Protecting the Market and Not Consumers

Delving into the intricacies of the electricity market is a perpetual fascination, especially for those of us immersed in its nuances. One facet that has always intrigued me is the Administered Price Cap (APC), activated when wholesale electricity prices breach the Critical Price Threshold (CPT).

As per AEMO's guidelines: "Administered price conditions are independently assessed for each region and market in the NEM. An Administered Price Period (APP) is triggered when either the cumulative spot prices or ancillary service prices over the last seven days surpass the Critical Price Threshold (CPT)." This CPT, calculated annually and effective from July 1, 2023, stands at $1,490,200, equivalent to an average spot price of $739.19/MWh over the preceding week.

So, when the wholesale electricity price surges to approximately $1.5 million within seven days, the Availability Payment Contract (APC) kicks in to act as a stabilising force. Given that gas-fired power stations often provide crucial peaking capacity on hot days, the attractiveness of the APC is vital to sustain their operation. The APC is temporarily set at $600/MWh, a significant increase from its previous rate of $300/MWh, a change prompted by economic challenges when international gas prices skyrocketed. This surge in gas prices ultimately led to the suspension of the electricity market in June 2022. This adjustment ensures that the APC intervenes when needed, providing a necessary support mechanism for the continued operation of gas-fired power stations.

Let's unravel the mechanics when CPT is breached and beyond: In a region experiencing an extended heatwave, all generation is dispatched for hours, while transmission capacity from other states is constrained due to the higher ambient temperature. The cumulative wholesale electricity price swiftly hits $1,490,200, triggering AEMO to enforce the APC at $600/MWh.

What unfolds next? For generators whose running costs exceed the $600/MWh threshold, negotiations with AEMO for a higher price may ensue. Alternatively, they may curtail their output or go offline completely to limit financial losses. Demand Response Providers find load curtailment unviable at $600/MWh, prompting participating customers to revert to normal operations. However, the underlying conditions that brought about the high wholesale electricity price in the first place persist – scorching temperatures and limited power exasperated due to withheld generation and halted Demand Response, increasing demand – leading to the ominous prospect of rolling blackouts.

While CPT and the APC serve as effective safeguards for the market, which is crucial, their alignment with consumer interests is debatable. Shouldn't the market, fundamentally, exist for the benefit of consumers? It's this a question worth exploring as we navigate the intricate dynamics of the energy landscape.