Market Review: Completed
On 4 July 2018 the Honourable Josh Frydenberg MP provided the Australian Energy Market Commission (AEMC) with terms of reference for the Commission to assess claims made in the Grattan Institute’s recent report – Mostly Working: Australia’s wholesale electricity market – of gaming in the wholesale electricity market. The terms of reference asked that the Commission work with the Australian Energy Regulator (AER) to verify Grattan’s findings and to make recommendations on appropriate solutions to address the issue, including whether rule changes are required.
The Grattan report sought to explain recent increases in the wholesale cost of electricity in the National Electricity Market (NEM). It highlighted a $10 billion increase in costs between 2015 and 2017 with three key drivers:
- a tighter supply demand balance, due largely to the recent retirement of generating plant including Hazelwood and Northern, accounting for $6 billion of the increase in costs
- increases in the cost of key inputs to generators, especially gas and black coal, accounting for $4 billion of the increase in costs
- generator practices that it referred to as gaming, accounting for $250 million of the increase in costs.
The Grattan report made a number of recommendations addressing increases in wholesale prices including measures to address market concentration and to ease input cost pressures. To address the problem of gaming, the report recommended the Commission reconsider the introduction of a gate closure mechanism.
The Grattan report defines gaming too broadly so it captures a range of legitimate rebidding practices that deliver efficient market outcomes to meet consumer demand.
The high wholesale prices that Grattan attributes to gaming are, where rebidding is involved, due to high levels of market concentration that allows dominant generators to set prices in the market.
Policies that reduce market concentration, lower barriers to entry, and promote efficient new investment will improve competition and help to alleviate market concentration in the future.
Changes to the market rules around rebidding, for example with the gate closure mechanism suggested by Grattan, will not address the issue of market concentration. It would also have a negative impact on the efficiency with which supply and demand are matched in real time, and the incentives for new generation.