Why those without solar are paying for it
Insights into Western Australia's Minimum Demand Service
A little bit about NCESS and the Minimum Demand Service
Introduced into the Wholesale Electricity Market (WEM) as part of a wider suite of reforms, the Non-Co-Optimised Essential System Services (NCESS) mechanism allows for procurement of services that support power system security and reliability and are not captured through existing mechanisms.
NCESS, which effectively replaced the previous Dispatch Support Services and Network Control Services arrangements, allows for procurement of services from both AEMO and Western Power. However, the focus of this article are AEMO-procured services and the first cab off the rank* was the Minimum Demand Service that started on 01 October 2023.
The Minimum Demand Service seeks to alleviate power system security concerns that arise from periods of minimum Operational Demand. These minimums typically occur during the middle of the day when Distributed PV (DPV) serves much of the underlying load, displacing large-scale generation facilities in the process. To address the concerns, service providers can be called upon by AEMO everyday between 10AM-2PM to increase their withdrawal (consumption) or decrease their injection (generation).
Service providers are paid for their availability and in limited cases receive activation payments too. To 01 June 2024, payments to 2 service providers total over $7m and are on track to reach around $11m for the full 12 months.
*Excluding System Restart Services which are longer standing arrangements that existed pre-reform
Who are the service providers?
With over 60MW of Minimum Demand Service Electricity Generation and Retail Corporation (Synergy) is the largest provider and has earned over $6m to 01 June 2024.
Synergy has multiple projects involved, including:
KWINANA_ESR1 (also commonly referred to as KBESS1), the first large-scale battery energy storage system (BESS) in the WEM which provides up to 50MW of service
UNREGISTERED*, a combination of behind-the-meter DPV and BESS that provide up to 13MW of service combined
While pricing differs between projects, on average Synergy earns an availability price of around $76/MW/Trading Interval (TI) with UNREGISTERED receiving an additional activation price of around $62/MW/TI.
Synergy's Minimum Demand Service participation to 01 June 2024
The remaining 20MW of Minimum Demand Service is provided by Alinta Sales Pty Ltd (Alinta) who have earned over $650k to 01 June 2024.
Both of Alinta's 140-odd MW gas-fuelled cogeneration plant at Pinjarra each provide up to 10MW of service, with unit 1 (ALINTA_PNJ_U1) earning an availability price of $23/MW/TI, slightly more than Unit 2 (ALINTA_PNJ_U2) at $17/MW/TI.
Alinta's Minimum Demand Service participation to 01 June 2024
*Unregistered is spread over two contracts, in this instance Unregistered_1 is NCESSMDS003 and Unregistered_2 is NCESSMDS004
Who pays for all this NCESS?
Cost recovery of the Minimum Demand Service is volumetric, similar to most other Essential System Services recovered from customers, and effectively a $/MWh charge applies to a customer's grid consumption. Importantly, cost recovery is time sensitive and any revenue earned by service providers within a Trading Interval is cost recovered within the same period.
Daily average revenue for the Minimum Demand Service sits around the $30,000 mark to 01 June 2024. Total consumption is not a publicly available dataset however, generation data combined with an estimation of DPV export can provide an approximation of the relevant MWh.
The result? The costs of the current Minimum Demand Service have been borne by customers who consume from the grid between 10AM-2PM and the average cost during these times, to 01 June 2024, is ~$5/MWh*.
Daily average NCESS price borne by customers to 01 June 2024
*Re-iterating that the daily average NCESS price figure is an estimation, as total consumption is not a publicly available dataset
So whats the problem?
The Minimum Demand Service seeks to alleviate power system security concerns resulting from minimum Operational Demand periods that occur during the middle of the day as a result of DPV displacing large-scale generation facilities, and it does this primarily through valuing additional grid consumption.
However, cost recovery places the biggest burden on customers who are consumers of grid electricity during the middle of the day and provide a now-valued service. In addition, by nature of their midday consumption these customers aren't likely to have significant amounts of DPV installed that contribute to the need for the service. Taking all of this into account, the current method of cost recovery seems to stray from the causer-pays methodology that underlies much of the WEM and sends market signals that incentivise uptake of DPV, which could further exacerbate the underlying low-load issue.
Taking a step back, customer electricity supply agreements and other hedging arrangements to avoid wholesale exposure may mean that NCESS costs are passed through in alternative ways and even for those that are wholesale exposed the additional ~$5/MWh is unlikely to be the driving force behind a business case to install DPV. However, the added NCESS costs are not in isolation and are joined by a range of rising costs on commercial and industrial electricity bills. In addition, the Minimum Demand Service is set to grow and the value for customers to take behind-the-meter action is likely to grow with it.
What does the future hold?
NCESS is growing and from 01 October 2024 the Minimum Demand Service is expanding from 84MW to 446MW. Synergy and Alinta remain as service providers and are joined by Neoen but there is a whole new suite of projects and all 3 are large-scale BESS.
AEMO publishes the availability price for each project but not the MW of service contracted. This makes cost projections challenging, however an announcement by Neoen indicates that the Collie_ESR1 will provide up to 197MW of service. Assuming a similar service provision to current (i.e. 4hrs, daily), Neoen's annual contract value is over $22m and in the ballpark of double the expected value of the current Minimum Demand Service.
After accounting for Neoen's 197MW, there is still an additional 249MW of Minimum Demand Service to make up the announced total. Availability prices vary widely between the remaining 2 facilities however a conservative estimate, assuming the entirety is provided by KWINANA_ESR2, results in a total annual Minimum Demand Service value of over $25m*.
*Annual value estimate assumes similar service provision to current (i.e. 4hrs, daily)
Summary
At the risk of stating the obvious, power systems and electricity markets are complex and the recent WEM Reform has increased the complexity further as it seeks to reflect the realities of a modern power grid, particularly one with high and growing penetrations of DPV.
While DPV has been fundamental in helping customers tackle the rising cost of electricity, it has also resulted in challenges to the secure operation of the power system and the Minimum Demand Service seeks to address this. Despite being a relatively simple concept the idea of valuing additional load is reasonably novel and the use of tried and tested cost recovery mechanisms have resulted in an arguably unfair allocation of costs that, in addition, send the wrong market signals that have the potential to further exacerbate the underlying issue.
However, rules aren't static and it is worth noting that Energy Policy WA (EPWA) and supporting agencies are currently investigating an array of policy issues and refinements. While cost recovery of the Minimum Demand Service didn't make it into the recent Miscellaneous Amendments No.3 it has been raised in energy industry forums and may well be on the radar now or in the near future.
