Published on March 12, 2014
National Electricity Market: Experience and Lessons for the WEM PRESENTATION TO WA POWER AND GAS CONFERENCE 2014
Discussion points 1. Focus is on wholesale market 2. Discussion to cover: a) Prices b) Volatility of prices c) Level of competition d) Reliability of supply e) Any lessons for WEM
Background 1. Commenced operation as a “national” market in December 1998 2. Evolved out of the combined NSW/Victoria pool market linking the SA market into these two markets. Queensland operated alone 3. Queensland became integrated in 2001 with commissioning of Eastlink and Tasmania in 2006 with commissioning of Basslink. 4. Now fully integrated market
Price History • Prices have moved up and down reflecting broad energy policy changes, temporary supply constraints, adverse weather. In other words, have reacted to changing supply/demand conditions. As market should. • Prices across the States converged especially after interconnection capacity was enhanced • Prices are currently at the lowest level in real terms since the combined national market commenced operation – Prices have recently increased in some states (e.g. Queensland) due to capacity withdrawals • Increased in mid 2012 as a result of the commencement of carbon pricing – Around $20 to $25/MWh contribution from carbon pricing
Price History $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 May-95 Nov-95 May-96 Nov-96 May-97 Nov-97 May-98 Nov-98 May-99 Nov-99 May-00 Nov-00 May-01 Nov-01 May-02 Nov-02 May-03 Nov-03 May-04 Nov-04 May-05 Nov-05 May-06 Nov-06 May-07 Nov-07 May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 $/MWh Quarter Ending Real Regional 52 Week Pool Price ($June 2013) Vic NSW Qld SA Tas Separate State Markets NEM 1 NEM QNIJoined State Markets Murraylink Basslink Drought Renewables and GFC Carbon Price Flood
Factors Affecting Recent Price Trends • Demand has shown steady declining trend since 2009 – Energy efficiency – Reaction to high retail prices – Industry restructuring – Renewable energy generation • Milder winter and summers (more recently) • Some of these factors will change putting upward pressure on prices – Rising fuel prices (legacy contracts expire) – Capacity withdrawals – Limited strategic bidding • Basically market is responding to supply/demand balances
Price Volatility • Level of volatility is an important indicator of market health – Price spikes or increasing incidence of price spikes is an important signal for new investment. It is a key feature of price only markets. – But high incidence of price spikes could also be an indicator of market power • Level of volatility has been up and down! – Has been a lower level of incidence in most States (since late 2010) – But in some smaller States constrained by interconnect capacity incidence has been at trend levels – Also a cyclical pattern to spikes, with increased incidence during summer and mid year in peak demand periods and/or contract renewals
Price Volatility - NSW 0 20 40 60 80 100 120 May-96 Nov-96 May-97 Nov-97 May-98 Nov-98 May-99 Nov-99 May-00 Nov-00 May-01 Nov-01 May-02 Nov-02 May-03 Nov-03 May-04 Nov-04 May-05 Nov-05 May-06 Nov-06 May-07 Nov-07 May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 $/MWh Real NSW Pool Price ($Jun 13) Real SMP Quarterly Annual
Price Volatility – South Australia -20 0 20 40 60 80 100 120 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 $/MWh Real South Australia Pool Price ($Jun 13) Real SMP Quarterly Annual
Price Volatility • Conditions for price volatility – Recent increase in reserve margin has dampened volatility – Only during temporary tight supply/demand balance periods (last summer) – Some instances of temporary price spikes in off-peak periods – Induced price volatility during contract renewal periods to maximise contract premiums – But retailers have responded to historical price spikes by building their own peaking capacity
Level of Competition • Generally the spot market has been competitive – Interregional networks have been unconstrained 95% of the dispatch intervals so not allowing for may periods of price separation. – Very few instances of yearly moving average prices going above new entry levels • There have been some instances of strategic bidding – Difficult to determine whether this is due generators using their market power – Or bidding to maintain reasonable profits • But increasing levels of horizontal and vertical integration – Witness ACCC’s recent decision of AGL purchase of Macquarie assets – Increasing vertical integration probably not yet reached level to be a problem – Barriers or costs for new entrants becoming high • SA market most likely prone to strategic bidding!
Incidence of Price Separation: Vic/SA -‐100 0 100 200 300 400 500 600 0 100 200 300 400 500 600 SA Price, $/MWh Vic Price, $/MWh
Reliability of supply • Interesting component of debate is how NEM price only market cannot provide enough signals for new investment – Early 2000s: It was argued NEM is not conducive to base load. – Mid to late 2000s: It was argued NEM is not conducive to peaking plant – Empirics tell a different story: investment has come in! • System has generally been very reliable – Few incidence of load shedding and some of those incidents due to industrial action or other external factors – AEMO has been able to use reserve trader powers to call on DSP to provide back-up – Coincidence of peak demand moderate so allowing sharing of reserve capacity across States
New Capacity Additions 0 200 400 600 800 1000 1200 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 MW sent out Baseload -‐ public Baseload -‐ private Mid -‐ merit -‐ public Mid -‐ merit -‐ private Peak load -‐ public Peak load -‐ private
Possible Lessons for WEM • Principle difference between WEM and NEM is the presence of a capacity market • Lesson 1: Give it time to develop – The NEM has been one of the most stable market systems with no significant change to market arrangements. – Participants have gained confidence in its operation • Do not be afraid of market mechanisms – The NEM’s success may have been fortuitous with many external factors helping to avoid potential problems from biting but there is also evidence that the market has reacted to changing supply demand conditions. Relatively lightly regulated markets do adjust to changing circumstances!
Possible Lessons for WEM • But care need to be taken if you want to consider adopting NEM style arrangements to the WEM – NEM is not dominated by one single supplier. There is still a fair degree of competition. – NEM is a large integrated system allowing sharing of reserve capacity minimising incidence/impacts of supply disruptions and help to enhance competition – Noteworthy that any problems that has been observed has tended to occur in smaller State regions not well connected to rest of NEM and sharing some characteristics of WEM market structure • Past analysis has indicated that market structures may be more important than market arrangements in achieving desired outcomes.
Conclusions • NEM has been one of the few successful markets. – Only minor changes to the market arrangements • NEM’s success could be based on a lot of luck but experience suggests markets do react to changing circumstances • Need careful consideration of the transferability of NEM style arrangements to the WEM – Need to consider interactions with existing market structures and regulatory arrangements • Market power tends to be more about market structures than market arrangements • Finally, it is ironic to note that many of the design features of the WEM were in reaction to perceived problems then occurring in the NEM!
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