Feast or famine? FCAS costs in South Australia

Frequency Control Ancillary Service (FCAS) prices are highly volatile, at times resulting in short periods of extremely high FCAS cost. Three such events in recent history are the South Australian (SA) islanding events in November 2019, February 2020, and November 2022. During these events, FCAS costs in SA totalled $16 million, $109 million, and $34 million, respectively.

What does not receive as much attention is that these three events accounted for 91% of South Australian FCAS costs over the past five years, as shown in the chart below.

Source: AER South Australia quarterly local FCAS costs

Figure 1 shows quarterly SA FCAS costs since 2018. This figure shows that the lion’s share (91%) of SA FCAS costs in the past five years can be attributed to three market events. There is significant revenue opportunity for flexible assets such as grid-scale batteries, demand response, and virtual power plants during major market events such as the islanding of a NEM region. These events’ ‘force-majeure’ nature makes them challenging to appropriately value in business cases.

On the one hand, such market events are likely to significantly contribute to the value stack and should not be overlooked. On the other, investment decisions that are excessively reliant on capturing these market events are at risk of being overly optimistic, as an asset’s profitability would be significantly impacted by a scenario where it could not respond to a market event due to unforeseen circumstances.

Market fundamentals highlight a growing need for frequency control in the long term. The power system is transitioning from a system dominated by centralised thermal generation to a diverse portfolio of intermittent renewable generation. This transition is leading to a reduction in system inertia and a greater need for frequency control. However, the strong grid-scale battery pipeline and major upcoming interconnector projects will have a major impact on FCAS markets. One such example is the Project EnergyConnect interconnector which connects SA to Victoria and New South Wales and will reduce the likelihood of SA islanding.

Source: Transgrid

Cornwall Insight Australia’s FCAS subscription service equips clients to successfully navigate these risks and opportunities in the FCAS markets. Our NEM energy and FCAS models are based on market-validated assumptions and sound power systems principles. For more information on our subscription services or other bespoke consultancy products, please contact enquiries@cornwall-insight.com.au.

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