The Electricity Authority (the Authority) has recently released a review of locally net pivotal generation events (the report). The review was conducted in response to two scheduled transmission outages in February and April which resulted in very high wholesale electricity prices.
The report is intended to form part of a more detailed project by the Authority (announced in May 2012) to investigate options for ensuring efficient pricing occurs in circumstances where a generator is net pivotal.
A locally net pivotal situation occurs when:
a generator’s generation is required to satisfy demand in a particular region; and
the level of that generation is greater than the generator’s own retail and hedge commitments (so other energy market participants must purchase from the net pivotal generator in order to satisfy their own retail/usage requirements).
Typically these situations occur when a region is isolated or transmission-constrained (for example, when a transmission outage prevents or restricts external generation from being provided to a particular geographical area).
The Authority considers that, in certain circumstances, the high wholesale electricity prices set by net pivotal generators are inefficient and therefore not in the best interests of the electricity market as a whole. Whilst the Authority acknowledges that high market prices that are caused by genuine supply shortages may be efficient, experience dictates that high prices in net pivotal situations will often be inefficient. This is because the high prices charged by a net pivotal generator often do not result from a genuine supply shortage but rather from the generator’s ability to charge high prices in the absence of a competitive constraint.
The Authority has proposed a number of possible options for mitigating the ‘inefficient’ price effects of net pivotal scenarios. The following remedies have been proposed by the Authority in situations of local net pivotal generation:
Net pivotal declarations. This proposal involves either the Authority or the generator declaring in advance that a net pivotal situation will occur over a defined period of time. Restrictions would then be imposed on the net pivotal generator’s ability to increase prices over the period during which they are net pivotal. These restrictions would limit the generator’s ability to offer generation at higher prices than would be possible under normal operating conditions and could take the form of either universally defined maximum offer prices for additional generation, or maximum offer prices for additional generation set at the generator’s long run marginal cost of production.
Price or offer by fiat. This proposal would see the Authority set fixed market prices in situations where a generator is net pivotal. This price would be set by the Authority either prior to a net pivotal situation occurring, or after the event. The set price could be calculated with reference to either a reference spot price for the period, the average price over the previous week or the long run marginal cost of the particular generator.
Branch buffer. This proposal involves imposing a set 'branch buffer' price (the EA suggests $200/MWh) at which the physical transmission limit of a branch can be hypothetically exceeded during scheduling (the Branch Buffer Price). This means that in the case of any marginal offer price over the Branch Buffer Price, the physical constraint will be exceeded during scheduling and prices for the branch will therefore not exceed the Branch Buffer Price. The physical transmission constraints would be used to determine dispatch, and as such constrained-on payments would increase, as Transpower compensates the high cost (but non-transmission constrained) generator for the generation it provides above the level that was predicted in scheduling.
An example of this in action would be the case of a low cost generator (A) who offers sufficient generation to power an entire branch at a marginal price of $100/MWh, but due to transmission constraints is prevented from supplying users at the other end of the branch. As a result of the transmission constraint, users at the other end of the branch are supplied by a high cost generator (B) whose marginal offer price is $500/MWh. By imposing a Branch Buffer Price of $200/MWh, the scheduled generation would be entirely supplied by A at a price of $200/MWh. By contrast in the absence of a branch buffer some users on the branch would be charged $100/MWh and others who would be charged $500/MWh. The branch buffer therefore reduces the locational price separation that can otherwise occur in the presence of a transmission constraint.
Contract grid. This proposal involves basing final pricing on an expected grid rather than the actual available physical grid. The physical grid would still be used to determine dispatch. In circumstances where the final price (as calculated based on the expected grid) received by a generator is lower than the dispatched price (as calculated based on the wholesale spot price), the shortfall is paid to the generator in the form of a constrained-on payment. The cost of constrained-on payments would be borne by load customers or Transpower. This proposal has the effect of spreading the burden of high spot prices in a transmission constrained geographical area across all electricity users. Given that most instances of net pivotal generation result from transmission constraints, this proposal appears equitable in the sense that it spreads the cost of these constraints across all transmission users (rather than simply burdening those in the area in which a net pivotal generation event occurs).
The review has not been met with approval from all market participants, with Genesis Energy challenging the Authority’s approach to defining and remedying net pivotal situations. In a submission on the draft report, Genesis Energy argues that in the long run the effect of net pivotal generation events is not sufficiently material to result in market inefficiencies. This is broadly consistent with the view taken by the Australian electricity regulator (AEMC) in their review of transient market power exercised by Australian generators, and cited by Genesis in support of their position.
Genesis also argues that, to the extent action is required to prevent an undesirable net pivotal scenario, this should be directed at remedying transmission constraints, rather than regulating generator behaviour. Specifically, Genesis views it as important that market impacts are given more consideration in the planning and operation of transmission services.
The Authority is expected to release a more developed paper on options for dealing with net pivotal generation in the coming months, but the proposals set out above are expected to provide a foundation for these recommendations.
The market performance report is available at:http://www.ea.govt.nz/industry/monitoring/enquiries-reviews-investigations/2012/