The Australian Energy Market Commission (AEMC) has made a more preferable final rule to the National Electricity Rules to keep the electricity system reliable for households and businesses as ageing coal fired generation retires and we transition to more renewable energy.
The change is set out in a final determination, following a rule change request by the AEMC’s Reliability Panel, a panel of advisers representing consumers, the energy industry, and the Australian Energy Market Operator (AEMO).
The AEMC sets the rules for the National Electricity Market (NEM) and provides independent expert energy advice to Australia’s State and Federal Governments. It is strongly focused on providing a framework for a reliable electricity system and affordable electricity prices, particularly in light of current cost of living concerns.
An essential part of this work involves implementing arrangements to make sure there is enough electricity supply in the wholesale electricity market to meet the needs of households and businesses over the coming years and reduce the risk of outages.
Analysis from the AEMC has shown that price settings in that market are currently set too low to ensure there is enough generation and battery storage to keep the system reliable as it transitions.
Additionally, pressure will continue to be placed on the electricity system as aging coal fired generation retires, with AEMO forecasting in its 2022 Integrated System Plan that 60 per cent of coal generation will exit the market by 2030.
This pressure will create reliability risks, with AEMO’s latest Electricity Statement of Opportunity update showing NSW and Victoria will begin to experience reliability pressures between 2025 and 2028 without new investment.
In order to meet our electricity needs, the AEMC has made rules to progressively increase the existing Market Price Cap, Cumulative Price Threshold, and the Administered Price Cap.
These changes would provide more scope for investors to deliver new generation and storage when it is needed most during times of high demand and in rare emergency situations. The final rule will also increase the incentives for consumer energy resources to participate in the market to enhance reliability.
Critically, the final rule, works together with the Commonwealth’s Capacity Investment Scheme (CIS) and jurisdictional schemes to help decarbonise the NEM by providing the flexible supply needed to support reliability given increasing levels of wind and solar generation. They act collaboratively to bring in supply and place downward pressure on wholesale prices in the long term.
Under the final rule:
- Market Price Cap, which sets the price ceiling in the wholesale electricity market, would increase from $16,600/MWh currently to $22,800/MWh by 1 July 2027
- the Cumulative Price Threshold, which serves as a trigger point to end a sustained seven day period of extreme high prices in the wholesale electricity market, will increase from the equivalent of 7.5 hours at the Market Price Cap to 8.5 hours at the Market Price Cap by 1 July 2027; and
- the Administered Price Cap, which caps the price in the wholesale electricity market once the Cumulative Price Threshold has been reached, will be set at $600/MWh from 1 July 2025.
These price settings would have no impact on wholesale electricity prices over 99 per cent of the time but would deliver additional capacity that will have substantial benefits in reducing the risk of outages and ensuring our electricity system remains reliable for households and businesses.
As these price settings apply rarely, the rule is expected to result in a relatively small impact on retail electricity prices. The Reliability Panel’s modelling predicts a 3 per cent increase in retail electricity prices by 2027, but ultimately the adjustments will lead to lower long-term prices for consumers than would otherwise have been the case.
AEMC Chair Anna Collyer said the setting changes must be made in order to help manage the transformation and to support decarbonisation of the electricity sector.
“These changes will encourage more generation and battery storage into the system when we need it most, reducing the risk of damaging outages for electricity consumers and keeping the system stable as we rapidly transition to higher levels of renewable energy and decarbonise our economy.
“Importantly, this final rule is designed to have no bearing on electricity prices under typical market conditions. Rather, it enables price fluctuations to encourage new market entrants, thus fostering competition to the benefit of all consumers.
“The Commission has considered the interaction between the market price settings and the CIS and determined they are complementary and likely to lead to better outcomes for energy consumers,” she said.
The rule is due to come into effect from 1 July 2025.
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