Electricity Market Review – Reserve Capacity Mechanism reform

WEM Information

Dec 14
Electricity Market Review – Reserve Capacity Mechanism reform

On 3 December, the PUO released a Position Paper on the preferred design of reforms to the Reserve Capacity Mechanism.

The Energy Market Review (EMR) has identified a need for major change to the Reserve Capacity Mechanism to:

  • reduce the cost of the current capacity excess to consumers; and
  • provide stronger signals to the sector for efficient delivery of capacity to the market over the longer term.

The Position Paper outlines the Electricity Market Review’s proposed reforms which have four principal elements.

  1. Adoption of an auction as the basis for procurement of capacity, with the first auction to occur when the market has reached an acceptable level of balance.
  2. Transition arrangements for a period for the introduction of the auction that will involve maintaining the existing administered price mechanism but with a steeper pricing curve and a differential treatment of demand side management.
  3. Implementation of measures to harmonise demand side management availability requirements with requirements for conventional generators , for both the transitional arrangements and under the capacity auction.
  4. Stronger commercial incentives for all forms of capacity to be made available for dispatch.

Submissions are due by 29 January 2016.

Background:

The current Reserve Capacity Mechanism (RCM) is a priced-based mechanism to promote investment in electricity capacity. Under the RCM, the payment for the provision of capacity by generators is set administratively by a formula established within the Wholesale Electricity Market Rules. The reserve capacity price and the capacity requirement are established by the Market Operator and there is a supply response from capacity providers that determines the quantity of existing and new capacity in the market. The administered price is adjusted down when more than the required capacity is offered and procured. However, the downwards adjustment of price is relatively gradual and by erring towards encouraging investment, results in a high capacity price being offered to the market, even when there is a substantial excess of capacity over the Reserve Capacity Requirement. In addition, actual demand growth has been far below forecasts made at the time the Wholesale Electricity Market was designed. As a result there now exists a substantial excess of capacity above the Reserve Capacity Requirement. This imposes a substantial cost to electricity consumers and the Reserve Capacity Mechanism does not provide the necessary mechanisms and incentives to reduce this cost over time.