ERA’s 2016 WEM Report to the Minister for Energy

ERA – Economic Regulation Authority

Jan 30
ERA’s 2016 WEM Report to the Minister for Energy

On 30 January 2017, the Economic Regulation Authority (ERA) published its annual report to the Minister for Energy on the Wholesale Electricity Market (WEM).  The latest report covers the 12 months to 30 June 2016 and in it the ERA is required to report on:

  • the effectiveness of the market and the effectiveness of the Independent Market Operator, the Australian Energy Market Operator (AEMO) and System Management (SM) in carrying out their functions;
  • any specific events that impacted the market over the period; and
  • recommendations to better enable the WEM to meet its objectives.

Generally, the report acknowledges that the Electricity Market Review (EMR) underway at present, addresses many of the previously identified concerns around effectiveness of the WEM (these are listed at the bottom of this article).  However, the ERA suggests that some key issues remain unaddressed by the EMR proposed reforms, these are summarised below:

  • Barriers to competition – The ERA remains concerned about Synergy’s continuing dominance in the wholesale market and the impact this is having on the retail sector.  In particular, the ERA states that the 20% spread between buy and sell prices in Synergy’s standard energy contracts is too wide such that these Standard Products do not signal competitive benchmark prices for retailers to reference in their forward contract negotiations.  Typically, retailers look to manage their energy price risk by entering into forward contracts to ‘lock in’ future electricity prices.  Since the WEM started electricity prices in the Short Term Electricity Market (STEM) have been stable as excess capacity exists in the market.  However, as this excess capacity is removed via the transitional reserve capacity measures and ultimately by the introduction of a Reserve Capacity Auction, increased volatility in STEM prices can be expected and the Standard Products increase in importance as a price signal.  To address these issues, the ERA recommends structural reform and/or Synergy being divested of some of its generation assets.  However, in the interim the ERA suggests that Synergy’s Standard Products be included in the EMR scope of work.
  • Market Governance – the ERA suggests that once the EMR is complete, ongoing policy development and periodic reviews need to continue regularly to avoid the need for another large-scale market review.  In addition, policy development needs to consider emerging issues as well as ongoing market refinements.  Comments from stakeholders in response to the ERA’s issues paper criticised the dominance of government and government-owned participants in the EMR Steering Committee.  Consequently the ERA recommends that agencies responsible for energy policy should be separate from the agencies responsible for overseeing government-owned electricity corporations.
  • Reserve Capacity Mechanism – the ERA suggests measures be introduced to mitigate the risk of AEMO over-forecasting electricity demand in the future.  This could take the form of market participants having a formal opportunity to challenge AEMO’s forecasting assumptions.
  • Energy Markets – the ERA is concerned that ongoing outage scheduling is contributing to price spikes in the market.  Whilst this will addressed by the EMR reforms, it has signalled intent to continue to closely review outage planning and the impact this has on market outcomes.
  • Ancillary Markets – the ERA suggests that System Management is best placed to determine options for preserving system security in the event of an outage.  In particular, this need to include price information as well as access to merit order, whereby System Management is better able to determine the most cost effective option between constraining a generator on or entering into an ancillary services contract.

The ERA acknowledges that the intended EMR reforms will address a considerable number of identified market inefficiencies as follows:

  • The introduction of full retail contestability will improve competition in the retail electricity sector generally and particularly benefit small-use customers who will ultimately be able to choose their retailer.
  • The removal of the different treatment of Synergy compared to other generators will improve competition in the WEM generally.
  • The move to constrained network access proposed by the EMR is expected to remove some of the existing barriers to entry and adopting a constrained dispatch engine ensure network constraints are included when determining which generators to dispatch, removing the need for manual intervention and ensuring economic dispatch.
  • Any potential conflict of interest with the network operator also undertaking system management is removed with the EMR action to move System Management out of Western Power and into AEMO.
  • Similarly, the EMR action to separate responsibility for market operation (by AEMO) from compliance and enforcement activities (now with the ERA) and the rule change process (now with a Rule Change Panel) addresses past market governance conflicts.
  • Both the transitional reforms to the Reserve Capacity Mechanism and the intent to introduce a Reserve Capacity Auction are considered sufficient to address key issues of excess market capacity and inefficient signals for the investment in or retirement of generation capacity.
  • The anticipated EMR reforms to be introduced in 2018 will improve the effectiveness of the electricity market, these include; security constrained dispatch, requiring Synergy to bid at the facility level not at the portfolio level as now, integration of the energy and ancillary markets and allocating ancillary costs on a ‘user pays’ basis.