The implementation of the Primary frequency response incentive arrangements rule is driving change in how system frequency is controlled and paid-for.
The changes stem from how the NEM will incentivise primary frequency response.
6 Years in the making
The rule change proposal was initiated July 2019, finally determined September 2022, and becomes effective in full financial operation on 8 June 2025.
The reform sets out arrangements that will:
- (FPP) Allocate payments to market participants that contribute positively to system frequency
- (FPP) Allocate costs to market participants that contribute negatively to system frequency
- (Causer Pays) modify the existing arrangements for Regulation FCAS costs, in doing so, replace the ‘Causer Pays’ procedure.
Full financial operation commences 8 June 2025
The new arrangements are best digested in two bites:
- The recovery of Regulation FCAS costs is changing.
- In addition, a new set of arrangements – Frequency Performance Payments – FPP – is introduced.
Out with ‘Causer Pays’ in with ‘Used and Unused’
Even with the mandating of PFR, Regulation FCAS is still required. Both compliment each other as mechanisms for frequency control. Read more about this in About Frequency.
In dealing with how to incentivise helpful primary contributions to frequency, somewhat indirectly, the approach to allocating costs of Regulation FCAS to change. The old approach was deemed inadequate to reward the fast-changing but helpful responses to grid frequency from PFR, meaning another disincentive if left as-is.
As such, for the allocation of Regulation FCAS costs, the Causer Pays procedure is replaced.
There will still be a Regulation FCAS market. Of course, those regulation raise and lower services are essential.
Units enabled for Regulation FCAS will still be paid for that enablement as per usual.
The cost of enablement of Regulation FCAS will be recovered differently. This aspect represents the change to Causer Pays.
In with FPP
In short, there was no incentive (financial) to provide PFR. In fact, disincentives were many, such that the original rule change proposal was actually named “Removal of disincentives to the provision of primary frequency response under normal operating conditions” (initiating proposal at the AEMC rule change page).
The change rewards helpful contributions to system frequency through the introduction of Frequency Performance Payments (FPP).
AEMO documentation describes it as:
“a double-sided system of incentive payments and penalties based on units’ impact on system frequency”.
The FPP arrangements create a new pot of money to reward good unit performance and penalise unhelpful impacts on frequency. That pot is the FPP pot. From this pot payments are made to those that made helpful contributions and recovered from those that made unhelpful contributions. A net-zero system.
Why now?
Fundamentally, there needed to be an incentive to provide primary frequency response. It needed to be in place for ongoing mandatory PFR. Confirmation that mandatory PFR would continue was a component of the rule decision.
Differences, changes, and what remains
Here, we aim to summarise the critical changes of the reform, concerning costs and payments, in the following tables*
FPP (Frequency Performance Payments) *
| FPP Aspect | Before | After | Discussion |
| The new ‘pot of money’ | – | “Trading amounts” are based on each individual FCAS requirement, scaling the cost of the requirement by the “RCR” (requirement for corrective response). | Changes at each trading interval (every 5-minutes). Calculations occur at the binding constraint level (the constraints for Regulation FCAS requirements). |
| The RCR | – | The peak sum of all helpful MW contributions to an FCAS requirement in a 5-minute interval, in each direction. | This allows the reward for positive contributions to change in proportion to the size of those contributions. |
| The price | – | Marginal value of each Regulation FCAS requirement. | Allows different costs of global and area/regional requirements, and contributions to those requirements, to be addressed individually. |
| Indicator of performance | – | The Frequency Measure (FM), a moving average of the frequency deviation from 50Hz. | Regulation FCAS cost allocation effectively will use the same indicator. |
| 4-second performance | – | The FM * Output Deviation. Negative means unhelpful. An alignment test is performed on the FM (to discard misaligned instances) only when system frequency is outside the primary frequency control band.
|
There are also conditions when the FM is considered unreliable, consequently performance is NULL and FPPs are effectively set to zero. |
| 5-minute performance | – | The 4-second performances are categorised (split) and summed into performance when raise and when lower is needed. So there is a raise and a lower performance measure. | There is no separation between FCAS enabled and not enabled. |
| 5-minute contribution factor (CF) | – | The ‘CF’ represents a units’ 5-minute performance relative to the aggregate of all unit contributions. This is calculated for each FCAS requirement separately. | The CF may be negative or positive. Only the negative ones are used for Regulation FCAS costs. [these factors are also used in FPP] |
| Default CF (DCF) | – | A Default CF is calculated based on historical performance. Calculated in similar fashion to the CF but averaged over a 7-day period. | Used for FPP only when a unit’s performance cannot be calculated for a 5-minute interval. The DCF is used for regulation costs. |
| Performance | – | The CF (or DCF) reflects the unit’s relative performance in the interval. The CF is the same CF that was determined for Regulation FCAS costs. | In FPP, both positive and negative CFs apply. |
| Payments / Costs | – | A unit’s contribution factor determines its split of the ‘pot’. | Negative CFs equate to costs, positive CFs equate to payments. Could be zero if the price (at requirement level) or RCR is zero. |
*This differentiation/summary might be considered a bare minimum overview. The relevant procedures, rules, and FAQ documents explain each approach comprehensively. We’ve focused on dispatched units with appropriate metering and avoided most corner cases.
