Energy generation ‘out of the money’ at price cap
A debate has kicked off on increasing price caps in the electricity market to avoid a repeat of the grid being suspended earlier this year with some set to gain more than others.
About 13 per cent, or 7000 megawatts, of the nation’s power generation would make a loss under the current price cap system while larger electricity retailers stand to benefit from a plan to raise the cap, the Australian Energy Market Commission has found.
Regulators imposed an administered price cap of $300 per megawatt hour in June in a bid to calm a volatile market after a period of unusually high wholesale prices.
However, the cap resulted in more than 10 per cent of supply being withheld because companies stood to make a loss on high-cost generation and feared running out of fuel.
Alinta, owner of the Loy Yang B coal plant in Victoria, submitted a formal request to double the cap payment to $600MWh in an effort to dodge a repeat event of the national electricity market being suspended back in June.
The AEMC, the national rule-maker for electricity and gas markets, said its early analysis had shown that large retailers able to fully hedge their positions were likely to be better off from the higher price cap should it be implemented.
“All things being equal, a fully hedged retailer appears better off under a higher administered price cap,” the AEMC said in a presentation to the industry on Tuesday.
Gas-fired generators needed a price of $500/MWh to turn a profit given soaring spot prices for the fossil fuel, sources said, illustrating why some withdrew rather than supplying the market at a loss at $300/MWh levels.
The AEMC calculated that some 7000MW of generation or 13 per cent of capacity in the national electricity market was “out of the money” at the current $300MWh price cap, underscoring the need to consider the rule change.
“We’ve determined that about 7000MW is out of the money at $300,” the AEMC’s Craig Oakeshott told the forum. “But as you increase it from $400 to $500, to $600 to $700 you can see that an increasing volume of plant is covered and by the time you hit $800MWh all plant is being fully compensated for their short run marginal costs.”
The Australian Energy Market Operator made the unprecedented move to suspend the entire national electricity market in June saying it had become “impossible to operate’’.
While the lockdown was lifted after just over a week, market boffins are nervous about a repeat situation given supplies look likely to remain tight over the next few years as coal plants close earlier than expected.
Consumers face a hit of hundreds of millions of dollars from the last electricity system failure and AEMC chief executive Benn Barr said it had so far received 113 claims from electricity generators from when the price cap system was in place. A total compensation figure had yet to be finalised, he added.
The Australian Energy Council, which represents big retailers and generators, said the suspension had been a mess and it was imperative the industry found a solution.
“It was a really disastrous situation to have the administered price cap and then a suspension occur during that period,” AEC general manager of policy Ben Skinner said.
“A key question here is we don‘t want to repeat that disaster. It’s always a worthy objective to try to chase down every rabbit but the trouble is if that leads you into taking time to avoid a repetition of this disaster, then that‘s completely counterproductive.
“Remember that the proposal before you is time limited. It has quite a short period of time. And you can always allocate yourself a proper review at the back end of that time period to chase down those uncertainties that you weren’t able to resolve with at this time.”
Alinta’s rule change suggests the higher price cap should apply for 12 months.
Submissions close on September 1 with the potential higher cap in place later this year.