The Reliability Panel today published the final report for its four yearly ‘check in’ of the reliability standard and settings for the national electricity market. The Panel found the current reliability standard and settings should be extended to 2024.
These market-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 and operational decisions and provide an important ‘price envelope’ protecting market participants from exposure to excessive high prices. This is essential to maintaining the integrity of the market.
The reliability standard is a trade off between meeting the required level of reliable electricity supply and 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.
In reviewing the standard and settings, the Panel modelled a range of different futures – including a world with more household battery storage systems and more wind generation. It also factored in the current state of uncertainty in the market and how the market is transforming. Understanding this is key to getting the settings right and supporting efficient investment in generation and demand response.
Reliability Panel Chairman Dr Brian Spalding said the robust analysis undertaken by the Panel found the settings will continue to achieve their purpose of signalling to the market the level of generation and demand response needed, while also supporting market integrity.
“Setting the reliability standard involves a trade-off between the prices consumers pay for electricity and the cost to consumers of not having electricity there when it’s needed,” said Dr Spalding.
“In doing this review, the Panel was extremely cognisant of getting the balance right to avoid what some have called ‘gold plating’ with excess capacity built but not required for years.”
The Panel noted that removing the difference between the current standard of 99.998 per cent of demand met and 100 per cent could require considerable additional investment in generation measured in the billions of dollars.
It is 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, transmission interconnectors and demand response.
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 factors including extreme weather, bushfires and equipment failure. For example, South Australia’s system black event was a power system security event.
The Reliability Panel’s final 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 the standard remains appropriate.
- 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.
The Reliability Panel is comprised of a range of experts in the national electricity market including AEMO, consumer groups, generators, network businesses and retailers. It is chaired by AEMC Commissioner, Dr Brian Spalding.
Media: Bronwyn Rosser, Communication Specialist, 0423 280 341
EXPLAINER OF TECHNICAL TERMS
What is reliability?
'Reliability' of the power system, at a wholesale level, is about having sufficient physical capacity in the system to generate and transport electricity to meet consumer demand. Over the last 10 years wholesale reliability events have only contributed to about 0.25% of all customer interruptions.
What is the reliability standard?
The reliability standard expresses the level of reliability sought from the national electricity market’s generation and transmission interconnector assets. The reliability standard also guides various decisions made by AEMO in its role as the system operator. It is AEMO's responsibility to incorporate the reliability standard within its day-to-day operation of the market, and to inform the market of any projection that the reliability standard is expected to not be met. If a market response to a projected expectation that the reliability standard will not be met is not forthcoming, then AEMO may intervene through the intervention mechanisms that are part of the current frameworks.
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.
The reliability standard does not address the reliability provided by the electricity transmission and distribution networks as this is the responsibility of jurisdictional governments. Distribution events are by far the largest cause of customer interruptions.
What is the market price cap?
The market price cap seeks to maintain the overall integrity of the NEM by limiting market participants’ exposure to temporary high prices which could threaten the financial viability of prudent market participants. The market price cap should be set at a level such that prices over the long term incentivise enough new investment in generation so the reliability standard is expected to be met. 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 seeks to maintain the overall integrity of the NEM by limiting market participants’ exposure to sustained high prices which could threaten the financial viability of prudent market participants. The cumulative price cap should be set at a level such that prices over the long term incentivise enough new investment in generation so the reliability standard is expected to be met. The cumulative price threshold caps the total market price that can occur over seven consecutive days (336 trading intervals), before an administered pricing period is declared. The cumulative price threshold for the energy market 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 is the price ‘cap’ that applies when the cumulative price threshold is exceeded. It seeks to maintain the overall integrity of the NEM by limiting market participants' financial exposure to sustained high prices, while maintaining incentives for participants to supply energy during the period of trading after the cumulative price threshold is exceeded, i.e. an administered price period. The administered price cap is currently $300/MWh in nominal terms.
What is the market floor price?
The market floor price prevents market instability by imposing a negative limit on prices in any trading interval, while allowing the market to clear during low demand periods. The market floor price should be set at a level that does not interfere with generators being able to differentiate themselves according to the value they place on being dispatched by bidding at negative prices during periods of excess generation.