The more things change, the more they stay the same…

In this week’s chart of the week we focus in on the comparatively small but important Frequency Control Ancillary Services (FCAS) markets in the NEM. FCAS in terms of total dollars is miniscule in comparison to the total energy bill. While the proportion may appear small, its function is key to maintaining a secure operating state within the five-minute dispatch cycle, acting as the force to keep the system frequency in balance when it wanders off course.

Just as the energy supply mix is transitioning, so too is the mix of FCAS providers. With each passing quarter, the mix continues to change with fast responding batteries and demand response providers eating into the market share of conventional generation (Figure 1).
The largest shifts have been in contingency raise services with batteries and demand response displacing coal particularly in the 6 and 60 second market where they accounted for 50% and 38% respectively of enablement in Q3 2019. Another significant shift is in lower 6 second contingency where batteries represent 25% of enablement.

Despite the shifting supply mix, the overall FCAS bill has remained comparatively steady over the last 18 months at around $60 million each quarter – apart from Q1s which tend to be the lowest cost periods for FCAS. While at a high level, the value by service remains somewhat steady, the requirements of the power system (and unit availability) determine which service is most lucrative.

In recent quarters, regulation services have been the highest paid service largely due to the increased regulation requirements from AEMO in response to deteriorating frequency performance in the NEM. Since March 2019, the minimum requirement for Raise/ Lower regulation FCAS has increased from 130/120 MW to as high as 220/210 MW respectively. This change has translated to the cost of regulation FCAS in Q3 2019 reaching $40 million – one of the highest in recent history.

It does signal the value of regulation services in maintaining secure operating state when frequency is within the normal operating frequency band (NOFB). AEMO have however proposed mandatory primary frequency response for generating units – a rule change that would obligate units to dynamically control frequency outside of a very small deadband (~90% tighter than the current NOFB) as an unpaid service. While it may improve frequency performance, this could impact regulation FCAS through reduced requirements, and potentially remove (or reduce) a revenue stream from the market. It could also flow onto the contingency markets which as we talked about in Issue 6, is a key revenue stream for batteries. We cover this, as well as future values in flexibility in our Flexibility Fundamentals in the NEM course next week.