Frequency Performance Payments (FPP) represents the most significant shift in how Regulation FCAS costs are recovered since the creation of the competitive markets for FCAS in September 2001.

This new framework fundamentally changes who pays and how much they pay for regulation FCAS. It also introduces both:

• an incentive payment for the provision of primary frequency response (PFR), and
• a penalty payment for deviations which contribute to frequency fluctuations.

Linton has published two articles which provide further background information:

• On 28th February, Linton wrote ‘Incentivising primary frequency response’, with a useful table summarising ‘Differences, changes, and what remains’.
• On the same day, Linton also wrote ‘Only 14 weeks to go until Frequency Performance Payments’, containing links to additional reference material.

… so we don’t have to go into those details here.

 

Better Off Overall

As with any major reform, including in the NEM, it’s natural for people to think about ‘winners and losers’ … and that’s what we’ll explore in this article, and a couple to follow.

However let’s not lose sight of the compelling reasons for change – including:

1)  Several fundamental flaws in the (soon to be retired) ‘Causer Pays’ method for allocating Regulation FCAS costs … including significant design flaws that (in ETSI’s view) encouraged behaviour that was not in the long-term interests of the Semi-Scheduled generation category, or the broader energy sector.

2)  Plus also the need to provide a commercial incentive for the ongoing provision of Primary Frequency Response – which might help to reduce what otherwise might have been a growing requirement for increasing volumes of Regulation FCAS.

 

A first step to examining Winners and Losers

FPP will create beneficiaries and those who are worse off – winners and losers. This article examines Non-Financial Operation (NFO) data published from commencement (on 9th December 2024) up to 5 March 2025 to highlight:

• Who benefits under FPP compared to the Causer Pays process,
• Who faces higher costs,
• The extent of these changes

Whilst the NFO provides valuable insight, it is important to note that once Financial Operation begins, participant behaviour may shift in response to the new incentives, although there is a (perhaps unforeseen) potential outcome that we will be watching for (I’ll touch on this more at the end of this article).

 

FPP Implementation and Transition

Currently, FPP is operating in a Non-Financial Operation (NFO) mode, essentially a shadow mode where all the backend calculations are published by AEMO however the actual financial settlement is still performed on the basis of the existing Causer Pays process. This NFO period began on 9 December 2024 and will continue until 8 June 2025, when FPP will transition to Financial Operation, meaning settlements will be based on FPP calculations.

 

Component 1)  Changes to the recovery of the cost of Regulation FCAS

The cost of the provision of regulation FCAS is currently apportioned to market participants using the ‘Causer Pays’ process. The total cost to be recovered is primarily influenced by the price of raise regulation and lower regulation FCAS (ultimately determined by the bids and offers of generators able to provide these services) and the amount of each service required by AEMO.

Under FPP, the total cost to be recovered will remain as a function of the price of the services and the amount of each service required by AEMO. However, the apportioning process of the total cost is significantly different under the FPP methodology, and as such, we are unlikely to see generators completely avoiding the regulation FCAS cost recovery (as we see now when units obtain a 0 MPF under the Causer Pays methodology).

To analyse the impact and therefore identify the winners and losers, we can compare the proportion of the total cost of regulation FCAS recovered from types of participants, under both the Causer Pays methodology and the FPP methodology. This percentage based comparison accounts for fluctuations in total FCAS costs and the amount of each service required by AEMO – i.e. these determine the size of the pot (i.e. how much the total cost of regulation FCAS is).

Using the GSD2024 and the QEDs published by AEMO (to determine the total cost and hence the amount recovered from retail customers i.e. the Residual), and combining that with the FPP NFO data, we obtain the following table.

 

Table 1 – % of regulation FCAS costs recovered under Causer Pays and FPP by fuel type (a negative % change indicates a cost reduction moving from Causer Pays to FPP)

.	% of regulation FCAS costs recovered
Fuel Type	Causer Pays (old)	FPP (new)	Change
Battery Storage	0.2%	1.9%	+1.7%
Black Coal	0.4%	2.6%	+2.2%
Brown Coal	0.0%	0.5%	+0.5%
Hydro	8.0%	14.8%	+6.8%
Natural Gas	0.5%	1.4%	+0.9%
Other	0.1%	0.6%	+0.5%
Solar	19.3%	23.8%	+4.5%
Wind	34.3%	27.9%	-6.3%
Residual	37.2%	26.4%	-10.8%

 

At first glance, it appears:

• that retail customers (the ‘Residual’ who ultimately end up paying for regulation FCAS as a hidden component of their retail bills) and the Wind generator class are the big Winners;
• while Hydro, Solar and to a lesser extent Coal (Black and Brown) and Battery Storage are the Losers.

