There’s an infuriating amount of downright disingenuous ‘advice’ out there leading people to think that FCAS is the game-changer that’ll deliver your much-desired <5-year BESS ROI. We’re here to pour cold water on that idea, using the time-honoured combination of FACTS and LOGIC.

If you’ve read our frequency 101 post, you’ll have a good understanding of what frequency control is, how AEMO controls frequency in the NEM, and what the different types of frequency control ancillary services (FCAS) are. In this post, we’ll look at what drives value in FCAS markets. We’ll examine supply and demand, identify drivers of high FCAS prices, and bust some pesky myths about FCAS market value.

As ever, we’ll be focusing on unscheduled BESS, which means we’ll talk mostly about contingency FCAS (if you’d like to know why, have a butchers at this one).

TL; DR

AEMO decides how much FCAS to procure in their capacity as the steward for power system security.
FCAS is procured globally (NEM-wide) and is generally a shallow market for the above reason.
For most of the year, FCAS prices are pretty low. Average FCAS price tends to sit at ~$4/MWh in total across all 8 Contingency FCAS markets outside of major separation events, which are by their nature unpredictable and uncontrollable.
However, when parts of the NEM are separated from the rest of it, prices can rise significantly. These separation events are unpredictable, and it’s not in anyone’s interest for them to take place. They do happen, though.
Should you build a BESS business case on something as unpredictable as an interconnector tripping when all other market signals are pointing towards prices tanking? We’ll let you be the arbiter of that.

The demand side of the equation

As the entity responsible for maintaining system frequency, it is AEMO’s job to determine how much FCAS it needs to buy. They have obligations to arrest frequency deviations and restore grid frequency to the normal operating frequency band (NOFB) within a certain timeframe. These obligations differ slightly depending on what caused the frequency deviation, but in general, AEMO will procure a quantity of FCAS that will enable it to comply with its obligations following a credible contingency event. In general, Contingency Raise procurement requirements are driven by the potential loss of the largest generator on the system.

The term contingency event is defined in the rules and can be paraphrased as “an unexpected event or failure that disrupts the normal operation of the power system.” A credible contingency event is “a contingency event that AEMO considers to be reasonably possible in the prevailing grid conditions”. Examples of credible contingency events include:

disconnection of a large generator (e.g. a major coal or gas-fired power station); and
trip of a transmission line; and
disconnection of a major load.

These events could result in a significant frequency deviation if they were to occur. AEMO must make sure it buys sufficient FCAS to arrest a frequency deviation following a credible contingency event and restore grid frequency to the NOFB. AEMO will review and adjust FCAS procurement volumes to make sure it can continue to keep the grid secure in a changing power system.

Very Fast FCAS

The procurement considerations for Very Fast FCAS (R1 and L1) are slightly different. These two services were introduced in October 2023 to help AEMO deal with the ongoing decline in power system inertia.

Inertia is a dynamic measure of a power system’s ability to resist changes in frequency following a sudden change in the electricity supply/demand balance - the classic analogy is a large train’s resistance to speeding up or slowing down. Inertia is a good thing for a stable power system, and is produced inherently by the large spinning machines that conventional synchronous generators (e.g. coal-fired power stations) use to produce electricity.

By contrast, renewable generators like wind and solar do not naturally provide inertia to the system. As traditional synchronous generators retire, system inertia decreases and significant frequency deviations can occur more rapidly following a contingency event.

The two very fast services were introduced because AEMO and others feared that R6 and L6 would be too slow in a low-inertia system, thus increasing the likelihood of under-frequency load-shedding (UFLS, i.e. blackouts). AEMO’s procurement of the two very fast FCAS services therefore includes an inertia component. When levels of system inertia are low, AEMO increases the quantity of very fast FCAS it procures.

The supply side

FCAS is supplied by generators, batteries, and flexible loads. Contingency FCAS markets have gradually opened up over the years to pretty much anyone who is technically capable of providing the service. Batteries are great at providing FCAS because of their quick and precise response, so we’ve seen them gradually take out the largest share.

Bringing the two sides together, and getting paid

Just as in the energy market, providers will submit offers setting out the quantity of FCAS they can provide per price band. AEMO builds a bid stack for each service based on price and clears enough capacity to meet its requirements every 5 minutes. FCAS is procured “globally”, meaning the bid stack is built using providers from anywhere in the NEM.

In an interconnected system, a frequency meter in Adelaide will measure the same as a frequency meter in Townsville. If a generator in Queensland trips and causes an under-frequency event, a battery in South Australia providing FCAS Raise can help arrest that deviation. Global procurement of FCAS is great because it allows AEMO to source the lowest-cost FCAS resources regardless of their location within the NEM.

This outcome is threatened when there are network constraints or when a NEM region is islanded. If a region providing low-cost FCAS is separated from the rest of the NEM, there may be insufficient capacity enabled elsewhere to keep the system secure, which means AEMO must now procure from more expensive providers. When a portion of supply is made unavailable, prices trend higher and this tends to sustain for the duration of the separation. Equally, if a region with high-cost FCAS providers is separated from the rest of the NEM, FCAS prices in that region will be (you guessed it) bloody high. Both of these can have knock-on effects on the price of FCAS throughout the NEM, but the affected region tends to see the highest prices.

These types of events can lead to FCAS providers making serious bank, and we’ll give you some examples further down in this post.

This dynamic may change in future if AEMO decides to shift to regional procurement. Whilst not an active consideration right now (as far as we are aware), AEMO has previously considered regional procurement to ensure that each region has sufficient local FCAS available during a separation.

