at the customer level. Power
system operation was about forecasting demand and scheduling the exact quantity of generation
to supply that demand, while holding some capacity in reserve. A key purpose of the real-time
market was to coordinate generation to efficiently serve expected demand. While the design
included features to promote innovation (such as demand side bidding), the prevailing technology
and processes were not economic for such innovation to emerge.
Today the high and growing penetration of variable and/or non-synchronous generation is
changing the nature of the dispatch problem, while new technologies provide a much greater
potential for demand-side response and engagement with the market. As the growth of variable
and non-synchronous generation creates new challenges for system reliability and security,
participation by the demand-side and DER can contribute to the prevention and management of
these issues while also improving market efficiency.
42.2.1 Consumer-led changes
The changing context of the electricity market and changing nature of electricity consumers are
opening new opportunities for significant development of the NEM’s wholesale market design.
The technological barriers to greater consumer participation that existed at the inception of the
NEM are continually reducing.
Responding to wholesale prices has historically posed a challenge to most consumers given it is
highly complex and consumers are generally focused on the outputs from electric devices, rather
than the electricity itself. To respond, consumers have generally needed:
1. to be technically equipped to respond, which involves having the appropriate pricing
information, metering and tools to make it economic for them to alter their consumption.
2. an incentive to respond to wholesale prices – consumers who are unable to capture the
benefits of responding to wholesale prices would not do so.
3. a desire to engage in the market and respond to wholesale price signals – consumers
have needed the appetite to engage and respond.
Technological advances mean consumers will not need to monitor electricity prices and decide
how or when to participate as these decisions could be set up to happen autonomously or in an
agreed way via their retailer or aggregator. Already, new equipment, appliances and software are
available that use digital technologies to save energy and seek out the lowest rates. Specific
loads such as electric vehicles, electric hot water, pool pumps and air conditioners can be set and
controlled remotely to consume electricity at the cheapest times and export it (in the case of solar
PV and batteries) at the time at which it has the greatest value without impacting on the benefit
consumers obtain from using electricity.
Growth in consumers actively engaging in the market via increasingly intelligent devices and
appliances should be complemented by a market design which both encourages engagement
and fully captures the efficiencies arising from such engagement. The future development of a
two-sided market would be able to address challenges associated with the changing nature of the
wholesale market, and more readily capture the efficiencies of greater consumer participation.
Importantly, while consumer participation is already growing through the increasing number of
remote capable devices and DER, it is not transparent to AEMO or other market participants
which reduces the quality of their decisions. As such, there are broader benefits of this
participation facilitated by increased transparency that are yet to be captured where they
outweigh the costs.
2.2.2 Changing generation mix
The wholesale market relies on participants forming expectations about market outcomes in the
future days, weeks, months, and years. Confidence around these expectations depends on the
degree of firmness of the information participants provide to the market operator, as well as the
information that participants observe from other sources (for example, the contract market).
This information is revealed by participants to the market operator and indicates their availability
and willingness to generate or use electricity, which changes as the time approaches and
circumstances change. Without this information, investments and operational decisions become
more uncertain and riskier. For AEMO, this information is critical to maintain confidence that the
system will operate safely, securely and reliably.
The NEM now has a generation fleet that provides mixed levels of information to the market
about their operating intentions.
In a tighter demand-supply balance and changing characteristics of the source of electricity
generation, the differences between forecasts and actual outcomes may have more significant
5and costly consequences. AEMO is less assured supply can meet demand and the power system
can remain within a secure and reliable operating state, as:
• the uptake of DER continues
• demand side participation grows
• there is a decline of online synchronous capacity
• there is more variable plant availability generally and more extreme weather days.
2.3 Benefits of a two-sided market
There are significant benefits from a two-sided wholesale market where the demand side and
DER are actively engaged in the demand for, and supply of, electricity, and technology can
actively control the way in which they can reveal their intentions in the market. And given the
discussion on the changing generation fleet in section 2.2.2 above, a two-sided market can
improve market efficiency and support system reliability.
