Great response to a frustrating report. I laughed so much at this "And for the sake of us all, can we please have like a five minute break from another review looking into a capacity market in the NEM." Those poor reg managers.
Well analysed Declan. Suggesting a capacity market seems like pushing a square peg through a round hole, and not considering how the domestic and international markets influence each other is problematic.
To your point, three ways that the government might reduce wholesale market concentration and increase retail market competition are as follows.
First, mandate that standard derivative products are traded through an open market. A lack of liquidity in regional derivatives markets is an obstacle to new entrants in the retail markets, and making derivatives markets more liquid will help to address that. Forcing them to be sold in a single open market (in the same way that energy must be sold through the spot market) could help.
Second, offer provisional licensing of retailers. Despite wanting more retail competition the government places obstacles in front of their creation. Rather than making retailers jump through hoops and spending great sums of money on applications, consider immediately providing provisional licensing to new retailers with certain caveats to manage risk, such as a maximum number of customers or level of wholesale exposure.
Third, free up retailer cashflows for grow (i.e. to compete with incumbents). Some ideas include increasing the availability of monthly (as opposed to quarterly and annual) derivatives, making cap premiums payable at the end of a term rather than before, as well as improving the availability and price of reallocations.
When I was working at a gas turbine power plant in 2022 we would see the wholesale price for Qld go to $1000/MWh or more. Then I would ask why we could not increase output to make some more $$$, the issue was a lack of gas so no increase in MWs!
Love the article as always. You write at one point:
"In addition, capacity markets can lock in high-prices over longer periods of time, leading to higher costs to consumers in the long term".
Noting that Part 3 of your explainer is coming out soon and might answer my question there, put simply, is this because of higher risk associated with long(er)-term contracts in a capacity market, plus cost recovery being slower?
Hey Mitchell, yeah I think that summarises the structural differences between capacity and energy-only markets – the presence of a capacity price will drive the primary investment case, noting that volatility in the balancing market is typically much lower, creating additional investment risk if you go too soft on the capacity price.
Capacity markets are procuring enough capacity to ensure that the system will be able to handle peak demand – so the capacity price is effectively pricing in system reliability risks. Energy-only markets fly closer to the wind and don't have good mechanisms for valuing this system reliability, instead hoping that the carrot of volatility will drive adequate investment.
Additionally capacity is typically procured well in advance – three years is a common lead time for capacity auctions. Anecdotally, I think there's been an understandable tend to historically over-estimate forecast demand – leading to units effectively sitting around under-utilised but compensated.
Great response to a frustrating report. I laughed so much at this "And for the sake of us all, can we please have like a five minute break from another review looking into a capacity market in the NEM." Those poor reg managers.
Well analysed Declan. Suggesting a capacity market seems like pushing a square peg through a round hole, and not considering how the domestic and international markets influence each other is problematic.
To your point, three ways that the government might reduce wholesale market concentration and increase retail market competition are as follows.
First, mandate that standard derivative products are traded through an open market. A lack of liquidity in regional derivatives markets is an obstacle to new entrants in the retail markets, and making derivatives markets more liquid will help to address that. Forcing them to be sold in a single open market (in the same way that energy must be sold through the spot market) could help.
Second, offer provisional licensing of retailers. Despite wanting more retail competition the government places obstacles in front of their creation. Rather than making retailers jump through hoops and spending great sums of money on applications, consider immediately providing provisional licensing to new retailers with certain caveats to manage risk, such as a maximum number of customers or level of wholesale exposure.
Third, free up retailer cashflows for grow (i.e. to compete with incumbents). Some ideas include increasing the availability of monthly (as opposed to quarterly and annual) derivatives, making cap premiums payable at the end of a term rather than before, as well as improving the availability and price of reallocations.
It might also be time to brush off and update the research Ryan Esplin did on the chilling effect of the DMO on retail competition. See here: https://www.sciencedirect.com/science/article/abs/pii/S0301421520305462
Fantastic simplification of a highly complex problem. Great read as always, also nice gags.
Very enjoyable reading Declan, thanks.
When I was working at a gas turbine power plant in 2022 we would see the wholesale price for Qld go to $1000/MWh or more. Then I would ask why we could not increase output to make some more $$$, the issue was a lack of gas so no increase in MWs!
Love the article as always. You write at one point:
"In addition, capacity markets can lock in high-prices over longer periods of time, leading to higher costs to consumers in the long term".
Noting that Part 3 of your explainer is coming out soon and might answer my question there, put simply, is this because of higher risk associated with long(er)-term contracts in a capacity market, plus cost recovery being slower?
Hey Mitchell, yeah I think that summarises the structural differences between capacity and energy-only markets – the presence of a capacity price will drive the primary investment case, noting that volatility in the balancing market is typically much lower, creating additional investment risk if you go too soft on the capacity price.
Capacity markets are procuring enough capacity to ensure that the system will be able to handle peak demand – so the capacity price is effectively pricing in system reliability risks. Energy-only markets fly closer to the wind and don't have good mechanisms for valuing this system reliability, instead hoping that the carrot of volatility will drive adequate investment.
Additionally capacity is typically procured well in advance – three years is a common lead time for capacity auctions. Anecdotally, I think there's been an understandable tend to historically over-estimate forecast demand – leading to units effectively sitting around under-utilised but compensated.