Impact of Reserve Capacity Market reforms on WA energy users

Impact of Reserve Capacity Market reforms on WA energy users
15 Apr 2016Archived News Andrew Lister Climate Change Matters

Changes to the reserve capacity mechanism in 2017-18 will result in a slight decrease in electricity costs for most energy users. But for those participating in Demand Side Management (DSM), there will be a sharp reduction in payments, including for those using DSM through an aggregator.

To reduce capacity charges and offset the loss in revenue from DSM, energy productivity improvements throughout operations should be prioritised, along with the installation of solar PV. In this article Energetics outlines the major changes that are proposed and how you can best position your business.

Changes to take effect 1 June 2016

On 7 April 2016 the Western Australia Treasurer and Minister for Energy, announced changes to WA’s energy market which will impact the Reserve Capacity Mechanism (RCM). The changes will become effective from 1 June 2016 under the New Wholesale Electricity Market Rule provisions. In addition, the Minister announced that Synergy will remove 380 MW of capacity from the market over the next two years, which is expected to include the closure of Muja A and B (240 MW).
The RCM has been operating in the WA energy market since 2005 to increase electricity supply, and therefore reduce shortfalls and blackouts. Under the RCM electricity generators and demand side management participants receive revenue for agreeing to provide electricity capacity to the system when needed.  This revenue is paid for by charges on energy users’ electricity invoices; some 20-30% of total charges.
Arguably, the mechanism has worked too well.
Excessive capacity has been procured every year since 2007/8.  This excess will be 1,061 MW in the 2016/17 capacity year, 23% above requirements at an additional cost of $116 million. 

Transition period in place for up to seven years

As the proposed reforms represent a major change to the RCM a transition period will operate for up to seven years before the reforms are fully implemented. Given this time horizon the transitional arrangements are arguably more important than the actual reforms. The major features of the reforms and transitional arrangements are summarised below:

  • Introduction of an auction process for procuring capacity to ensure the capacity price reflects supply and demand. This will commence in 2021 (or earlier if excess capacity is reduced to 5-6% before this date) for capacity three years ahead. During the transition period the existing administered capacity price mechanism will be maintained but the capacity price formula will be amended with negative slope values.

  • Demand side management (DSM) capacity will have a separate pricing arrangement to other forms of capacity during the transitional period based on the deemed ‘value of customer reliability in the NEM’. This price is currently $33,460/MWh with an additional half hour payment for administration of a demand response program, however there is almost no dispatch forecast from 2017-18 meaning DSM participants would effectively be paid $17,500/MW p.a., a significant reduction from the current levels.

  • When the auction process commences there will be new availability requirements for DSM providers to align them with those for generators. This includes increased hours per year and hours per day of availability, increased dispatch hours and a reduced notice period for dispatch.

The reforms and transitional arrangements are designed to decrease the level of excess capacity in the market and its associated cost, and harmonise the treatment of capacity in the market.

No significant reduction in the delivered cost of electricity

The reforms and transitional arrangements are expected to decrease the delivered cost of electricity by about 2-3% (all other things being equal) from 2017-18. Capacity charges currently make up around 20-30% of invoiced charges and these are expected to reduce by about 10%. The cost reduction is not overly significant and may be absorbed by potential increases in wholesale electricity costs and network costs.    

Do you have a bundled electricity contract?

Where energy users are on bundled electricity contracts (capacity charges are ‘bundled’ into peak consumption charges) the reduction in capacity charges will not be passed through as these are typically fixed rates ($/kWh).
Where bundled contracts extend into the 2017-18 period we recommend reviewing the contract to understand your position and engaging your retailer on this issue.  

Does your business use DSM?

The biggest impact will be felt by energy users that engage in demand side management with the requirements for participation impractical under the proposed reforms and payments significantly reduced during the transition period. We expect capacity payments for DSM to reduce by around 90% from 2017-18 based on forecast dispatch.

As a large number of energy users are also DSM participants the direct impact on these operators during the transition period will be an increase in costs due to a slight decrease capacity charges and a large decrease in DSM payments.  

Opportunities for energy users

  • Energy productivity, which describes measures to increase the value produced for every unit of energy, remains the lowest cost (highest earning) opportunity for energy users in WA.
    Energy users in manufacturing, resources and commercial industries can improve energy productivity at very little cost through better monitoring, process optimisation and equipment upgrades.

  • Opportunities to reduce capacity charges remain for energy users if demand response is dispatched proactively. Capacity charges are based on a customer’s median peak load (MW) during the 12 peak trading intervals during summer. The intervals are not known in advance but are typically during business day afternoons when temperatures are above 38°C. By anticipating the intervals and reducing demand, energy users can reduce the capacity charges they’ll receive in the following year.

  • Solar PV is now cost effective at most sites in WA. This will reduce energy consumption charges but over the long run will also reduce capacity and network charges. As energy storage prices decrease, solar PV can be combined with storage to make an even bigger impact on capacity and network charges, and arbitrage between peak and off peak rates. Energy users with batteries and smart control technology will be able to anticipate peak trading intervals and reduce demand with precision to significantly reduce costs. 

Unintended consequences

Submissions from DSM aggregators to the Energy Market Review indicate that most DSM will stop providing capacity under the transitional arrangements. Although the exit of DSM and the announcement of Synergy’s reduction in capacity of 380 MW will still leave significant excess capacity in the market, scenarios involving a capacity shortfall could occur if there was an outage of a major generator(s) or other unforeseen events. Despite significant excess capacity in 2011, DSM was dispatched when Cyclone Carlos disrupted gas supply to electricity generation in WA. If it is required, DSM may take a long time to re-establish in the capacity market or may not return in its current form.
The penetration of utility scale solar energy is expected to continue to increase, followed by the introduction and then penetration of utility scale battery storage technology during the transition period.
This will have the effect of introducing additional available capacity into the market and exacerbating the excess. In turn, putting pressure on existing generators to exit, particularly if solar production exceeds demand during day time.

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