Competition concerns persist in NEM

NEM, RERT (GenInsights21)

The National Electricity Market (NEM) continues to undergo a significant transformation, however traditional competition concerns, such as barriers to entry and market concentration persist, according to a new report released by the Australian Energy Regulator (AER).

AER Chair Paula Conboy said the 2018 Wholesale electricity market performance report is the AER’s first report to look at competition across all NEM regions, providing a full picture of wholesale market performance.

“As we all know, the market is undergoing a significant and unprecedented transformation, and at the same time, electricity wholesale prices remain higher than historical levels,” Ms Conboy said.

“In this report, we found that the leading contributors to the rise in wholesale prices included the exit of low fuel cost generation from the market, and the rise in coal and gas fuel costs.

“These changes saw a decrease in competitive constraint, which influenced the bidding strategies of some generators.”

It was also found that while wholesale prices are currently still higher than historical levels, average prices eased in 2017–18 in all regions other than Victoria.

“We know that healthy competition helps to achieve fairer prices for consumers and requires a number of active competitors in the market, genuine price signals, and the credible threat of new players,” Ms Conboy said.

“We have found that there are elements in the market that are vulnerable to the exercise of market power.

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“This includes a few large participants controlling a significant portion of generation in each region. The output of these large generators is required to meet demand in most regions a significant proportion of the time.

“Despite the market’s vulnerability to the exercise of market power, we did not identify sustained untoward behaviour in most regions. But we have some continuing concerns about factors driving prices higher in New South Wales and Queensland.

“Currently wholesale spot prices would provide a range of generation technologies with the ability to recover their costs if they entered the market. There has been considerable investment in new wind, and solar generation is on the horizon.

“However, there are views amongst market participants that there are barriers for further investment by existing market participants and potential new entrants. One of the key matters identified by market participants was the need for a consistent policy environment to support investment in the sector,” she said.

Ms Conboy said that these potential barriers may not be having significant effect on new wind and solar given the current levels of investment in the NEM. However, achieving consistent energy policy settings is important if we are to continue to rely on market signals to deliver an effectively competitive wholesale electricity market over the long term.

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“Other barriers identified by market participants included interventions in the market, government ownership of generation assets, difficulties in obtaining finance, vertical integration and contract market liquidity,” she said.

“Ongoing barriers to entry are likely to reduce competitive constraints in the market. Careful monitoring of the market is necessary to identify the pervasive nature of any barriers and to highlight their long-term effect on competition.

“We will continue to monitor behaviour and price outcomes in the wholesale market into 2019, particularly as there are a number of processes underway that may impact market outcomes.”

The AER regularly monitors and reviews the performance of the wholesale electricity market, including analysing and identifying whether there is effective competition in the market.

The AER will update findings each year and report on the market at least every two years.