Estimates of the long run market cost (LRMC) and the market-based cost of energy will both be used to set the floor price for the energy purchase costs element of the regulated price.

The NSW Independent Pricing and Regularly Tribunal (IPART) has begun its triennial review into regulated retail prices. It will set prices for 2013-2016 early next year. Submissions on the IPART review Issues Paper and three draft Methodology Papers are now open.

IPART's papers cover a range of issues, but two revisions relating to energy costs setting may be of particular interest:

  • estimates of the long run market cost (LRMC) and the market-based cost of energy will both be used to set the floor price for the energy purchase costs element of the regulated price; and
  • the methodology for calculating the cost of certificates under the Renewable Energy Target (RET) scheme is set to change.

The hybrid approach to setting energy purchase costs: LRMC not abandoned

IPART will determine an energy purchase cost floor price based on a weighted average of:

  • the LRMC of electricity generation (weighting of 75%;) and
  • the market-based cost of purchasing electricity (weighting of 25%).

The Issues Paper indicates that IPART has a preference for a "stand alone" or "greenfield" approach to estimating the LRMC, but asked for submissions on whether this is appropriate.

It also establishes that IPART will calculate the market-based cost figure using a methodology that relies on the concepts of portfolio theory used in finance and investment. (That is to say, IPART will estimate the electricity purchase costs using a mix of purchasing instruments – spot market purchased and electricity.) The Issues Paper requests submissions to settle exactly how it will use forward price data or calculate the volatility allowance.

The Frontier Economics draft methodology report sets out the proposed approaches to these calculations in more detail.

The NSW Government's decision to mandate this approach is notable because other states have been abandoning reference to the LRMC of generation in their price setting. Queensland moved to a solely market-based calculation approach earlier this year. South Australia's Essential Services Commission recently announced an early price review to allow it move to a market-based approach. By contrast, in NSW the estimated LRMC has is central to the price setting process.

Green scheme costs calculation method still be settled

IPART has recognised that the approach it took to calculating RET scheme costs in their last determination was flawed. Their estimated price for Small-scale Renewable Energy Scheme (SRES) certificates was too high. Its estimates for Large-scale Renewable Energy Target (LRET) certificates also diverged from the market price.

To get it right this time IPART:

  • will consider the Climate Change Authority's recommendations regarding the cost of complying with the SRES and apply if appropriate. (A draft recommendation suggests that the SRES Clearing House may become a deficit sales facility, meaning certificates would only clear through it when there is a deficit, rather than at a set price, which would be preferable);
  • proposes using a cost-pass through mechanism to get around the problem of the SRES small-scale technology percentage (STP) being calculated for each calendar year and the IPART determinations operating on financial year basis; and
  • is seeking comment on whether a costs based approach or market-based approach is preferable for determining LRET certificate costs.

The Frontier draft methodology report addresses these questions and SRES and LRET calculations. Frontier puts the arguments about using a fixed price or a market-price for SRES calculations and seeks submissions. Frontier intends to advise IPART on the cost of complying with the LRET using both available approaches.

Other points to note: Coverage, carbon and cost pass-through

From July 2013 onwards some businesses will no longer able to choose to be on the regulated price, since the consumption threshold for a "small retail customer" will be reduced from 160MWh of electricity per year to 100MWh. (The average household uses 7MWh.) This is likely to affect premises such as pubs, clubs, motels and large strata plans.

The Issues Paper notes that Carbon Pricing Mechanism costs are accounted for in the energy purchase costs allowance (ie. as part of the LRMC and market-based costs estimates,) to address any questions stakeholders may have about that.

IPART expects that the regulatory package for the 2013 determination period will include a cost pass-through mechanism. It notes that there is the particular potential for change in the RET and the Carbon Pricing Mechanism. The scope of the cost pass-through mechanism is a matter for review.

Submissions to IPART on the Issues and draft Methodology Papers are due before 20 December 2012.