Reforms to the WA Reserve Capacity Mechanism

by Energy Action | Dec 15, 2015
There is currently a large excess of capacity within the WA Wholesale Electricity Market which is imposing a substantial cost on electricity consumers. The cost of this excess in the 2016-17 Capacity Year is estimated at around $116 million.

The Position Paper on Reforms to the Reserve Capacity Mechanism (“Position Paper”), released 3 December 2015 by the WA Public Utilities Office says there is an excess of capacity of 1,061 megawatts in excess of the Reserve Capacity Requirement. Given the Independent Market Operator’s latest demand outlook, a large quantity of excess capacity may be sustained into the mid-2020s.

The Position paper states that the persistence of substantial excess capacity reveals a fundamental problem with the current form of the Reserve Capacity Mechanism (RCM). The result is electricity consumers are paying a large cost for excess capacity that delivers little to no value in delivering the target reliability of the electricity system.

Without reform, the current RCM in its current form is unlikely to motivate decisions that will return the market to an acceptable level of balance of load and capacity the Position paper states.

A review of the WA electricity market is therefore considering reforms that will provide a means for capacity pricing to be determined through a market process, and for this pricing mechanism to be introduced in an orderly manner that reduce the current excessive cost to electricity consumers but avoids undue financial disruption of market participants. The intent is to provide stronger price signals for efficient entry and exit of capacity according to the needs of the market and ensuring that the system security and reliability objectives are achieved at least cost for consumers.

The proposed reforms to the RCM outlined in the Position Paper have four principal elements.

1. Adoption of an auction as the basis for procurement of capacity, with the first auction to occur when the market has reached an acceptable level of balance.

2. Transition arrangements for a period for the introduction of the auction that will involve maintaining the existing administered price mechanism but with a steeper pricing curve and a differential treatment of demand side management.

3. 
Implementation of measures to harmonise demand side management availability
requirements with requirements for conventional generators, for both the transitional arrangements and under the capacity auction.

4. 
Stronger commercial incentives for all forms of capacity to be made available for dispatch.

These reforms to the RCM will deliver a more efficient capacity procurement process over the longer term and a more value-reflective capacity cost to electricity consumers in the short to medium term. The transition period will facilitate an orderly adjustment in the capacity balance and the auction mechanism.

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