Final determination on Potential Generator Market Power in the NEM rule change request

26 April 2013

Potential Generator Market Power – final determination

The Australian Energy Market Commission (AEMC) today released its final determination on Potential Generator Market Power in the National Electricity Market (NEM).

The Commission recommends that the Standing Council on Energy and Resources consider giving the Australian Energy Regulator (AER) a specific function to monitor the efficient operation of the wholesale electricity market.

AEMC Chairman, John Pierce, said today appropriately developed monitoring would help provide greater assurance that that wholesale electricity market remains workably competitive.

Monitoring would help provide early identification of financial and economic conditions or other structural issues which may create barriers to entry for new competitors across the market.

"As we look to the future it is important that our regulatory framework provide early insights and flag the need for action if structural changes or significant barriers to entry are identified," Mr Pierce said.

"Risks to the operation of an efficient market can arise from different causes, most notably barriers to entry, and regular monitoring could facilitate the best solutions if problems are found."

The Major Energy Users Inc. (MEU) requested the introduction of a rule to restrict dispatch offers by generators in the NEM following its observation of possible exercise of market power in South Australia between 2006-2007 and 2009-2010.

Following analysis the Commission determined the evidence was inconsistent with the likelihood of substantial market power in the current NEM-environment.

Substantial market power is when prices in the wholesale electricity market are sustained for extended periods of time above the level of long run marginal cost.

Transient price spikes can be caused by a range of events like unexpected peaks in demand, equipment failure, or the intermittent nature of renewable generation.

Market conditions have changed significantly in recent years. Underlying wholesale market prices, adjusted for the carbon price, are at an historic low-point, because of growing energy-efficient behaviour and structural changes in the Australian economy. The planned upgrade of the Heywood interconnector between Victoria and South Australia should also help deepen competition between generators.

However, the Commission recognises that market conditions in the NEM could change in the future.

Accordingly, the determination explains the importance of a new monitoring function to periodically review the performance of electricity wholesale markets and to add further accountability mechanisms for the use of the AER’s current information gathering powers.

The Commission also concluded that the MEU’s rule change request would undermine the wholesale market’s efficient operation. Accordingly the Commission determined to make no rule on that request.

For information contact:

AEMC Chairman,

John Pierce

(02) 8296 7800

Media: Communication Manager, Prudence Anderson 0404 821 935 or (02) 8296 7817

 

 

Date: 26 April 2013