5 Minute Settlement
Once you get past air, water and chocolate, it’s hard to think of a commodity more important to life on earth than electricity.
In July 2021 the biggest changes to the electricity market since deregulation in the late 90’s will occur with a change from trading on the spot market from 30 minute to 5 minute “blocks”. These are regulator driven changes, and benefits include lower wholesale electricity costs over time, a more reliable power system, and rewards for customers who respond to demand peaks, such as batteries.
Seven Consulting, Australia’s best program delivery company, is at the forefront of assisting our major energy clients in planning, managing and delivering this change. This paper unpacks the background and detail behind the changes and offers some thoughts about how to structure this and similar regulatory programs of work to ensure successful delivery.
Enter the spot market
Deregulation in the late 90’s introduced a requirement for electricity to be freely traded, so participants can buy from and sell to whomever will give them the best deal. Thus, the National Electricity Market or NEM was born – essentially a stock market for electricity.
When the NEM was launched a key trading rule was the tradeable parcel for electricity was defined in 30-minute bidding increments: generators offer parcels of electricity in the market in 30-minute blocks. The exchange, now known as the Australian Energy Market Operator (AEMO), matches demand against offered supply and dispatches electricity to consumers. It does so in 5-minute blocks, but the settlement price is the average of the 5-minute blocks in a 30 min period.
Today’s electricity market is stuck in a time warp
A major constraint which impedes a broader adoption of fast-response technologies are the incentives embedded in these last century rules. The settlement price for a 30 min block of electricity is the average of the six 5-minute prices in that half hour. So, if there is a short-term price spike it’s not possible to get paid full value for this spike due to the fact the average price will always be lower than the peak.
This has been a disincentive to investment in new , fast response technologies.
Enter the 5-Minute Settlement (5MS)
5MS 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. If you like, it means the market is moving from baking and selling whole pizzas to baking and selling by the slice. Generators who can churn out pizza more quickly and sell-by-the-slice will find the playing field has been levelled, in their favour. This is a major change with some estimates as high as $700 million in industry compliance costs.
What does that mean for the energy industry?
There are a large range of systems and process changes required to comply with these mandatory changes. There are over 70 market participants who have work to do, including AEMO itself. The nature and scale of these is dependent on the type of participant. Distribution companies have less to do than generators and retailers for example.
You can’t settle electricity in five-minute blocks if you can’t measure the usage. Some large meters that are key to AEMO’s settlement processes will change by 2021, while others will transition over time. Household meters are only required to change when they are replaced, drivers to do so will include new housing construction and the uptake of household batteries. So, for the key electricity participants there is a lot of work to do to install new meters, configure existing ones to read at 5-minute intervals and process this new 5 minute meter data.
Generators will need to be able to operate their trading platforms in a 5-minute world, requiring vendors to amend systems to comply. This will require some potentially complex changes to technology and software that supports the trading platforms.
Any company that bills a customer for electricity consumption will need to be able to do so using 5 min data – this is a brains and brawn challenge – are the systems smart enough to “speak the 5 min language”, are they fast enough to process the higher data volumes and what are the costs associated with extra data storage.
Finance, Risk Management
Any system that uses 30 min data to manage risk, predict or model financial outcomes will need to be upgraded to a 5-minute world.
A typical generator or retailer will have 25-30 applications to upgrade, and key questions to answer about performance, storage requirements and change management processes. Testing will be complex and execution will need to be in step with AEMO mandated timelines.
Consequences of not being ready are high – potentially being unable to bill customers or participate in the traded energy market.
Some thoughts on successful delivery
While the challenges in delivering a 5MS project are not unique they do have aspects to them which are sufficiently unusual as to require some clear up-front thinking to control risk and increase the chances of success. Seven Consulting has a long track record of delivering programs of work of similar scale and complexity, we’d like to offer some thoughts on how best to approach the task at hand. These thoughts have application to similar types of challenges.
Future proofing when forward data loads are uncertain
For a given meter currently operating at 30 min interval, configuration to 5 min will increase the data challenge significantly. A medium sized retailer will today be gathering up to 100 million data reads a day. This needs to be processed within tight timeframes and stored for future use (for example re-constructing a customer bill). As more and more meters convert over time, data volumes will increase, and participants will need to plan for a future of ongoing data increases.
Planning and execution when timelines are fixed
Given the hard delivery dates, an end to end Agile planning and delivery approach is likely to be risky. We favour a Traditional style planning approach, in this instance, with clear milestones and documented traceability of requirements back to regulatory obligations. Your SteerCo will want to see delivery against milestones, unlikely to get excited by burndown charts. Once a plan is in place requirements could be documented in the form of user stories and executed in Sprints.
Don’t be dumb by design
5MS has a lot of complex nuances to deal with – for example the transition phase from 30 min to 5 min meters needs to be understood in detail. It will be important to get good quality SME’s, BA’s who understand the domain, and, Product Owners who step up and get engaged, particularly in signing off user stories.
Be clear on what success looks like
Given the new procedures will be clearly defined by AEMO, make sure your “definition of done” for user stories is clear and unambiguous – this will save a lot of time in reworking failed test cases and “robust discussion” amongst team members about whether a given story has been delivered or not. Clear end to end traceability from rules to executed requirements will assist greatly in evidencing compliance.
Co-locate your teams
There will be a lot to get through and it will be important to maintain open lines of communication, and to keep the team dynamics healthy. While you are at it try to ensure you keep one team together for the life of the program – which means managing your contractors with the same care as your perms and ensuring any service providers feel part of the family. Co-location will not always be possible, especially if some teams are offshore. Here, good quality and regular communication is essential for success.
Leave plenty of time for testing
Test windows need to operate at an industry level given the number of participants involved, so planning ahead on test strategy and being ready to go when the windows open will pay dividends
Understand your fall- back position at go live
The go-live date is mandated under AEMO rules, so an extension is very unlikely and a code roll back on go-live weekend is not viable. So, a “fix on fail” after go-live will be obligatory and having a contingency plan to deal with this will be important.
5MS changes are complex, involve multiple system changes, many participants and fixed deadlines. Delivery of quality throughout the production chain will be crucial. A disciplined approach to planning and execution will be essential to successful delivery.
The history of regulation and compliance-driven projects is a mixed one of success and some serious, often very public failures. Given the impact of any failure to deliver 5MS on our dependence upon a regular electricity supply, let’s hope we don’t have to go back to relying on just air, water and chocolate.