ACCC set to authorise move to regional pricing of certain ancillary services in the electricity market

The Australian Competition and Consumer Commission today issued a draft determination authorising* a request by the National Electricity Code Administrator to alter the way costs of certain frequency control ancillary services (FCAS)** are recovered within the National Electricity Market.

The proposed changes are intended to improve the equity and efficiency of the NEM.

The changes relate specifically to the situation where FCAS are required to correct the supply and demand imbalance that arises when part of the market becomes isolated due to a major failure in the system.***

Under the current provisions of the National Electricity Code, the costs of FCAS incurred in these circumstances are spread across the entire electricity market.

The proposed amendments will result in these costs being limited to market participants within the region where the event occurred.

ACCC Commissioner responsible for energy, Mr John Martin, said the proposed amendments should ensure that costs are allocated more equitably and this in turn will produce a more efficient electricity market.

"One of the problems with the current situation is that participants who have neither caused a requirement for FCAS services nor have the ability to influence the cost of these services are forced to pay for these services", he said.

"Not only is this inequitable, but it can lead to higher prices across the energy market as generators attempt to limit their exposure to higher FCAS prices by reducing their output or raising their prices.

"The ACCC believes the amendments will redress this situation and will improve the efficiency of the markets by providing incentives for participants to have appropriate risk management systems in place.

"This should result in a net public benefit with minimal detriment to industry participants".

The proposed amendments also provide for a price cap which will limit a participant's liability in the event of an extreme and extended price spike.

The ACCC invites interested parties to either request a pre-determination conference to discuss the operation and effect of the draft determination, or to make an additional submission prior to issuing its final determination.

A copy of the draft determination is available from Mrs Maxine Helmling on (02) 6243 1246.

Background

*Authorisation under Part VII of the Trade Practices Act 1974 provides immunity from court action for certain types of market arrangements or conduct that would otherwise be in breach of Part IV of the Act. The ACCC is empowered to grant authorisation in circumstances where it concludes that the public benefits of proposed arrangements or conduct would outweigh the anti-competitive detriments of such arrangements or conduct

**Ancillary services are essential services required for the management of power system security, facilitating trade in the NEM, and ensuring that electricity supplies are of an acceptable quality. Frequency control ancillary services (FCAS) are specifically aimed at balancing power supply and demand over short time intervals throughout the system.

***On 27 May 2003, a region within the NEM was isolated from the rest of the market for approximately one hour. FCAS prices subsequently increased dramatically. Most of these costs were borne by generators throughout the market. Energy prices outside the affected region which normally would have been expected to reduce as supply in those regions increased, in fact increased as generators rebid their positions and withdrew generation in response to high prices in the FCAS markets.