Unlike the energy market, FCAS providers are paid for being available. This is because we can never know whether a contingency event will occur. Providers that are cleared or “enabled” by AEMO are being paid to hold headroom to provide FCAS if it is needed in that dispatch interval. No extra payments are made if an event occurs and the response is activated.

The attractiveness of FCAS market participation therefore lies in the ability to get paid to do nothing, especially during periods when prices are high as described above.

Providers are paid based on the relevant market’s settlement price and the quantity of service enabled for the corresponding dispatch interval. If FCAS prices are at market cap, they may sit there for several hours and this may spread across several markets. If all four Raise markets (or all four Lower markets) are at market cap, that’s $70,000/MWh up for grabs. This will increase to $81,200 ($20,300/MWh per market) from 1st July 2025. Now imagine that this happens for several hours, or even several days. Chunky!

Just because you can doesn’t mean you should, though. The reality for most of the year is that FCAS prices are dull as.

“If FCAS prices are at market cap, they may sit there for several hours and this may spread across several markets. If all four Raise markets (or all four Lower markets) are at market cap, that’s $70,000/MWh up for grabs. This will increase to $81,200 ($20,300/MWh per market) from 1st July 2025. Now imagine that this happens for several hours, or even several days. Chunky!”

— Quote attributed to Rakhesh Martyn, showing you how easy it is to cherry-pick data

What drives FCAS market value?

The circumstances in which you might see high FCAS prices are as you would expect – when available FCAS supply is low and/or when demand for FCAS is high. Let’s look at a few real scenarios.

Situation normal

When the NEM is working normally with all interconnectors and most large generators operating, Contingency FCAS prices are consistently low. This is because there’s plenty of FCAS to go around. With energy prices sitting in the $100-$200/MWh mark for equivalent periods and significant energy arbitrage value available later in the day, bidding into Contingency FCAS wouldn’t be the best use of your precious BESS capacity. If an event were to take place and you discharged your BESS (which you’d be obligated to do), you’d have to recharge at ~$100/MWh in preparation for energy arbitrage later. Your reward? ~$3/MWh across all 8 FCAS markets. Not a good trade-off.

Interconnector down

This is where things get interesting. For reasons described earlier in this post, ‘separation events’ can lead to very high FCAS prices, sometimes for sustained periods of time. Queensland and South Australia are considered to be more susceptible to this, as they (currently) have only one point of interconnection with their neighbours.

There are several examples from the recent past of this type of thing happening. When it lasts for more than a few hours, it is what some refer to as a ‘major market event’.

When South Australia islanded from the NEM in February 2020, FCAS revenue went up from $1.5m (prior week) to $54.8m in the first week of islanding.

That is mental.

FCAS revenues dropped in the following week, but they were still very high relative to the week before the separation. In just those two weeks, most batteries in SA will have earned more money than could’ve been earned in one normal year with no islanding. In fact, Hornsdale Power Reserve apparently paid for itself shortly afterwards.

This WattClarity article has a handy list of separation events for those curious creatures among you. It runs through to the end of 2022 so excludes events from the last two years, but there’s enough for you to get the point. It is worth reiterating that depending on where the islanding has happened, FCAS prices can go up in other parts of the NEM too.

Generalised high demand

If AEMO increases its procurement requirement for a particular FCAS service, you can expect to see that flow through to an increase in market value immediately afterwards, assuming available supply remains the same.

This is what we saw play out in the early days of Very Fast FCAS. At market start (October 2023), AEMO’s “system normal” procurement requirement was capped at 50MW. The only parties able to participate at market start were batteries and flexible loads already participating in the R6 and L6 markets but capable of providing a 1-second response. The increase in demand for FCAS and relatively small amount of capacity able to provide it meant a period of strong pricing. This didn’t last long, as more providers signed up to offer the 1-second services. Despite AEMO gradually increasing, and eventually removing, the dispatch caps on both R1 and L1, available supply now far outstrips demand, and consequently prices hover around $0.10MWh for R1 and $0.01/MWh for L1.

As more synchronous generators retire, you might see further increases in the procurement quantities for the fast and very fast services. We might also see the introduction of a super very fast service (probably not going to be called that), to help manage frequency in a system with very low levels of inertia, which would again create additional value for anyone capable of providing such a service.

Looks like it’s a bit of a lottery?

Pretty much every man and his dog (battery) can join the FCAS market party these days, and most either have already or will. More participants means more competition, which means lower prices and less revenue to share.

There is still value in FCAS market participation, especially during the low-probability events that are impossible to predict. Most bullish BESS business (b)cases are built assuming at least one major market event per year, but this post will hopefully have shown you that it’s impossible to know whether or not this is true. For most of the year, FCAS prices are low, and BESS value comes from good old-fashioned energy arbitrage (as well as demand charge management for load-connected BESS). We should expect the increasing levels of supply to continue to put downward pressure on prices.

That’s not to say there won’t be days when FCAS prices are sky-high. Ageing power stations are becoming increasingly unreliable. Interconnector trips do happen. Combine a major generator outage with a transmission constraint or interconnector trip, and baby you’ve got a stew going.

But it’s important to be sceptical of revenue predictions that rely on these outlier events, especially if they’re being used to convince you to drop serious coin on a BESS. Consider them to be a nice bit of upside if they occur, not the foundation on which your investment is built. Just because they’ve happened before doesn’t mean they’ll happen again. In the immortal words of every super fund in Australia (even the ones without 2-factor authentication), “past performance is not an indicator of future performance”.

FCAS - Reliable business case builder or unpredictable beefer-upper?