A report has been released by the Economic Regulation Authority of Western Australia which finds that the electricity market in the South West of Western Australia is at a cross-road and warns against higher power prices due to renewable energy incentives.

 

The 2010 Annual Wholesale Electricity Market Report for the Minister for Energy report by the Economic Regulation Authority says incentives for wind and solar generation are overly generous and an economically inefficient way to cut greenhouse gases.

 

The Authority predicts that unless there is pressure on retailers to produce green electricity at a lower cost, then consumers will pay the price.

 

It backs a price on carbon as a better mechanism for moving away from fossil fuels.

 

The report finds that the market is impeded by a lack of clarity about the State Government’s policy intentions and timeframe for increasing competition, particularly in the electricity retail sector. The State Government needs to signal to the market its commitment to promoting competition in the market. Otherwise, market confidence could be undermined, which will put timely private sector investment at risk.

 

There are also significant cost pressures as a result of incentives for renewable energy:

 

  • the extended Renewable Energy Target implemented by the Federal Government is resulting in increased costs to consumers. The Independent Pricing and Regulatory Tribunal of New South Wales has estimated that changes to the Renewable Energy Target scheme will increase regulated electricity prices in NSW by six percentage points;
  • the feed-in tariff scheme introduced by the State Government is driving high uptake of inefficient small-scale renewable generation (particularly roof-top solar systems) that are not otherwise commercially viable;
  • Synergy’s procurement of renewable energy is not constrained by competitive pressures or regulatory oversight; and
  • incentives for wind generation are overly generous and new wind generators do not face the costs they are likely to impose on others.

 

“These schemes are likely to result in inefficient investment and a distortion in prices, which represents a cost to consumers,” the report said.

 

“Cost pressures are also emerging as a result of the approach that Western Power is required to apply when connecting new generators to the grid. The current approach allows connected generators to have full access to the network, in the absence of dynamic physical constraints. This has facilitated a simpler operating regime for the power system and the market as a whole. While this approach was reasonable when the network had surplus capacity, it is no longer efficient. It is likely that an alternative approach that allows Western Power to accommodate new generation in a constrained manner, without making significant augmentation to the network, will lead to more efficient investment in the future.”

 

Whilst the market has evolved in an incremental manner since its inception, it is currently undergoing accelerated development led by the Independent Market Operator. The Authority supports the work-streams that are currently underway, including:

  • the design framework for introducing competitors to Verve Energy in the provision of Balancing and Ancillary Services, as long as it can be demonstrated that the benefits will exceed the costs. This project will require significant changes to the existing market design and operations. The associated costs, which will be funded by participants in the market, could be substantial, and will eventually be passed through to consumers.
  • the proposed capacity valuation method for assigning Capacity Credits to wind generation that better reflects its contribution at times of peak demand; and
  • the review of the Reserve Capacity Mechanism of the market, including consideration of whether the mechanism is efficient in delivering the optimal mix of generation and Demand Side Management capacity.

 

The Authority supports the Independent Market Operator, on the advice of the Market Advisory Committee, taking the lead on specific projects that will improve the efficiency of the market. This process would be improved by refining the Market Objectives so that it is clear that economic efficiency is the priority. At present, the Market Objectives include a mix of potentially inconsistent objectives.

 

However, the challenges facing the market (i.e. the lack of policy direction, the cost pressures arising from renewable energy incentives, the move to a constrained network) are too substantive to be left to the Independent Market Operator alone. The Office of Energy should be funded to take the lead on this work, which should be conducted in a transparent and consultative manner. Importantly, this work needs to be conducted, to the extent possible, at arm’s-length from the State Government, given the conflict of interest the State Government has as owner of the two dominant players in the market, Verve Energy and Synergy.


The full report, including key recommendations, is available here