WA to reform the Reserve Capacity Mechanism

by Energy Action | May 02, 2016
The recently announced reforms by the West Australian Government to its Reserve Capacity Mechanism are targeted at reducing the cost of the capacity component of the Wholesale Electricity Market and are expected to result in reducing costs to consumers.

As detailed in an Energy Action article late last year, a Position Paper on Reforms to the Reserve Capacity Mechanism was released 3 December 2015 by the WA Public Utilities Office. In the Position Paper it stated that the Reserve Capacity Mechanism (RCM) recorded a capacity excess of 1,061 megawatts. Given the Independent Market Operator’s latest demand outlook, a large quantity of excess capacity may be sustained into the mid-2020s.

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.

On 7 April 2016, the West Australian Government announced reforms to its RCM, which are aimed at dealing with the excess capacity which equates to 23 per cent of the total capacity in the South West Interconnected System (SWIS). 

As with the National Electricity Market, the excess capacity is the result of falling demand driven by energy efficiency, declining industrial demand and the increased penetration of rooftop solar.

WA Energy Minister Mike Nahan said the changes, which would take effect from 2017-18, formed part of the Government's Electricity Market Review, aimed at keeping electricity prices as low as possible for West Australians. The reforms include:

- transitional arrangements to reduce capacity payments to power stations and Demand Side Management (DSM) providers due to current levels of excess capacity

- the introduction of an 'auction' by 2021, at the latest, to achieve efficient levels of electricity capacity in the market

- updated requirements for DSM providers so that services are more readily able to be called upon, and therefore more effective to the market

- improved incentives to maintain power stations to ensure they are ready to supply electricity immediately, as required.  

The Minister said, "Currently, there is more than 1,000 megawatts (MW) of surplus electricity (excess capacity) within the SWIS, which is enough to power up to 750,000 homes on a hot summer's day.”

It is intended that the capacity auction, whilst retaining the capacity-plus-energy fundamental of the WA market will result in the prices paid for capacity being subject to a more competitive process. In the interim, measures will be implemented to reduce costs to consumers, including lowering capacity payments to power stations and demand side management providers.

The WA Government announcement also mentioned reforming the DSM program which they believe is not providing value for money given the surplus of capacity in the SWIS. The changes to the DSM program include a different pricing mechanism for payments made to participants and increasing the requirements on participants. It is anticipated that the new DSM pricing mechanism will result in significantly reduced payments made under the program.

The WA Government expects the reforms to save $130 million each year and savings are expected to be passed on to consumers from 2017-18. Full consumer benefits are expected to be achieved from the reforms post 2020 when Full Retail Contestability (FRC) is implemented.

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