Frothing over Very Fast FCAS
On 9 October the National Electricity Market in Australia debuted two brand new Fast Frequency Response markets, and they’ve already made something of a splash.
Before we dive in, a quick reminder of how FCAS operates in the NEM.
The NEM has ten (!!) Frequency Control Ancillary Services. There are two (Raise and Lower) Regulation (or pre-fault) markets whose purpose is to continually manage the frequency on a second by second basis. Participation in these markets requires sophisticated control hardware and they are effectively restricted to large generators — coal-fired or gas-fired generators, hydroelectric and more recently large (>5 MW) batteries. The naming convention is that Raise markets serve to correct decreases in frequency below the nominal 50 Hz, and Lower markets serve to correct increases in the frequency.
The remaining eight FCAS markets are the Contingency (or post-fault) markets, whose purpose is to manage sudden deviations in system frequency. Prior to October 2023 there were three markets on each side (Raise and Lower) whose purpose was to arrest, stabilise and restore the frequency back to 50 Hz. These markets are Fast (response must be delivered within 6 seconds), Slow (60 seconds) and Delayed (5 minutes).
As the NEM transitions away from large, centralised synchronous, and primarily thermal, generation there is a decreasing amount of inertia in the system. Lower inertia leaves the system potentially vulnerable to larger and more rapid falls in frequency during contingency events. The introduction of the new and imaginatively named Very Fast Contingency markets, which require a response within 1 second, is intended to help manage these frequency deviations in a low inertia system by providing an even more rapid response when these contingency events occur.
So why have the new Very Fast services made such a splash? The prices have been frothy — the average price for Very Fast Contingency Raise (RAISE1SEC or R1) has been slightly better than the sum of all other contingency raise markets (R6, R60, R5) combined.
And the average price of Very Fast Lower Contingency (LOWER1SEC or L1) has been just less than three times more than the sum of the remaining lower contingency markets (L6, L60, L5). In fact the new L1 market has been consistently more valuable then Lower Regulation, which is a little wild.
Since FCAS markets can be participated in simultaneously the value from these markets can be stacked (quite different to frequency services in other markets like the UK), meaning a large battery sitting idle (and able to provide all ten raise and lower services) is earning over $100/MW/h before spot price arbitrage. Not bad for sitting on your bum!
With such high prices, there are two questions that jump to mind:
- Why are the prices so high; and
- Have the prices cannibalised the existing fast markets (R6 and L6)?
Let’s start with the second question. No, the new Very Fast markets haven’t cannibalised the existing Fast markets. To date the prices in the other markets have been stable, with no significant changes up or down. However it's not entirely clear that this will remain the case forever.
And why are the prices so high?
This is all down to who’s providing the new Very Fast Contingency services — there are currently only two technologies registered to provide it — batteries and loads (demand response).
In the chart below we can see that Very Fast Contingency Raise (top panel) is being provided by large grid-scale batteries (BESS), demand response (loads) and small batteries (aggregated in virtual power plants or VPPs). The contribution of VPPs is relatively small due to their size (most VPPs are only single digit MWs), so the market is dominated by the large batteries and demand response.
But when we look at Very Fast Contingency Lower, the only assets providing it are batteries — both the large grid-scale and smaller aggregated batteries of VPPs. There are currently no loads configured to provide L1 (almost no loads providing any other lower contingency services either).
And this is the simple reason why the Very Fast Contingency Lower prices have been so frothy — it’s a highly constrained market with only a handful of participants able to provide the service, the majority of them large batteries sophisticated enough to keep the prices healthy for their financial benefit.
How long will these prices stick around? It seems unlikely that these prices will be sustained for too long; there is a flood of new large utility-scale batteries arriving in the NEM over the coming months and years. Virtual power plants are also going from strength to strength and portfolio sizes are steadily increasing into the double digit MW territory. Plus, if prices remain this high demand response will start playing in the L1 market.
The Shape of it all
Before we finish, one final note. The charts above show the average daily FCAS price for each service. In reality however contingency FCAS prices have a high degree of shape to them. The Contingency Lower markets show a diurnal pattern — higher prices during the day and very low prices overnight. The Contingency Raise markets show a strong correlation between the price and the system demand peaks — a smaller morning peak and a more significant evening peak.
The chart below shows the average half-hourly price for each quarter over the last year (plus 2023 Q4, aka October).
But why the early evening dip in Very Fast Contingency Lower prices? Because AEMO procures less of the service during these hours. The bidstacks of all FCAS markets are largely inelastic and lower procurement volumes results in lower prices.
In wrapping up, I have two thoughts:
The new Very Fast Contingency FCAS markets have made a splash with very high prices, but these are likely to calm down in the coming months as more competition enters these markets — more batteries, more VPPs (smaller aggregated batteries), demand response and maybe even gas turbines with novel control system configurations(?). It seems unlikely that these high prices can be sustained at such high levels for very long. People are watching.
Just looking at average FCAS prices is deceptive. All of the FCAS markets (bar the new Very Fast Contingency Raise market, which is finding its feet) have very clear daily pricing patterns to them. The average price is being pumped up by only a handful of hours in the day. In order to accurately capture the revenue available from participating in these markets, it’s important to properly consider the optimisation of batteries across a full half hourly (or 5-minute) resolution.
Ok, ok. Two more bonus charts. The charts below show the full, unadulterated 5-minute price during October for all FCAS markets.