by Kayne Coulter, Product Manager, Power, ION Commodities
When Australia first formed its national electricity market over 20 years ago, it adopted a five-minute dispatch period. Due to technological limitations at the time, it also adopted a 30-minute settlement period. Over the years, this discord between supply and demand resulted in inherent market inefficiencies. However, with the advancement of new technologies and ongoing efforts to modernise electricity markets in preparation for the explosion of renewable energy, Australia has mandated a move to a five minute settlement (5MS) period by 2021.
For many organisations, staying ahead of the existing half-hour settlements is already a priority. However, five minute settlements (5MS) will fundamentally change business operations. Because of this, Australian utilities traders must be strategic about how they manage the new 5MS process – six times the settlements, six times the workload, and six times the data they are accustomed to processing.
The advantages of 5MS
The benefits of adopting 5MS are numerous. Utilities will be able to respond faster to changing consumer demand, consumers will see lower electricity costs as a result of a more reliable grid, and utilities will see greater profits as the cost of wholesale electricity declines.
Another perceived advantage of the shorter settlement period is the potential to trigger greater investments in renewables and upgraded technology infrastructure. Renewable energy is driving greater attention to 5MS in other countries as well. The Australian Energy Market Commission purports that 5MS will encourage greater investment in rapidly advancing technologies like batteries that support the increased adoption of renewable energy – which inherently brings with it greater variability in supply.
Additionally, early adopters will find that the shorter settlement period provides better price signals for resources and greater clarity on market conditions and constraints – especially the unpredictability of wind energy.
Is Australia a bellwether?
By 2021, utilities traders in Australia will no longer receive 48 settlements in one day – they will receive 288 settlements. The rest of the world may not be far behind.
European countries in particular are all-in on investing in renewable energy. Denmark recently reported that almost half of its energy came from wind power in 2019. With this rapid transition, global energy markets are opening themselves up to greater variability and will need a solution like 5MS to address these changes.
One example, Ireland, which also relies heavily on wind energy, moved toward 5MS following an EU directive pushing the island from multiple markets to a single market interconnected with the rest of the EU. As a result, both Northern Ireland and the Republic of Ireland benefit from a seamless, cross-border exchange of electricity, which has reduced spot prices and increased efficiencies. The interconnections linking the grids between the two countries and EU countries on the continent as well as the growing reliance on renewable energy all add up to the makings of an ideal scenario for swift reconciliation periods. Notably, the single electricity market on the island of Ireland has been a point of contention during Brexit negotiations.
The Philippines has also moved toward a 5MS scenario – although for different reasons. Following decades of persistent electricity shortages, the Philippine government introduced reforms designed to drive greater investment in the national electricity grid’s infrastructure, including additional investment in renewable energy. These investments increased the interconnectivity of the country’s three main energy grids, necessitating faster response times to address supply and demand throughout the country.
Mitigating the five challenges of adopting 5MS
Even with perceived advantages, moving the market to 5MS will not be without operational obstacles. Here are five challenges utilities might face when moving to 5MS and how to address them:
Challenge 1: the explosion of data
The first challenge will be an explosion of data flowing through front-to-back office operations with the increased settlement periods. Schedulers, traders, and risk managers will have to make decisions based on more and more data at shorter intervals. And back-office accounting will have to manage the increased number of settlements in their workflow as well.
For many commodity organisations, this new influx of data is simply too much for spreadsheets to handle. To remain competitive in the 5MS market, many organisations will need to look to commodity trading and risk management software to help make decisions and report information seamlessly across the business enterprise.
Commodity management software paired with advanced analytics can help commodity organisations harness the changing volume, velocity, veracity, and variability of data sources in a market where there is more data generated than ever before. As this industry shift takes place, organisations that take advantage of advanced commodity analytics to harness the barrage of data will not only capitalise on their own settlements, but also maintain an edge over their competitors.
Challenge 2: an increase in decision points
Along with the rise in data points, another challenge that will need to be addressed is the increased number of decisions resulting from increased settlement periods. Machine learning (ML) can help address this challenge by automating previously manual processes and significantly improving energy supply and demand forecasting.
Technology like machine learning can help traders better predict instances like changing wind production or when energy demand may peak. By narrowing the margin of uncertainty, utilities will see increased profitability. Additionally, machine learning reduces previously manual operations and allows traders to spend time on higher value activities.
Challenge 3: transition to new technology
With the rapid transformation of Australia’s electricity sector, utility traders need nimble processes designed for a market that is vastly different from 50 years ago. Outdated processes will no longer sufficiently manage the increased speed of workflow impacting entire organisations from the front-to-back office.
Investing in digitalising processes with a commodity trading and risk management solution and evolving technologies like machine learning and artificial intelligence (AI) can address these challenges. A CTRM solution paired with machine learning and AI will be critical to driving information across interconnected systems to automate the value chain and help utility traders make decisions.
With 5MS, schedulers, traders, and risk managers will need to quickly embrace and strategically adopt new technologies like advanced analytics, artificial intelligence, and machine learning to manage the influx of data and decision points.
Challenge 4: Quicker responses to changing regulatory environments
Another challenge this new era will bring about is the fact that regulatory regimes are now requiring faster responses from energy companies, which must be nimble in adhering to new regulations.
Again, this challenge can be addressed by investing in commodity trading and risk management solutions and pairing them with machine learning algorithms that can set limits and automate alerts when systems near certain parameters. Similarly, advanced analytics can help analysts across the value chain gather and draw insights from data to ensure compliance.
Challenge 5: changing energy mix and the rise of prosumers
As 5MS drives greater investment in renewable energy, traders will also have to prepare for the rise of “prosumers” resulting from the linked rise of distributed generation. Prosumers are consumers that have become power producers. Their impact ranges from solar grids to commercial-scale solar projects that can at times create excess power. This excess power is sent to the grid via net metering – a process that will have to be accounted for and reconciled much faster with 5MS.
Here, innovation is also key. Commodity trading and risk management software can provide insights, controls, and tools to manage the increased volatility, uncertainty, and risk that comes from managing new and unpredictable sources of electricity derived from distributed generation.
Preparing for tomorrow
Utilities in Australia and around the world need to prepare for the challenges and opportunities new technologies offer. Done right, 5MS could ultimately help utilities increase their profitability.
With 5MS, schedulers will have to make decisions based on more and more data and will need tools to help them execute at a competitive level. With the right analytics and trading and risk systems in places, schedulers, traders, and risk managers will be able to make decisions and report that information across the entire enterprise.
With the speed of regulatory change and the explosion of data, utilities should integrate advanced analytics into processes today to ensure front-to-back office operations are prepared for tomorrow.