The AER has conducted this review on the performance of the wholesale electricity market under the National Electricity Law. We analyse and identify whether there is effective competition in the NEM and whether there are market features that may be detrimental to effective competition or the efficient functioning of the market. We are also empowered under the law to advise Energy Ministers on any legislative or regulatory reform to address key risks in the market.
This 2022 report is our third report covering all 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 released in 2020.
Findings
Since our last report in 2020, the NEM has been placed under unprecedented stress by a convergence of supply side issues largely due to sharp increases in international fuel prices, significant outages of thermal generation and fuel supply problems. The resulting volatility led to extraordinary interventions to maintain reliability and security of the system.
The ownership of dispatchable generation remains concentrated, leaving the market vulnerable to exercise of market power or the business decisions of individual generators. This is a particular issue when output from wind and solar is low. More flexible generation like gas and hydro, which can be switched on quickly when the sun isn’t shining and the wind isn’t blowing, has become more influential in the market, setting prices more often in peak demand periods.
Supply-side factors were a major driver of higher generator offers in 2022, but they may not explain all of the shifts we have observed. While we have not identified any widespread or systemic patterns, new analysis suggests that in some instances there may be evidence of sustained exercise of market power through offering capacity higher than cost with the intention to increase prices. Our results require further analysis to test the potential drivers of the behaviours we have observed and to assess the significance on market outcomes.
On the other hand, the NEM continues to transition from a system dominated by large thermal generators to one that incorporates an increasing volume of widely dispersed intermittent renewable generators. The significant new entry of large-scale solar and wind generation has brought competition to certain times of the day, helping constrain prices to some extent.
The appropriate powers to monitor these markets are needed to provide greater visibility of contracts, enable us to better assess the competitiveness of wholesale markets, and better understand ongoing market liquidity. Through our assessment of competition and efficiency in the wholesale electricity market, we have identified a set of recommendations to support policy makers to deliver an effective transition.
Contact
Contact wholesaleperformance
aer [dot] gov [dot] au (wholesaleperformance[at]aer[dot]gov[dot]au) for further information.