Regulation FCAS Costs *
| Regulation FCAS Cost Aspect | Before | After | Discussion |
| The principle | The causer of the need for Regulation FCAS should pay. | Unhelpful contributions to frequency attract a share of the cost of Used Regulation FCAS and historical performance. | |
| The ‘pot of money’ | The value of Regulation FCAS enablement. | The value of Regulation FCAS enablement. | No change. Calculations occur at the binding constraint level. |
| Cost allocation | 28-day aggregate costs are allocated to Portfolios based on 28-day factors. | Costs of each Regulation FCAS requirement are split into a used and unused portion and allocated at unit-level using separate factors for each portion, every 5 minutes. | Relative to Causer Pays, the factors, apportionment and timeframes are all changing. |
| Indicator of performance | The Frequency Indicator (FI), a highly processed value of the MW amount, based on frequency deviations, deemed to be required to restore frequency to 50Hz. | As per FPP. The Frequency Measure (FM). |
Watt Clarity compares the FI and the FM. [link coming soon].
In both approaches, a unit’s deviation is deemed to be helpful with it aligns with the sign of the indicator. Yet the two series behave quite differently. |
| 4-second performance | FI x Output deviation. Therefore, negative means ‘unhelpful’.
Calculations apply when the frequency measure/indicator matches the actual frequency need. Mismatches are effectively discarded. |
As per FPP. FM * Output Deviation. |
Alignment tests are different.
The primary frequency control band is +/- 15mHz. |
| 5-minute performance | The 4-second performances are summed to 5-minute values and categorised (split) as to whether the unit was regulation-enabled and whether the system frequency needed raising or lowering. | As per FPP. The 4-second performances are categorised (split) and summed into performance when raise and when lower is needed. |
The indicator defines whether a raise or lower response was needed. |
| 5-minute contribution factor (CF) | – Not applicable in Causer Pays. | As per FPP. The ‘CF’ represents a units’ 5-minute performance relative to the aggregate of all unit contributions, for each FCAS requirement. |
The CF may be negative or positive. Only the negative ones are used for Regulation FCAS costs.
|
| 28-day contribution | The 5-minute factors are aggregated (summed) across a 28-day ‘assessment’ window to produce unit contribution factors. | – No further aggregation from 5-minute level is applied. | Causer pays includes positive 5-minute performances when not enabled for the regulation service. This can offset negative performances in later aggregations.
Poor performance could potentially net out against good performance over the 28-day assessment window. |
| Market Participation Factors (portfolio benefits) |
MPFs represent the aggregation of the unit-level contributions in each frequency area, aggregated up to the portfolio-level, and normalised. | – No portfolio aggregation is applied. | In Causer Pays, this allows positive performance from one unit within a portfolio to offset negative performance from other units within the same portfolio. |
| Performance application | The MPFs are applied to apportion costs of Regulation FCAS over a different (subsequent) 28-day period. | Performances (as contribution factors) are applied at 5-minute intervals.
Negative CFs (NCF) are applied to the cost of Regulation FCAS that was used. Negative Default CFs (DNCF, calculated in similar fashion to the CF but averaged over a 7-day period) are applied to the cost of Regulation FCAS that was unused.
|
Only the negative ones are used to apportion costs of Regulation FCAS. |
| Timeframe
Performance applied to allocate costs |
The performance period and application period (both 28 days) are staggered one week apart from each other so there is a disconnect between performance and cost. | Performance drives allocations of every 5 minutes providing a tight link between performance and financial outcomes.
It is only the default contribution factors from the historical performance period that lag application, necessarily, for the unused portion of Regulation FCAS. |
The procedures move towards a more direct link between performance, impact and cost. |
*This differentiation might be considered a bare minimum overview. The relevant procedures, rules, and FAQ documents explain each approach comprehensively. We’ve focused on dispatched units with appropriate metering and avoided most corner cases.
Links to the relevant the relevant procedures, rules, and FAQ documents
The Causer Pays Procedure (landing page)
The FPP Procedure (Frequency Contribution Factors Procedure, landing page)
Primary frequency response incentive arrangements rule change (landing page)
Key takeaways
- Costs and payments in the reform are calculated for every 5-minute interval. There will be:
- FPPs (for each Regulation FCAS Requirement),
- A cost for Used Regulation FCAS and
- A cost for Unused Regulation FCAS
- The long lag in calculations for Regulation FCAS costs is discontinued.
- We can see how costs of Regulation FCAS will continue to be allocated to “poor” performers.
- But the way in which performance is measured is changing substantially. Therefore, the allocation of the costs will surely change too.
- The new FFP arrangements mean poor frequency performance will fund good performances.
- FPP is in addition to Regulation FCAS cost recovery.
- Units making unhelpful contributions could be stung twice (Regulation FCAS recovery and FPP payments).
- Yet opportunity still exists to avoid a large Regulation FCAS bill by not having a persistent negative frequency contribution.
- And opportunity exists to earn payments when PFR guides a unit’s power deviation towards positive frequency impacts.
A last word
Enablement in Regulation FCAS isn’t a guarantee of positive FPP contributions as deviations are guided by AGC which fluctuates more slowly than the FM (Frequency Measure) that FPP uses.
Yet analysis for the reform indicated that there should be a net-positive outcome for FCAS providers if they are good-performing Regulation FCAS providers. And the same can’t be said for poor-performing Regulation FCAS providers!
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