This observation holds true when considering only the recovery of the cost of Regulation FCAS. However, FPP also introduces an incentive and penalty payment mechanism, which is dependent on helpful or harmful deviations from a linear reference trajectory, and this is where things get shaken up even more – these additional payments significantly alter the overall financial impact on different participants.

 

Component 2)  Incentive and penalty payments under FPP

A key feature of FPP is the creation of a new pot of money, which is distributed as incentive payments to generators that help restore system frequency to 50Hz by making active power deviations in the right direction.

The size of this incentive pot is directly tied to the price of raise and lower regulation FCAS, meaning it scales dynamically with market conditions. I digress here, but this linkage is particularly notable because it allows for the creation of this new incentive mechanism without the need for a new PFR FCAS market (as was the case when the Very Fast Contingency FCAS market was introduced recently).

To fund the new pot of money, generators whose deviations from a linear reference trajectory push system frequency away from 50 Hz incur a penalty payment (i.e. debit). Any leftover deviations after adding up all the measured deviations are assigned to the Residual which unfortunately results in a substantial penalty payment attributed to the Residual.

Because this system and the new pot of money operates as a zero-sum-game, the total incentive payments always equal the total penalty payments.

Using the FPP NFO data, we can calculate the percentage of incentive and penalty payments that are assigned to each fuel type. Once again, this is done on a percentage basis as the size of the new pot of money will scale based on the price of regulation FCAS.

 

Table 2 – % of incentive and penalty payments (a negative % indicates a penalty payment)

	% of incentive (+ve); or % of penalty (-ve) payments
Battery Storage.	+30.7%
Black coal	+40.2%
Brown coal	+15.0%
Hydro	+8.9%
Natural Gas	+4.7%
Other	+0.5%
Solar	-33.6%
Wind	-17.4%
Residual	-49.0%

 

The Biggest Losers?

The biggest losers under FPP are the retail customers (the Residual), along with Solar and Wind asset classes, while all other asset classes emerge as net winners.

 

 

An Emerging Risk?

A key observation is that the primary beneficiaries of incentive payments – Batteries and Coal – are also the assets that typically set the price for raise and lower regulation FCAS services through their bids.

Since the size of the new pot scales with the price of these services there exists a potential risk that the price of regulation FCAS might be inflated, benefiting the very assets that determine it.

• This is a perhaps unforeseen potential market dynamic that the ETSI team will be watching out for as FPP transitions to Financial Operation.
• Although it might also prove to be the case that this new mechanism might slow the growth in requirement for Regulation FCAS, helping to constrain Market Power and hence keep prices low.
• We will look forward to seeing more from the AER about their process for monitoring for this potential risk.

 

Final Thought

This analysis has highlighted the likely winners and losers under FPP.

• On a fuel type basis, Batteries and Coal assets are the winners set to gain the most, with an estimated net financial benefit of over $5 million annually (shared among the assets of these fuel types).
• Meanwhile, Solar, Wind, and the Residual are the biggest losers, to the most part effectively funding the winners.

These estimates are based on annualising the NFO data and may therefore change with participant behaviour as FPP becomes financial.  We hope it does, because that’s partly the purpose of the change.

Within each fuel type class there are further winners and losers.

• The ETSI team have recently upgraded their pre-existing dashboard, to drill into the FPP data right down to the individual generator, its 4-second data and the components that make up the net financial settlement.
• These (recently upgraded) tools are being workshopped with ETSI’s clients.

ETSI can help you better understand FPP. If you would like a demo or want to discuss how FPP will impact your assets – and how you can position yourself to benefit from these market changes – please get in touch.

You can reach us by leaving us a message below this article or emailing us at enquiries@etsi.energy

 

 

---

About our Guest Author

---

and…

---

Editor’s Full Disclosure

---