Participants in a two-sided market are very aware of the relationship between their actions and
the market outcomes.
For consumers of electricity and those that participate in the wholesale market on their behalf, the
potential to either not be supplied or pay high prices when supply is scarce creates incentives to
change behaviour and conserve electricity. Conversely, when supply is abundant and low cost
there are strong drivers to change behaviours to make use of that supply.
An end user that has technology in place to respond to prices can use less electricity when the
price exceeds the value it places on that electricity. Likewise, the same end user may find ways
to supply more electricity when prices are high, while taking the opportunity to service equipment
or even turn up (or charge in the case of batteries) when prices are low.
For example, prices should be very high when generation is tight and import congestion is
occurring in a region. Conversely, they are very low when generation is abundant and export
congestion is occurring in a region. Pricing congestion in a two-sided market could lead to the
market responding more efficiently to ration the limited network/generating capacity that is
available, which might reduce or at least delay the need for new investment in either of these
facilities.
An example of how a two-sided market could address potential distribution network issues is
highlighted in the box below.
Two-sided market design and the potential to address distribution network issues
A two-sided market could help address key system issues related to the integration of DER.
The continued take up of behind the meter solar PV is reducing the operating demand on the
system. A minimum level of demand is required on the system so that there is capacity to
dispatch generation resources required for secure operation of the system. A two-sided market
would provide incentives to end users to increase consumption or shift load to times of peak
solar output to provide enough demand to allow the secure operation of the system.
Under Frequency Load Shedding (UFLS) is an emergency mechanism that allows distributors
to load shed in specific parts of their distribution network to manage under frequency events in
the NEM. Given the large uptake of solar PV, this mechanism may not be effective in
addressing under frequency if these parts of the distribution network are exporting energy. A
two-sided market may provide a market platform that can facilitate the provision of a network
service by end users that are able to curtail their consumption during an under frequency
event.
62.3.1 Benefits for end users
As a two-sided market energy market develops and advances in technology continues, more end
users such as homes and small businesses will have software and commercial arrangements in
place to allow them, or third parties acting on their behalf, to respond to price signals and gain
greater control over their electricity usage. Further, with these advances in technology, a two-
sided market can reduce the complexities of cost reflective network tariffs as automation can
internalise and automate end users’ willingness to consume electricity or supply it to the market.
As noted earlier, with digitalisation and a two-sided market, homes and small business could
benefit from active participation, with much less effort on their behalf and limited impact on their
lifestyle.
Greater flexibility through exposure to price for all participants can enhance the efficiency and
robustness of the market. Over time, this creates significant opportunities to reduce system costs
and therefore, consumer prices.
As more end users become active participants in a two-sided market, those retailers and
aggregators who work to best understand their customers’ demand profile and preferences, and
act in the interests of their customers, will become lower cost and able to offer better deals — and
hence return more benefits to the end user while themselves being rewarded by being more
competitive.
2.3.2 Benefits for trade
As technology continues to develop and a new power system service is identified, the two-sided
market design can influence how the market can maximise the opportunity for traders to
participate in new service markets, broadening opportunities to trade while enhancing overall
market efficiency.
2.3.3 Benefits for the market
More accurate and up to date information on both the supply and demand sides would enhance
the ability for market participants to make informed decisions and assist AEMO in maintaining the
safe, secure and reliable operation of the power system.
A two-sided market encourages price responsiveness and demand flexibility which serves to
improve matching of supply and demand across time. This in turn might remove, or at least
reduce, the need for operational interventions by AEMO, or in market re-design.
Greater flexibility through exposure to price for all participants can enhance the efficiency and
robustness of the market. Not only is this efficient but helps maintain system security and
reliability.
2.3.4 Benefits for distribution network operation
A two-sided market design will facilitate the active participation of end users in the wholesale
energy market. Through their participation in the wholesale energy market, active end users will
provide information about their intention to consume or supply. This information could be utilised
to by distributors to determine more accurate demand forecasts for their network. A more
accurate demand forecast will be a valuable input into the optimisation of network assets with
increasing levels of DER.
