By Suzanne Falvi, Executive General Manager, Strategy and Economic Analysis, Australian Energy Market Commission
The footprint of utility-scale batteries as a force in Australia’s National Electricity Market is relatively small at the moment–but it’s not going to stay that way.
An influx of energy storage is forecast to enter the NEM as the economics of batteries begin to shift. Since 2017, five large batteries have connected to the national grid–three in South Australia (Hornsdale, Dalrymple, Lake Bonney) and two in Victoria (Ballarat, Gannawarra).
More are on the way. The Australian Energy Market Operator (AEMO) has identified 13GW of publicly announced, maturing and committed future storage projects, including batteries. And modelling from financial advisory and asset management firm Lazard suggests that standalone battery storage projects are now profitable without Government support.
As the number of market participants continues to increase, so the price of batteries continues to come down. In the past decade, the cost of lithium ion batteries has plunged by 87 per cent. And in the next decade, CSIRO forecasts that capital costs for grid-scale batteries will fall from $227kWh to $53kWh. In every NEM jurisdiction, state and territory governments are also driving uptake of both small and grid-scale storage.
Preparing for a future market where energy flows two ways rather than one and batteries play a central role, is the focus of much thinking and planning at the AEMC. We know the NEM of the future is going to look very different and we’re looking to lay the groundwork now. Getting this right is critical to managing the energy transition in a way that keeps power bills affordable for consumers.
There are a number of projects underway, but three major arms of our work in particular will have a long-term impact in preparing the grid for the energy storage era.
Five-minute spot price settlement
In July we made a final ruling that will, from October 2021, align the physical electricity market and its price signals for the first time. Just as energy is dispatched in five-minute intervals, wholesale electricity spot prices will now be settled every five minutes as well–rather than in 30-minute intervals as has been the case for two decades.
This change will lead to more efficient bidding and operational decisions by generators and more efficient investment in flexible technologies. This includes batteries but also benefits new generation gas peaker plants and rapid demand response. Five-minute settlement reforms will increase the opportunity for price arbitrage in the NEM’s energy and Frequency Control Ancillary Services (FCAS) markets. This will see batteries charging when prices are lower and exporting energy when prices rise, better compensating them for their ability to quickly charge and discharge their full capacity in just a few trading intervals.
This of course, delivers a stronger incentive for storage technologies to enter the market as well as making the market more responsive.
Transmission access reform
Transmission access reform is about creating the right market signals so that new generation and storage is located where it’s needed most. As the power system decarbonises, this will be particularly important, given that most of the current generation stock in the NEM will be replaced by 2040. And in the next decade 50GW of new generation is expected to connect to the grid–roughly equal to the current size of the market.
Currently, market participants are paid–or pay–the same regional price for electricity, even when its value drops in some areas of the network because there is too much congestion. Those higher prices end up on consumer bills because the congestion prevents the cheapest combination of energy from getting to market. Congestion is increasingly becoming an issue as new market participants flock to sunny and windy areas of the grid, often in areas of weak transmission.
Transmission access reform proposals include replacing regional reference pricing with locational marginal pricing, which reflects the value of energy produced at a given location. This type of pricing, used in markets such as New Zealand and throughout North America, will give batteries much more granular information on whether to invest, where to invest and how to operate to capitalise on price volatility. For example, in a sunny area with a large amount of solar, there is likely to be congestion during the day and the locational price would be lower. A battery could recharge at this lower price and dispatch energy during the evening peak when the congestion eases and prices are higher.
Having more information about where to locate also means batteries can play a greater role as co-located firming technology to backup variable renewable generation. And they can also act to alleviate congestion by helping to manage network loads. This work to reform transmission access forms an important part of the Energy Security Board’s 2025 market design currently underway.
Integrating storage into the NEM
We are also looking at how storage and hybrid businesses are treated under the national energy rules–hybrid businesses combine different technologies like batteries, solar and wind, behind one connection point to supply or consume electricity.
We are currently considering whether the rules–which were written when energy flowed one way from producer to consumer–create barriers to these businesses entering the market, increase costs and workload, or affect investment certainty or clarity.
This energy storage integration work also intersects with work already underway by the Energy Security Board which is looking at, among other things, small and large-scale storage as an important part of a two-sided energy market, where energy consumers large and small both buy and supply electricity.
Because we are working on the two-sided market initiative as part of our role on the Board, we can keep these projects aligned. We may even be able to use our integration project to produce interim measures towards a two-sided market.
Stakeholder submissions recently opened on the integrating energy storage work and close on October 15. It’s important that we continue to hear a range of perspectives to help shape our thinking so please get in touch. Now is a challenging time for the energy sector as it shifts gear and transitions to a different future. But this also presents us with an opportunity to effect change that’s both transformational and sustainable.