ACCC authorises regional pricing of certain ancillary services in the electricity market

The Australian Competition and Consumer Commission today issued a final determination authorising* a change to the way costs of certain frequency control ancillary services (FCAS)** are recovered within the National Electricity Market.
 
The changes, which aim to improve the equity and efficiency of the electricity market, relate 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.

Mr John Martin, ACCC Commissioner, said the change will result in these costs being limited to market participants within the region where the event occurred.

"This should result in a costs being allocated more equitably, and will also provide an incentive for participants to have appropriate risk management procedures in place which will contribute to a more efficient electricity market", he said.

"It should also minimise the incidence of generators reducing their output or increasing their prices to limit their exposure to higher FACS costs. In the past, this practice has resulted in higher prices across the energy market.

"The overall outcome should be a net public benefit with minimal detriment to industry participants".

The changes also introduce a price cap which will limit a participant's liability in the event of an extreme and extended price spike.

A copy of the will be available on the ACCC's website or from Mrs Maxine Helmling on (02) 6243 1246.

*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.