The two-sided market will establish an interface between end users (directly or through a trader)
and the wholesale market. The wholesale market interface could be utilised to facilitate
distribution network markets and services. There is also the potential in the future to co-optimise
these distribution network markets with the wholesale energy market.
7Questions for stakeholders
1. Do stakeholders agree with our characterisation of the benefits of moving to a two-sided
market? Are there other areas the ESB should be considering?
83 Key concepts within a two-sided market design
This section presents the core elements or building blocks of a two-sided market in a way that is
distinct from the current market design. This allows for a more streamlined approach to the
market design that isn’t encumbered by the current definitions in the market.
Further information on some of these key concepts is provided in appendix B.
3.1 The system and the market
The integrated electricity network is a complex system and for the purposes of this paper this will
be referred to as the ’system’, operated by the power system operator (AEMO). Energy services
are provided by means of the system. As system operator, AEMO’s role is to ensure the system
operates within its limits and is reliable and secure.
There are one or more markets which directly influence the quantities of resources (i.e. energy or
system security services) that are dispatched in the system. The coordination of generation to
meet demand is managed in the wholesale energy market by AEMO. AEMO may also facilitate
other markets for energy services. In practice, to ensure system security, AEMO might need to
procure public good services in a market. The markets for energy services which are facilitated
by AEMO, i.e. the wholesale spot market, are referred to as ‘the market’ in this paper for
simplicity.
Other markets will exist to support the market arrangements described in this paper, including
retail markets, bilateral trading and exchange-traded markets, but these are external to the two-
sided market rules.
3.2 Access to the system through the connection point
Parties obtain access to the system via a connection point. A connection point is where:
• connection to and disconnection from the system occurs
• flows of electrical energy and quantities of other energy services are measured and
accounted for
• the party with operational control and obligations regarding the flow of energy to and from
the system is established and changes from time to time.
For example, at a connection point a party may provide energy to, or receive energy from, the
system. Metering arrangements at the connection point will measure the quantity of electricity
provided or received, and this data will be used to determine the amount of money the relevant
party receives from, or owes to, the market as a result.
There are many potential ways in which a connection point can be configured or managed and a
key component of any detailed market design will be the final requirements and obligations for
the connection point. Further detail on connection points is provided in appendix B.
3.3 Key entities
There are two critical roles in the provision and use of energy services and the trading of those
services in the market – the end user and the trader.
93.3.1 End users
The party who provides or receives services at a connection point is an end user. An end user
could be a supplier of services, a consumer of services or both, and includes generators, battery
owners, EV owners, small and large customers, and customers who also provide energy or other
services to the system through their own facilities (for example rooftop solar PV).
In the current market, end users or customers are generally thought of as ‘loads’, (i.e. only
withdrawing electrical energy from the system). But many end users also provide electricity or
other energy services at certain times; for example, an end user who has DER such as solar PV,
batteries or an electric vehicle. However, the amounts of electricity provided by DER to the
system are currently largely uncontrolled and do not respond to market signals. The opportunities
presented by a two-sided market enable this characterisation to change.
As the market readily caters for buying and selling at the efficient price, this end user provision of
energy to the system, as well as consumption of energy from the system, is catered for. End
users pay for the services they use, and are paid for the services they provide, through a trader.
3.3.2 Traders
Traders perform all trading of energy services within the market, on behalf of end users. This
simple concept captures the diverse arrangements that exist today – including retailers,
generators, different types of aggregators, and special arrangements for storage and other
devices – but without necessarily having specific market rules and participant categories for each,
as exist today. Traders buy and sell services, trading between themselves, with AEMO, with
network operators, and with end users. Relationships between traders and end users are
discussed further below.
The key role of the trader is to identify opportunities and services that they can provide to
participants in the market that will be valued, bringing more capacity and capability into the
market efficiently.
