Reliability Panel Chairman, Neville Henderson, today called for submissions on draft recommendations to extend the current reliability standard and settings to 2024.
These system-wide settings are an integral part of the national electricity market framework which aims to get power to customers as cost-effectively as possible. The settings and standard support efficient generation investment and operational decisions and provide an important ‘price envelope’ protecting market participants from exposure to excessive high and low prices.
The reliability standard specifies the required level of reliable electricity supply at the lowest possible cost. In simple terms the current reliability standard requires sufficient generation and transmission interconnection to service 99.998% of the community’s forecast annual demand.
The Panel’s draft report released today finds there is projected to be sufficient physical capacity in the electricity system to generate and transport power to meet consumer demand from 1 July 2020 to 1 July 2024.
Neville Henderson said it was important to separate the longer-term reliability status of the national electricity market from security issues facing specific regions.
Reliability in the generation sector is delivered through investment in new generating capacity.
Security in the generation sector requires that technical parameters such as voltage and frequency are maintained within defined limits. To maintain frequency the power system has to instantaneously balance electricity supply against demand. The vast majority of supply interruptions are security events, caused by sudden equipment failure due to factors including extreme weather, bushfires and possums falling into lines. For example, South Australia’s system black event was a power system security event.
“The Panel considers its draft recommendations are likely to maintain certainty and help continue to deliver efficient operational and investment decisions in the long term,” Mr Henderson said.
The reliability settings are the price mechanisms under which the wholesale generation market operates. They include the market price cap; the cumulative price threshold; the administered price cap; and the market floor price. These market settings protect the integrity of the market by limiting exposure to excessive high and low prices. They also form the key price envelope within which the wholesale spot market balances supply and demand and encourages the delivery of sufficient capacity to meet the reliability standard. The market operator, AEMO, is responsible for implementing the reliability standard through a variety of operational processes.
The Reliability Panel reviews the reliability standard and settings every four years.
Its draft recommendations on the reliability standard and the reliability settings are:
Reliability standard: No change. Having reviewed potential changes in the Australian Energy Market Operator’s (AEMO) value of customer reliability and changes in the way consumers use electricity, the Panel considers that there would be no material benefit in reassessing the level of the reliability standard at this time.
Market price cap and cumulative price threshold: No change. Both parameters are indexed annually in line with the Consumer Price Index.
Administrative price cap: No change.
Market floor price: No change.
Stakeholders are invited to comment on the issues raised in the draft report. Submissions are due by 22 December 2017.
Media: Prudence Anderson, 0404 821 935 or (02) 8296 7817
EXPLAINER OF TECHNICAL TERMS
- What is reliability?
“Reliability” of the power system is about having sufficient physical capacity in the system to generate and transport electricity to meet consumer demand.
- What is the reliability standard?
The reliability standard provides a clear, actionable expression of the level of reliability sought from the national electricity market’s generation and transmission inter-connector assets. It is a key factor in establishing the level at which the reliability settings are set, and is a key criterion in AEMO’s operation of the power system including contingency management. The current standard, expressed in terms of the maximum expected unserved energy (USE), is set at a maximum USE of 0.002 per cent of the total energy demanded in each region per financial year.
‘Unserved energy’ means the amount of customer demand that cannot be supplied within a region of the NEM due to a shortage of generation or interconnector capacity. The term ‘expected’ is important – it means a statistical expectation of a future state; an average across a range of future scenarios, weighted for probability.
Setting the level of the reliability standard involves a trade-off, made on behalf of consumers, between the prices paid for electricity and the cost of not having energy when we need it. The trade-off is between two sets of costs, both of which are ultimately borne by consumers. The key in setting the reliability standard is to strike a balance between delivering reliable electricity supplies and maintaining reasonable costs for customers.
- What is the market price cap?
It is the maximum market price that can be reached in any dispatch interval and is currently set at $14,200/MWh (indexed annually to increases in CPI).
- What is the cumulative price threshold?
The cumulative price threshold limits participants' financial exposure to the wholesale spot market during prolonged periods of high prices. It limits the total market price that can occur over a period of one week (336 trading intervals), before an administered pricing period is declared. The cumulative price threshold is currently $212,800 (indexed annually in line with the consumer price index), and at six times the energy market value for frequency control ancillary services markets.
- What is the administered price cap?
The administered price cap limit markets participants’ exposure to prolonged high prices by serving as the maximum settlement price (ie price cap) that can apply during an administered pricing period, i.e. when the total of settlement prices over seven consecutive days exceeds the cumulative price threshold. The administered price cap is currently $300/MWh in nominal terms.
- What is the market floor price?
It is the minimum price that can be reached in any dispatch interval and in any trading interval and is currently set at -$1,000/MWh.