Ongoing surveillance of generator behaviour important in rapidly changing market

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The National Electricity Market (NEM) continues to be concentrated in ownership despite new entry of wind and solar, and ongoing surveillance will remain important in a rapidly changing market, a new report says.

However, Australian Energy Regulator (AER) Chair Clare Savage said the AER’s Wholesale electricity market performance report 2020, which reviewed competition in the market since 2018, did not find a concerning exercise of market power by generators.

“In our previous report we raised concerns about factors that were driving prices higher in some jurisdictions, and we know that the wholesale electricity market can, at times, be vulnerable to the exercise of market power. In this report we did not find a concerning exercise of market power by generators,” Ms Savage said.

“While market ownership remains concentrated, this has slightly improved since 2018. Our latest analysis also shows increased competition, coupled with falls in input costs, have been reflected in lower average generator offers, particularly by coal generators.”

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The report shows wholesale prices have dropped from record highs since 2018, and in 2019-20 annual prices were below $85 per megawatt hour in all regions for the first time since 2014-15. In 2019–20, wholesale prices fell from the previous year by 30-40 per cent in South Australia, Tasmania, Queensland and Victoria, and by 14 per cent in New South Wales.

“We expect electricity retailers will pass on savings from these cheaper wholesale prices to consumers,” Ms Savage said.The report also highlighted emerging issues resulting from the transition of the market from a system driven by large thermal generators to one that incorporates widely dispersed renewable generation. Ms Savage said.

“The market is changing and different trends in competition are emerging. The growth in renewables, particularly solar, is increasing competition in the middle of the day. However in the evening peaks the role of flexible generation, such as hydro, is becoming more important in driving market outcomes. The role of flexible generation and battery storage will become even more crucial in future as more renewable generation connects to the grid and the AER will monitor these markets closely. While wholesale prices are lower, they are still at a level to encourage new investment in a range of generation technologies, with most new investment supported by governments.”

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Other key report findings include:

  • The investment environment is challenging with uncertainty about future technology costs, exit pathways for large generators, and the future of energy intensive industries which make up the majority of demand.
  • While it was acknowledged that government interventions were designed to address affordability, reliability or environmental concerns, market participants identified these interventions as a source of uncertainty impacting private investment in the National Electricity Market.

Ms Savage said the Energy Security Board’s National Electricity Market 2025 review would be critical in shaping the future direction of the market.

“Recognising that governments will continue to pursue their policy objectives, it is desirable that there is a mechanism to embed these approaches in a common framework. The National Electricity Market 2025 work presents an opportunity to achieve this and secure the best possible outcomes for consumers,” Ms Savage said.