This approach avoids over-complicating the market rules and simplifies the path for participation
for new types of traders. If a new type of trader or a new service emerges, under the two-sided
framework the barriers to trading might be reduced compared to the current arrangements.
3.3.3 Relationship between end users and traders
There are a range of ways an end user may interact with a trader:
• Be a trader at a connection point. This would describe a traditional generator that bids
on its own behalf but could equally describe a commercial user (with or without its own
energy facilities such as solar PV or a battery) who wants to trade a service directly into
the market and is sophisticated enough to manage the trading arrangements with AEMO.
End users’ ability to interact with the market directly (i.e. as traders on their own behalf)
will vary widely based on their demand for and ability to provide energy services, and their
commercial sophistication (recognising that technological developments such as smart
devices and trading algorithms may make it easier for end users to become traders).
• Procure services through a trader. In this case the end user’s ability to consume energy
becomes part of a service that is bid in the wholesale electricity market by the end user’s
selected trader. This would be akin to a standard retail arrangement in today’s market.
• Provide services through a trader. This could be a homeowner who wants to sell
energy services into the market based on wholesale prices and who has hired a service
provider (trader) to manage its interface with the wholesale market, rather than becoming
10a trader themselves. This arrangement may be on an individual basis or an aggregated
basis (where the trader has relationships with multiple end users and aggregates
capabilities across connection points to form a single aggregated service).
A single end user may be its own trader in respect of some services and procure or provide other
services through one or more traders.
A two-sided market should support the competitive provision of services by traders to end users.
Arrangements between traders and end users are governed by private contracts, which may be
standardised (for mass market services) or individually negotiated (for example where the end
user has unique needs or can provide unique services).
Certain arrangements may also require appropriate consumer protection provisions, for example
licensing requirements and minimum contract terms and conditions. These specific obligations
and requirements need only be applied to the relationship between the trader and the end user
where it has been determined that the end user is of a kind who requires protections in respect of
the particular services provided by the trader. The full suite of current consumer protections may
not be appropriate for all end users and all services.
The AEMC is conducting a review into the relevant protections, as discussed in chapter 9.
3.4 Services
A range of energy services are provided through the system and traded on the energy markets.
In the NEM, markets currently exist for bulk energy (wholesale spot market) and frequency
control (Frequency Control Ancillary Services (FCAS) markets).
Other services essential to the safe, secure and reliable operation of the NEM include ancillary
services, such as Network Support Control Ancillary Services and System Restart Ancillary
Services; and emergency reserve services, such as the Reliability and Emergency Reserve
Trader (RERT). Within the NEM’s current market design, these public good services are
purchased by AEMO on behalf of the market under contractual agreements with service
providers. Costs for these types of services can include separate payments for availability and
delivery and will vary dependent upon the relative scarcity of suppliers of a service and amount of
service required at any time.
In addition, other essential services, such as inertial response and system strength, are not
currently formally ‘valued’ by a service market or ‘priced’ through a regulatory or market
mechanism – they are provided as an inherent trait of the existing supply fleet. 2
The two-sided market design should allow innovations in technical standards and services,
without rigid market designs linking services back to physical types of generators, loads or
storage devices. Technical capabilities and the set of services offered could then evolve without
requiring major rule change processes. Further, the design should enable participants to tailor
solutions that are proportionate to their scale, while still allowing for protections for end users as
necessary.
2 For a full description of essential power system services, refer to AEMO Power System Requirements (2018).
113.5 Questions for consultation
Questions: Key concepts for two-sided market design
1. What considerations should be taken into account in determining the rights and
obligations that attach to a connection point in a two-sided market (in relation to end
users, traders and the market operator)? How should these differ from the current
arrangements?
2. Under the current market rules, traders of different kinds (eg retailers and small
generation aggregators) have different obligations to the market operator, end users
and other market participants. To what extent (if any) would it be helpful for a two-sided
market design to distinguish between different types of traders, or between traders in
different services?
