Electricity consumers would receive additional protection from future major supply disruptions under a proposed change to the National Electricity Rules recommended today by the Australian Energy Market Commission (AEMC).
This change is set out in a Directions Paper for stakeholder consultation, following a Rule change request by Alinta Energy.
Recent analysis conducted by the AEMC’s expert Reliability Panel shows that rising global fuel prices are disrupting the operation of our power generation fleet during emergencies, threatening the safe, stable and secure operation of the electricity system.
The analysis follows concerns raised about the level of the Administered Price Cap (APC) and whether it was high enough to manage recent extreme market volatility, which led to the suspension of the NEM in June.
During the June energy crisis, a number of states faced major electricity shortfalls. It was caused by a “perfect storm” of colder than average winter weather conditions which raised electricity demand, high global fuel prices, scheduled generator maintenance and unplanned outages, and low renewable power output from wind generation.
In the course of the crisis, AEMO needed to issue close to 500 directions to generators to ensure security of supply and avoid widespread load shedding or in the most extreme circumstances, blackouts.
After examining these issues, the AEMC proposes an increase in the level of the APC from $300/MWh to $600/MWh, which should cover the short-run marginal costs of most generators in a range of credible scenarios.
The APC has only been applied three times in the 24 years since the NEM commenced, underscoring its purpose as a last resort safety net during times of extreme and unpredictable market volatility.
The AEMC also considers the increased APC will reduce reliance on the compensation process to a limited number of generators, required to operate during emergency situations.
The higher APC will also improve incentives for storage to participate during emergency situations, further supporting the transition to net zero.
AEMC Chair Anna Collyer said, “to protect consumers from extreme market conditions in the future we have decided to propose a prudent change to the market settings, to increase the APC to a level that will reduce the risk of costly and damaging blackouts, more effectively secure our electricity supply, and keep the system stable as we transition to more renewable energy,” she said.
“The APC is a last resort safety net that stabilises the electricity system by capping wholesale electricity prices during rare emergency situations. The APC has not been updated in 14 years and it is no longer at a level where it provides the right incentives to facilitate more supply in emergency situations."
“If this change had applied in June, it would have unlocked significantly more electricity generation - enough to power more than 2 million homes."
“Importantly, this change would have no impact on wholesale prices during normal market conditions, but it would have a substantial benefit in protecting us from damaging blackouts and securing our reliable electricity supply during emergencies.”
Energy Consumers Australia (ECA) CEO Lynne Gallagher said, “we are supporting this proposal because it provides important protections for consumers from price and supply shocks from volatile market conditions.”
The proposed increase in the APC would apply until no later than 1 July 2025, after which the APC level would revert to longer-term settings which have been recommended by the expert Reliability Panel and will be considered by the AEMC through the normal rule change process. Submissions on the AEMC’s Direction Paper will close on 13 October 2022.
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