What is a Settlement Residue Auction (SRA) and what purpose does it serve?
The National Electricity Market (NEM) is divided up into trading zones that generally align with state boundaries.
Limited interconnector capacity and different demand-supply balances in each NEM zone means that often there is a different price in each zone and a flow of energy from one zone to another.
During most trading intervals, the product of this price differential and energy flow generates a cash residual called the Inter-zone Settlement Residue.
So what happens to this cash?
In order to distribute the Inter-zone Settlement Residue, Australian Energy Market Operator (AEMO) conducts a series of auctions every quarter. In these auctions, AEMO offer the right to a share in the Inter-zone Settlement Residue generated over a quarter between two NEM zones in one direction. A share in the residual offsets price separation risks when trading power between NEM zones.
Typically, AEMO undertake a series of auctions every quarter. During these auctions, qualified Market Participants can bid for units in any of the twelve following quarters. Each auction offers a number of units that sum to one twelfth or 8.33 percent of a quarter’s residue. Units are offered for each direction between each of the NEM zones with regulated interconnectors.
For example, for quarter one of 2021 between Queensland and New South Wales, 100 units were auctioned in the 12 proceeding quarters (totalling 1,200 units). Unit holders paid a weighted average price of $13.6K per unit, which is about $16.3M in total. In this case, due to generally lower than expected price separation and not a lot of volatility in 2021 against the normal quarter one power prices, residual payments amounted to $2.4M to the unit holders for the residual (AEMO 2021 Quarter One Auction Report).
Revenue generated by the auctions is paid to AEMO and subsidises their cost of operations.
As a protection against negative settlement residuals, a guaranteed minimum payment of $10 per unit is made. The transmission network service provider is then required to stump up the negative residue; however this is countered by the revenue cap, so it ends up recovered through AEMO’s transmissions use of system (TUOS).
Keep in mind Arche Energy is unable to provide financial products advice. Settlement residue auction units are not without risk. Readers should seek their own financial advice from an Australian Financial Services license holder. This blog is provided for discussion purposes only.
How does an SRA unit compare to transmission capacity on a market interconnector?
A HVDC Market Interconnector could offer firm, tradable transmission capacity on a network market inter-connector.
How does this compare with settlement residue auction units?
Capacity is controllable
On a HVDC network market inter-connector, the customer can control the direction and quantum of flow; a settlement residue auction unit holder just gets the volume that physics or system security dictates.
Controllable capacity allows us to tailor an inter-zone transportation service to meet your needs and to maximise flows in either direction to suit market demand or to match your generation profile.
Capacity is tradable in smaller increments
A HVDC system might have a flexible capacity trading system allowing smaller increments of volume and time to be traded. For an settlement residue auction unit, you have to take the whole quarter. On a HVDC Market Interconnector, you might be able trade your capacity on an hour by hour basis. For example, allowing a solar farm to trade its night time capacity.
This allows an interconnection capacity service provided by a HVDC Market Interconnector that meets your individual needs and can match your generation profile.
Talk to Arche Energy
Arche Energy is one of Australia’s most experienced energy advisories; we develop rigorous energy strategies that incorporate technical, economic and political sensibilities and deliver projects according to the strategy.