3. If, in an eventual two-sided market, distinctions between different types of traders
should be removed or significantly reduced, what interim steps would help to progress
the market in that direction while minimising commercial disruption to existing traders?
4. Section 3.3.3 outlines the ways in which end users and traders may interact in a two-
sided market, and Appendix B provides more detailed examples. Are there other types
of interactions which the two-sided market design should accommodate?
5. Should some types of interactions (eg between traders and vulnerable residential
customers, in respect of certain services) be restricted or prohibited, or will appropriate
consumer protections address the concerns while allowing full end user choice in
participation?
6. What considerations should be taken into account in designing a two-sided market that
allows innovations in technical standards and services?
124 How parties participate in a two-sided market: scheduling and
bidding
In designing a two-sided market, a key design element will be determining how end users and
those acting on their behalf should participate in the market, through scheduling and bidding
obligations. This chapter will therefore look at:
• scheduling and bidding requirements in today’s market
• the drivers for why we need to change
• the key components and considerations for scheduling and bidding in a two-sided market
• an analysis of the key components
• recommendations for the optimal design
• next steps and the potential transitional approach.
4.1 Context
Scheduling in today’s market refers broadly to market participants sharing information with each
other and the market operator about when and at what price they intend to produce and consume
electricity. It provides for efficient outcomes by helping all market participants decide the
expected value of producing and consuming electricity at different times and helping AEMO
maintain a secure and reliable power system.
Bidding is part of being scheduled. Scheduled market participants are required to make bids and
offers to produce or consume electricity. These bids and offers let the market clear and produce a
market price. This price is provided alongside a schedule of which participants have been cleared
to produce and consume at the cleared price.
The information provided by scheduled participants relates to real-time through dispatch and
ahead of real time through the projected assessment of system adequacy (PASA) and pre-
dispatch processes.
Under the current arrangements, scheduled participants are required to:
• provide information into the PASA process
• submit bids into the pre-dispatch process
• participate in dispatch, including following dispatch instructions
• meet technical requirements, including telemetry requirements.
4.2 Drivers of the need for change
As noted earlier, when the market was established, almost all generation in the market was large
and scheduled. In addition, the demand-side was generally more predictable. This meant that
only requiring large generators to be scheduled was enough for secure system operations and for
price formation.
However, as the transition continues, non-scheduled generation, DER and demand profiles are
becoming increasingly responsive to the wholesale price. Many of these consumption or
generation intentions are not visible or scheduled in the market. Having more visibility of the price
responsiveness of the market will lead to higher efficiencies and certainty for market participants
and the system operator.
13Further, having access to DER and the demand side may deliver a transparent source of flexible
capacity to the market. Flexible capacity will become more important to the market as traditional
generation closes and intermittent renewable generation increases.
Greater integration of end users with controllable resources should reduce the overall imbalances
in the system, reducing total costs for everyone.
4.3 Key components and considerations
A starting premise for a two-sided market is that there will be greater levels of participation in the
scheduling process. That is, more traders will be providing information to the market about their
intentions. Facilitating the integration of end users with controllable demand and supply should
reduce the overall imbalances (and reduce total system cost). Providing a platform for end users
to participate in FCAS (and other service markets) will increase supply and competition, again
reducing total system costs.
However, this does not mean simply extending the existing requirements for scheduling to these
new participants (traders). Scheduling and the associated obligations established in the National
Electricity Rules (NER) was designed for large, controllable generating units and loads.
Introducing a semi-scheduled category acknowledged the cost and difficulties for intermittent
generators to comply with these obligations at all times.
Developing a more two-sided market provides an opportunity to revisit what obligations are
necessary to be scheduled and consider what should apply to a much more diverse set of market
participants. It also provides an opportunity to provide incentives and reduce participation barriers
for participants who traditionally haven’t been scheduled.
Ideally, a two-sided market would have all the participants ‘scheduling’ their intentions
themselves or through a third party. This would improve the price discovery process and
eliminate the need for central forecasts.
