The Australian Energy Regulator (AER) has released its biennial Wholesale electricity markets performance report today which outlines key considerations to manage volatility and incentivise investment in Australia’s wholesale electricity market.
AER Chair Clare Savage said the report provides a detailed examination of market competition and efficiency over the past two years, and outlines recommendations for market design as our energy market evolves. The recommendations come as the Federal Government kicks off its review of future market settings.
“Wholesale electricity spot prices have fallen since late 2022, thanks to lower fuel costs, increased renewable energy, and government actions. However, the market remains unpredictable, with outages, weather variability, and high demand contributing to price spikes,” Ms Savage said.
“Greater spot price volatility can flow through to higher forward contract prices that then impact household electricity bills.
“Renewable sources like wind and solar delivered 32% of electricity in the past year. During the day they are increasingly setting prices and leading to negative price periods. But during evening peaks, when prices are at their highest, traditional generators still set the price over 90% of the time.
“From a competition perspective, this influx of renewables is driving a lessening of market concentration during the day while ownership of dispatchable generation remains concentrated and a few large participants are often needed to meet demand.
“Structural reforms and timely investments in dispatchable and renewable capacity are needed to address price volatility, market stability, and competition, to ensure lower costs for consumers and to maintain investment that is essential for the energy transition,” she said.
The report recommends:
- Designing for the future: Any new market design should ensure generation revenue can cover long-term costs, support new technologies that address supply variability and demand changes, enable innovative risk management solutions to reduce volatility costs, and ensure there is competitive tension in providing energy, firming and essential system services.
- On-time delivery of new projects: Governments need to ensure new generation enters the market in a timely fashion. As coal and some gas plants prepare to leave the system, there is also a case to manage price and competition impacts arising from risks of unplanned outages and fuel market prices and supply constraints. Governments should develop options to manage these aspects of thermal generator exit in parallel to the roll-out of their investment schemes.
- Encouraging competition: Governments should factor in diversification when awarding dispatchable generation contracts or directly investing in generators.
- Risk management mechanisms need to be a continued focus under the current market design: Government programs can assist in reducing project risk but need to do so in a way that maintains incentives for generators to contract hedges or take part in other risk management transactions. This helps manage price volatility and maintain competition in both the wholesale and retail markets.
This year’s report also takes a deeper dive into the South Australian market, with the AER using its new contract market monitoring powers to examine market dynamics in a state where over 70% of its electricity is from renewable generation.
“South Australia's experience offers valuable lessons for the National Electricity Market’s transition,” Ms Savage said.
“While increased renewable generation has sometimes lowered prices, factors like fuel costs, network congestion, and bidding strategies have kept prices high and volatile, with fewer mid-priced offers and incentives for limiting supply further driving instability.
“These factors have led to new inefficiencies, challenges to competition, and costs that should be addressed in market design reviews.
“The AER is very keen to work closely with the market design review panel next year on all of the recommendations presented in this report to build a market that delivers reliable and affordable energy at the least cost to all Australians as we transition to net zero emissions,” she said.
Background
Under the National Electricity Law (NEL), the AER is required to undertake a comprehensive, longer-term assessment of the performance of the wholesale electricity markets every two years.
This 2024 Wholesale Electricity Markets Performance Report is our fourth report covering all National Electricity Market (NEM) regions. It presents a comprehensive picture of the state of wholesale competition, and analyses how the performance of the NEM has changed over the past 5 years, with a particular focus on outcomes since our last report in 2022.