Elon Musk’s crusade to rid the world of fossil fuels and lead the transition to clean energy took a small but significant step forward this week, when the Australian Energy Market Operator decided to put an end to a market that has been rorted outrageously by fossil fuel generators in recent years.

It’s a highly technical change in the complex world of managing Australia’s largest machine – the electricity grid. But it is significant, because it highlights just how quickly new technologies such as batteries are changing the way grids are being managed, and making them smarter, faster, cleaner, and cheaper.

Decades-old assumptions about how the grid should be managed, using old technologies, are now being challenged. And some of the market rorts built up over time by the energy incumbents are slowly being swept away (hopefully not to be replaced by new ruses invented by new players).

AEMO advised energy market players this week that it was bringing to an end the three-year-old requirement for 35MW of local regulation frequency and ancillary services to be provided in South Australia when there was risk of the state’s grid separating from the rest of the national grid.

This contingency was introduced in late 2015, and was designed to ensure, says Christian Schaefer, AEMO’s head of system capability, that the state’s grid – with a high percentage of renewables – could operate safely and securely by itself. Such isolation events were expected to be frequent given the planned upgrades and maintenance of the main link to Victoria.

Until the Tesla big battery was put into service last December, that market had been rorted outrageously by the previous sole providers of FCAS – several major gas generators – who ensured the price of FCAS in that state rose nearly 100-fold to the market cap of $14,000/MW when AEMO made the precautionary call for local back up.

That would send the cost of FCAS for such events up to $6 million a day. It happened almost every time the constraint was imposed and total costs from several dozen such events totalled $109 million in 2016 and 2017, with the costs passed on to wind farms and other big energy consumers.

That was until the Tesla big battery arrived and smashed the gas cartel, because it meant that the gas generators could no longer control the price of that service.

The total cost in 2018 is projected by AEMO to be just $3.6 million. That also reflects a big decline in the number of occasions that the constraint was imposed, but also because the presence of the battery means prices can’t be gamed when it is imposed.

Now it seems that AEMO is satisfied that the presence of the Tesla big battery, along with its new system strength rules to ensure a minimum amount of gas generation at any one time, means that it no longer needs to impose the market constraint. In effect, the Tesla big battery spoiled the party, and now the party is over.

AEMO’s growing confidence in the strength of the South Australia grid has been considerably boosted by the performance of the Tesla big battery, which is proving faster, quicker, more flexible and more accurate – and cheaper – than any other technology it has seen before.

The latest example occurred in late August, when the Tesla big battery played a key role in stabilising the massive frequency disturbances in the network caused by twin lightning strikes that caused the failure of two major transmission lines linking Queensland and NSW.

That set off a cascade of events that caused the separation of the grids in Queensland and South Australia, the loss of coal and hydro generation in Queensland, the widespread loss of power in NSW, Victoria, and Tasmania (including pot-lines for two big smelters and whole suburbs in Sydney and Newcastle).

But in South Australia, partly because of the stability brought by the super-fast response to the frequency variations by the Tesla big battery, officially known as the Hornsdale Power Reserve, there were no incidents – no loss of power, and no failure of generators.

The Tesla big battery is now playing a front-line role in AEMO’s defence mechanisms against major faults and disturbances on the grid, and the new batteries that are about to be connected – at Dalrymple North in South Australia, and at the Ganawarra solar farm and a Ballarat network junction in Victoria – are expected to play similar roles.

“The operation of SA has changed significantly over the past 12 months,” AEMO said in an advisory mailed to market participants, ahead of a teleconference held on Thursday.

“Synchronous unit requirements (for SA system strength) and the installation of the Hornsdale battery have ensured regulation FCAS is more readily available post-islanding of SA. Hence this requirement is no longer considered necessary.”

It should be noted that the Hornsdale wind farm has also successfully demonstrated its ability to provide FCAS and boost system security, and other wind farms, batteries and providers are also expected to enter the market,

AEMO says it will replace the much-rorted 35MW “pre-contingency” requirement in South Australia with a two month trial that will look at increasing overall FCAS levels by 30MW, and it will also review its needs when new synchronous condensers are installed in South Australia in 12 months time.

AEMO says the need for the extra 30MW of regulation FCAS (both raise and lower) reflects the changing nature of the grid, but also the degradation of the traditional providers, particularly the governor controls of older synchronous generators.

Market players say there is significant change occurring in the market. The overall FCAS market, as highlighted by recent analysis, has often been gamed and delivered excessive revenues by existing fossil fuel generators – usually at the cost of wind farms and other big energy users who have to pay for that service.

And there is a growing realisation that the biggest threat to the grid is often the performance of what some like to call “fair dinkum” power and “base-load”, and AEMO itself has recognised the ability of renewables and storage to play significant roles in stabilising the grid.

“This is a good news story,” Schaefer told RenewEconomy in a phone interview on Friday. “The work that our engineers in the AEMO team have done shows that we can continue to operate South Australia in a stable and secure manner.”

(That may seem an obvious statement, but it is an important one given the political rhetoric about the threat to grids with high level of renewables, and South Australia is now surging well past 50 per cent share of wind and solar, and moving to 75 per cent and towards 100 per cent).

“Hornsdale has had a significant impact on the South Australia system,” Schaefer notes, “and we have got new batteries coming on line with Victoria and South Australia.”

Such is the interest in the these developments that the AEMO teleconference on Thursday afternoon exceeded its 200-person capacity, and it needed to schedule a second briefing on Friday morning.

“That is really positive,” Schaefer says. “It shows that all parts of the industry (networks, generators, the renewable sector, battery providers and regulators) are getting behind this and showing an interest in what has been done.”

There are many studies currently being assessed in how the FCAS issue should be managed, and how the FCAS markets should be re-defined.

Some question if a separate market for FCAS is even needed – given that it often delivers a market signal that goes against the physical needs of the grid – and with the likely presence of more batteries that could provide that facility as part of their service contracts – as the Tesla big battery at Hornsdale does with the South Australia government.

There are suggestions that with another dozen or so battery energy installations of the size of the Tesla big battery, then no such market might be needed. It will become part of a contracted service.

As another example of how batteries are changing the way people think about the grid, the newly installed battery at Alinta’s gas plant in Port Hedland, which became the first to utility-scale battery energy storage system to provide “grid-forming services” on a high voltage network.

“Until now, the conventional thinking had been that electrical networks needed thermal generators to be online and operating to provide the required inertia to support the network,” it was said in a recent award citation. “Thanks to this significant milestone in electrical engineering, that is no longer the case.”

The potential changes to the FCAS markets present challenges for the battery storage owners themselves, and their business models, because FCAS has been a major part of the Tesla big battery earnings in its first six months of operations – as RenewEconomy revealed exclusively a fortnight ago – and was assumed to underpin other battery storage projects.

But batteries have more than one trick up their sleeve. Manufacturers such as Fluence say there are up to 20 different value streams from batteries – ranging from time shifting the output of renewables, balancing the system, arbitrating prices, and all sorts of network services – but many of these are not recognised in market rules.

Tesla itself has complained that one-third of the services it provides attract no revenue, usually because they are faster, more flexible, and more accurate than the market rules and regulations have ever contemplated. And as Sophie Vorrath reports from the All Energy conference, Tesla is not the only to complain that regulations are getting in the way.