The Australian Energy Regulator (AER) monitors and reports on wholesale electricity markets. As part of this role, we report on events that result in wholesale electricity spot prices exceeding $5000 per megawatt hour (MWh) and frequency control ancillary services (FCAS) prices exceeding $5000 per megawatt (MW).
Most end-customers are not directly exposed to wholesale electricity and ancillary service market prices. Energy retailers are the main purchasers in the wholesale electricity market - they bundle electricity with network services for sale to their residential, commercial and industrial customers. Generators and retailers can manage their exposure to price variations in the wholesale market by entering hedge contracts that lock in firm prices for the electricity they intend to produce or buy. Participants enter into hedging arrangements separately outside of the wholesale electricity market.
Transparency is key to the efficient operation of the National Electricity Market. AEMO facilitates this by publishing, amongst other things, advanced notice of planned network outages and forecasts of the demand for and prices of electricity. In addition, AEMO publishes all market outcomes, including participants’ offers for both energy and FCAS, the day after any given trading day.
Today we are publishing seven reports into extreme pricing events in the frequency control ancillary services (FCAS) markets in South Australia, as follows:
| Date | Prices |
|---|---|
| 9 November 2016 | raise and lower regulation services above $6000/MW |
| 25 November 2016 | raise and lower regulation services above $7900/MW |
| 23 January 2017 | raise and lower regulation services above $13 000/MW |
| 21 March 2017 | raise and lower regulation services above $8990/MW |
| 30 March 2017 | raise and lower regulation services above $11 400/MW |
| 18 April 2017 | raise and lower regulation services above $10 900/MW |
| 22 May 2017 | raise and lower regulation services above $10 700/MW |
What is FCAS and who provides it?
FCAS is required to maintain the frequency of the power system within the frequency operating standards. Lower and raise regulation services continuously adjust to small changes in demand or supply (changes that cause the frequency to move by only a small amount). Of the 26 power stations (including wind farms) in South Australia only the following four are registered to provide FCAS.
| Power Station |
Registered Capacity (MW) |
|
|---|---|---|
| Lower regulation | Raise regulation | |
| Osborne (Origin Energy) | 36 | 36 |
| Quarantine (Origin Energy) | 50 | 50 |
| Pelican Point (Engie) | 100 | 100 |
| Torrens Island (AGL) | 200 | 260 |
| Total | 386 | 446 |
But, these generators need to be operating to provide these services, and even then they are not always able to provide their full FCAS capability at all times, for reasons including plant and operational limitations.
The AER’s analysis determined that a combination of factors led to the high prices:
- Of the seven events, five occurred during planned outages and two occurred during unplanned outages on the Heywood interconnector. The planned outages, announced to the market some time in advance, were part of routine maintenance on the transmission network in Victoria. Some of the planned outages lasted for several days, which, given the transparency of the market, led to the potential for predictable market outcomes. All of these outages on the Heywood interconnector created a risk of islanding South Australia from the NEM. Under these conditions, AEMO requires 35 MW of raise and lower regulation FCAS to be sourced locally in South Australia.
- Either through offers in advance or changes in participant offers, for most of the high price events, just under 35 MW of low priced raise and lower service capacity was available. So, higher priced capacity was needed to meet the 35 MW requirement, resulting in high prices.
- On one occasion, although participants offered 35 MW of low-priced capacity, the technical characteristics of one generator meant that high priced capacity was needed to meet the requirement.
Prices for regulation services on 9 and 25 November 2016 and 18 April 2017 were sufficiently high for long enough to breach the Cumulative Price Threshold, or CPT. On each occasion AEMO immediately capped prices for these services at $300/MW (the Administered Price Cap, a safety net to protect those paying for the regulation services) until cumulative prices for these services again fell below the CPT.
More in-depth analysis of these events can be found in the AER’s high price event reports: 9 November 2016, 25 November 2016, 23 January 2017, 21 March 2017, 30 March 2017, 18 April 2017 and 22 May 2017.
The AER’s role in monitoring wholesale energy markets and reporting on high price events helps to enhance market transparency and compliance. Our analysis provides a foundation to detect non-compliance, market irregularities, inefficiencies and consumer harm. We draw on this work to advise the COAG Energy Council, other stakeholders and market bodies on wholesale market issues.