Protecting the Market and Consumers

Last week, I shared insights on the challenges posed by the Critical Price Threshold (CPT) and Administered Price Cap (APC) in my post, "Protecting the Market and Not Consumers." Paul McArdle from Global Roam rightfully questioned my perspective, prompting me to consider a solution.? Thank you, Paul.

As a quick recap, the APC is currently and temporarily set at $600/MWh, a significant increase from the previous $300/MWh over the past two decades. The CPT, recalculated annually, is set at $1,490,200, triggering APC when the average spot price hits $739.19/MWh over the preceding week. The suspension of market mechanisms, with all generators receiving a fixed price of $600/MWh, aims to prevent prolonged periods of high electricity prices.

However, the sudden declaration of APC can lead to challenges. When APC is announced due to insufficient generation or grid issues, loads exposed to pool prices come back online. Generators operating uneconomically at $600/MWh switch off, leading to an increase in demand and a decrease in supply. This imbalance can result in rolling blackouts initiated by the Australian Energy Market Operator (AEMO) until equilibrium is restored, which may be many hours later.

To address this, I propose integrating Demand Response (DR) into the APC mechanism. When APC is declared, the Reliability and Emergency Reserve Trader (RERT) mechanism is likely to have been activated.? However, by aligning RERT with the APC it means that when the APC is declared AEMO would be obliged to continue to pay for the DR to avoid blackouts until the danger of outages is over.

The current RERT would require a significant revamp. It’s well known that the current RERT has significant shortcomings, which can largely be addressed by a shift to three- and five-year DR contracts, accompanied by the introduction of better measurement methods and availability payments.

Implementing this solution would provide customers and aggregators with sufficient time to adopt technology platforms for better capacity management. The revised measurement methods should broaden the types of loads eligible for participation in this emergency DR program, and availability payments would appropriately reward customers and keep them engaged. This way the CPT/APC would not only continue to protect the market but also afford greater consumer protection too.

Anticipating industry concerns about increased costs, it's crucial to recognise that the electricity industry already invested millions into developing programs like the Wholesale Demand Mechanism (WDRM). Despite these efforts, the limited capacity attracted, primarily from a single aggregator, highlights the need for more effective solutions. With the industry's annual turnover exceeding $16 billion, the suggested investment in availability fees for a refined RERT mechanism seems negligible in the larger context.

The electricity industry must avoid blackouts and prioritise reliability and security, recognising that a 100% dependable power supply is not practical.? However, we can take measures to get close to it. Integrating DR into the APC not only helps to avoid blackouts but it also benefits participants, fostering competitiveness by compensating businesses for their contribution. AEMO should reassess its DR mechanisms and, as I mentioned in a previous post, consider delegating DR administration to an authority more focused on demand-side solutions.