Individual customers would be able to choose their preferred level of engagement by either
participating directly in the market or by participating through a trader. Passive customers would
still be able benefit from increased participation in scheduling without needed to change their
behaviour or operation.
The options for change in this aspect of a two-sided market include consideration of what
participation means and who should participate (see chapter 5). The broad concept of scheduling
is likely to be retained and extended but it will need to change in form. The section below sets out
what this change might look like.
4.4 Analysis of key components
There are three main aspects of scheduling. The subsections below explain how these aspects
could develop toward a two-sided market for the below three aspects of the market. The aim of
any approach is to reduce the costs of and increase the incentives to bid into the wholesale
market – whether as an individual end user or through a trader.
4.4.1 Dispatch
Dispatch refers to the period in which the market price is calculated, and traders instructed on
what to do over the next five minutes. It is likely the current approach of issuing dispatch
instructions and relying on compliance with dispatch instructions will need some adjustment to
foster greater levels of participation without imposing significant costs.
Requiring traders to meet dispatch targets is necessary in order keep the system within a secure
operating state.
14In a two-sided market, there will be a greater number of scheduled traders. In addition, these
traders will not just be in the business of producing or consuming electricity as current generators
are. They may be trading on behalf of consumers who are making multi-faceted decisions that
impact on their electricity use. As such, the expectation that all scheduled traders can meet
dispatch targets in each interval may not be realistic.
The inefficiency created when a participant deviates from its dispatch target depends on the size
of the deviation and the effect it has on other participants.
Therefore, we will consider the details of a framework that proportionally rewards traders when
they meet their targets and penalises those who do not. When setting these incentives/penalties,
thought will be given as to how they can be both commensurate to the benefit/cost and impact on
the market. It also important that we consider how to balance these rewards and penalties so that
they present as low a barrier as possible for new entrants.
4.4.2 Pre-dispatch and PASA
Pre-dispatch is a process that currently combines bids from scheduled participants and forecasts
of non-scheduled participants to estimate what the optimal outcomes will be over the next day or
two. This in turn helps market participants make operational decisions.
In moving towards a two-sided market, a key question arises in relation to forecasts. Currently,
AEMO is required to make forecasts of demand and non-scheduled generation. AEMO does this
over short time horizons (i.e. five minutes to a week) to inform operational decisions, and longer
time horizons (a week out to years) to inform maintenance, planning and investment decisions.
As we move closer to real time, participants will likely have a better understanding about their
future intentions over a centrally determined estimate. As such, there is a clear opportunity for a
two-sided market to place obligations on these parties to participate in the short-term forecasts in
the same manner as existing scheduled participants.
However, as the forecasts become longer term, it becomes more difficult for the traders of
residential load (for example) to provide meaningful estimates. There will be a tipping point at
which a top-down forecast (i.e. a central AEMO forecast) will be more valuable than bottom up
forecasts (i.e. a collection of forecasts submitted by each trader).
Therefore, a two-sided market will allow for the forecasts of non-scheduled participants (i.e.
smaller generators and retailers/market customers and aggregators) to be provided by those
parties instead of being forecast by AEMO in the short term. A two-sided market would be
informed by bids being submitted by all traders for the consumption and generation of electricity.
This would reduce the reliance on or eventually replace the need to rely on centrally determined
demand forecasts.
However, for the sake of longer-term forecasts, it would make sense to continue to rely on top
down forecasts for some processes. For example, medium-term PASA (MT-PASA) is likely to be
a process by which it will continue to make more sense for AEMO to forecast demand. However,
short-term PASA (ST-PASA) in a two-sided market should be informed by demand side
participants.
4.4.3 Technical requirements
Participating in dispatch involves responding to short-term price signals, which in turn requires
real time measurement of consumption and generation. These measurements also need to be
communicated to the system operator in close to real time so that it can operate wholesale
market dispatch. It has been economically feasible for large generators to meter information in
real time and provide it to AEMO. However, it is unnecessary and cost prohibitive to require it
from every consumer of electricity.
15You can also read
