The AER has released its latest review of the performance of the National Electricity Market (NEM). This review evaluates current market dynamics, competitive conditions and structural changes under the National Electricity Law (NEL) and offers insights into the evolving NEM landscape. The report explores the challenges and drivers that shape market outcomes and assesses areas of the market that may benefit from policy or regulatory reform that would support ongoing effective competition and 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 2024 report presents a comprehensive analysis of all NEM regions and focus on significant developments since the previous report in 2022. Notable changes across market dimensions, from pricing and market structure to participant behaviour and regional dynamics, are highlighted and market dynamics in the South Australian region are explored in depth.
Findings
Wholesale electricity spot prices have fallen since late 2022 due to lower fuel costs, increased renewable generation and government intervention. The market continued to experience significant volatility, driven largely by network and generator outages and variability in wind and solar output. Higher priced trading intervals have reduced, but high price events remain prevalent, due to a combination of these factors and periods of high demand.
Intermittent renewable sources now contribute over 30% of total generation and are increasingly setting daytime pricing. Significant new investment in wind, solar, batteries, pumped hydro, gas-fired generation and the transmission network is needed over the next decade to replace aging coal and gas plants.
The increase in 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.
A dedicated analysis of the South Australian market, including the first use of our new contract market monitoring powers, highlights a significant increase in intermittent renewable generation and falling levels of demand have driven an increase in the frequency of negative prices, particularly during periods of low demand. However, the combined effect fuel costs, network congestion, participant bidding strategies and lower wind conditions have maintained prices in recent years above pre-2022 levels.
We observed in the South Australian contract market low levels of trading, limited product options and an increasingly volatile spot market that make it more costly for smaller retailers to hedge and manage their risks.
Through our assessment of competition and efficiency in the wholesale electricity market, we have identified a set of recommendations to inform new market design and support policy makers to deliver an effective transition.
- 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.