Reforms to the WEM’s Reserve Capacity Mechanism

WEM Information

Apr 10
Reforms to the WEM’s Reserve Capacity Mechanism

On 7 April, the Minister for Energy announced a number of highly material changes to the operation of the Wholesale Electricity Market’s (WEM’s) Reserve Capacity Mechanism, including:

  • Adoption of a three-year ahead auction as the basis for procurement and pricing of capacity, with the first auction process to occur at the earlier of a pre-set level of excess capacity (five to six per cent) or a fixed date of 2021;
  • Changes to the capacity price formula for a transition period prior to the auction;
  • Implementation of measures to harmonise Demand Side Management (DSM) availability requirements with requirements in place for conventional generators; and
  • Stronger commercial incentives for all forms of capacity to be made available for dispatch.

The Public Utilities Office (PUO) has identified that implementation of an auction design in the near-term would cause the capacity price to sharply fall to around zero (as a reflection of the current excess of capacity in the market).  To address the risk of disruption to the market from price volatility a number of transitional arrangements have been developed:

  • The auction will occur at the earlier of two trigger events.  The first trigger will be an Australian Energy Market Operator (AEMO) forecast that the market will reach a pre-set level of excess capacity (five to six per cent) for a particular capacity year.  The second trigger will be a fixed date for holding the first auction in 2021.  This means that the auction will at the latest be held in 2021 for the delivery of capacity in the 2024/25 Capacity Year; and
  • A progressively steeper price curve will be applied during a transition period – the slope of the pricing curve will be adjusted on an annual basis from negative 3.75 in the 2017/18 Capacity Year, through to negative 7 in the 2023/24 Capacity Year, with an average slope of negative five over the period – if a capacity auction is not held before 2021.

The Minister for Energy has also announced that Synergy will reduce its (Synergy owned) generation capacity by 380MW by October 1, 2018.   This retirement of Synergy generation, as well as the impacts of the rule changes on the commerciality of DSM programs, will impact the determination of when the first capacity auction will be required.  The determination of the amount of new capacity required will also be impacted by the forecast uptake of household renewable technologies such as solar PV.

The PUO is undertaking a consultation on these reforms with its final report (including the draft amendments to the WEM Rules).  Submissions close on 3 May 2016.