The Australian Energy Market Commission grants Alinta approval to double the power price cap
A bid to increase the power price cap has been granted following chaotic market conditions in the national electricity system during the 2022 winter.
Alinta Energy has won approval from the national regulator to raise price caps in the national electricity system, designed to avoid a repeat of last winter’s market suspension and ease ongoing pressures on supply.
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 were worried about running out of fuel.
Alinta, owner of the Loy Yang B coal-fired 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 Australian Energy Market Commission on Thursday approved a doubling of the cap, a move it expects will cover the short-run marginal costs of most electricity generators in a range of market scenarios. The price cap “has not been updated in 14 years and it is no longer at a level where it provides the right incentives to facilitate more supply in emergency situations,” AEMC chair Anna Collyer said on Thursday.
“If this change had been applied in June, it would have unlocked significantly more electricity generation – enough to power more than two million homes.
“Importantly, this change would have no impact on wholesale prices during normal market conditions, but it would have a substantial benefit in protecting us from damaging blackouts and securing our reliable electricity supply during emergencies.”
Sources said gas-fired generators need a price of $500/MWh to turn a profit, given soaring spot prices for the fossil fuel, illustrating why some withdrew rather than supply the market at a loss at $300/MWh levels.
The AEMC previously 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.
The increase in the cap will apply from December 1 until June 30, 2025 when longer-term settings are reviewed by the AEMC reliability panel.
In the past 24 years, the price cap has been applied only three times during periods of extreme market volatility.
The pricing change may help ease ongoing tensions in the market amid a rocky transition from coal to renewable energy.
The Australian Energy Regulator warned on Wednesday the amount of new energy supply being delivered into the market also slowed to its lowest quarterly volume in five years, likely to worry energy ministers given the looming withdrawal of major coal capacity starting with the exit of AGL Energy’s Liddell coal plant in April 2023.
Still, the Clean Energy Regulator said on Thursday that 1.5 gigawatts of large-scale wind and solar projects is expected to be approved for large-scale generation certificate creation in the fourth quarter with rooftop solar likely to take the total to 2.3GW for the three-month period.