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New Market Participant – Market Ancillary Service Providers

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There will no longer be a requirement for Frequency Control Ancillary Service (FCAS) providers to be Market Customers.

Accordingly, third parties will, as of 1 July 2017, be able to offer retail customers’ individual or aggregated loads directly to FCAS markets without the third party being a Market Customer that purchases electricity from the spot market.

 

Background

The provision of Frequency Control Ancillary Services (FCAS) is currently restricted to Market Customers[1] who purchase electricity from spot markets.

The Australian Energy Market Commission’s (AEMC’s) Final Rule Determination, handed down on 24 November 2016, seeks to unbundle these services by creating a new market participant – a Market Ancillary Service Provider (MASP).

MASP’s have the ability to ‘provide FCAS Services through individual or an aggregation of market loads without the requirement to register as a Market Customer’[2] as of 1 July 2017.

 

FCAS markets

Load on a power system is currently required, under the National Electricity Rules and the power systems security standard, to be maintained at an operating frequency between 49.9 Hz to 50.1 Hz or such other range so specified in the power system security standard.

However, energy doesn’t always remain within these parameters as changes in demand and supply can raise or lower operating frequencies.

Accordingly, it is often the case that the Australian Energy Market Operator (AEMO) will require that energy either be added or removed from the system in order to either lower or raise frequencies to a level that falls within these parameters.

The addition or removal of energy is procured from FCAS markets.

There are currently 8 FCAS markets[3] that provide, very broadly, two distinct services, being regulation and contingency services.

Regulation FCAS are controlled by AEMO and are services that address minor variations that occur on a regular basis. However, ‘Contingency FCAS responds to larger deviations in power system frequency’. [4]

 

The need for changes to FCAS markets

Load frequency variations have become more common due to technological change and the increased uptake of intermittent energy supplies in the market, placing increased reliance on FCAS markets.

Accordingly, there has been much discussion about increasing demand side participation in FCAS markets and fostering competition in this area in order to minimise the cost of these services to the broader market.

 

Rule Change – in practice

Practically the new rule, ‘means that while a customer has a retail supply contract with a retailer, a customer may have a separate contract with a… [MASP]… (who may be another retailer) to provide ancillary services. In this case, the ancillary service contract sits alongside the existing electricity retail contract’.[5]

 

Eligibility Criteria

AEMO will deem an entity eligible to be a MASP if they can:

  • Identify units of load under their ownership, operation or control;
  • Show that the relevant loads are under their ownership, operation or control (through for example an appropriate arrangement in place with retail customers at the relevant connection point for the supply of FCAS services);
  • Demonstrate that the load has the requisite assets and equipment; and
  • Demonstrate that the load can meet relevant performance standards and specifications to AEMO’s satisfaction.

 

Rule Change – benefits

There are three main benefits of the new rules that broadly seek to increase competition and promote more efficient FCAS markets:

  • MASP entities will not need to ensure that either their customers or themselves are Market Customers.[6]
  • MASP entities will not be required to engage with customers’ retailer to offer load into the FCAS market, reducing transaction costs[7]; and
  • Retailers may register as MASPS and compete for the ancillary load of customers that are not otherwise their retail customers.

 

MASP Compliance requirements

MASP entities will still be required to meet registration requirements and have all appropriate systems in place to deliver FCAS services to the market in accordance with AEMO’s Market Ancillary Services Specifications (MASS) and chapter 3 of the National Electricity Rules.

Aggregation constraints – further changes required

The AEMC recognised, in its determination, that the current AEMO MASS limits the provision of FCAS services as follows:

  • Regulation FCAS Markets – MASPs may only offer individual loads (but not through aggregated loads).
  • Contingent FCAS – MASPs may offer either individual or aggregate loads.

Accordingly, the determination strongly recommends that AEMO consider reviewing the MASS as soon as possible to resolve the technical restrictions preventing the provision of aggregated loads in relation to Regulation FCASs going forward.

 

Interaction with Ring-Fencing

The AEC has, in its determination, made comments to the effect that network service providers wishing to take on a MASP role in a competitive segment of the market should be subject to some form of ring-fencing from its core business. The intention of this is to ‘avoid an unfair advantage being conferred on its market ancillary service provider by cross-subsidising its contestable services through its regulated service or providing it [being the related MASP provider] with access to commercially sensitive information’.[8]

We note that the Australian Energy Regulator is currently in the process of developing electricity distribution ring-fencing guidelines that are expected to address these issues going forward.

Finlaysons would be happy to assist entities that are considering operating as MASPs, particularly in light of the need for arrangements to be in place with customers and the significant compliance issues that could arise in establishing and providing these services.

A copy of the Final Rule Determination can be found here.

[1]   See: Rule 2.3.4, National Electricity Rules (Version 86)

[2] Australian Energy Market Commission, Final Rule Determination – National Electricity Amendment ( Demand Response Mechanism and Ancillary Services Unbundling) Rule 2016, 24 November 2016, pg 101.

[3] Australian Energy Market Operator, Guide to Ancillary Services in The National Electricity Market. April 2015, <https://www.aemo.com.au/-/media/Files/PDF/Guide-to-Ancillary-Services-in-the-National-Electricity-Market.ashx>

[4] Australian Energy Market Operator, Frequency Control Fact Sheet, <https://www.aemo.com.au/-/media/Files/Electricity/NEM/Security_and_Reliability/Reports/AEMO-Fact-Sheet_Frequency-Control—Final.pdf> , pg 2.

[5] Australian Energy Market Commission, Final Rule Determination – National Electricity Amendment ( Demand Response Mechanism and Ancillary Services Unbundling) Rule 2016, 24 November 2016, pg 1.

[6] Ibid at 6.2.3

[7] Ibid

[8] Australian Energy Market Commission, Final Rule Determination – National Electricity Amendment ( Demand Response Mechanism and Ancillary Services Unbundling) Rule 2016, 24 November 2016, pg 99.

 

This Alert is intended as an alert only. It does not purport to be comprehensive advice. Readers should seek professional advice before acting in relation to these matters.

 

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