Amendment of the Market Price Cap, Cumulative Price Threshold and Administered Price Cap

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The National Electricity Market (NEM) is going through a significant transition. A large proportion of existing coal-fired generation is approaching retirement, requiring replacement by new renewable energy generation to meet future demand and maintain reliability. The market price settings – the market price cap (MPC), cumulative price threshold (CPT) and administered price cap (APC) – provide the incentives for this new investment.

The Reliability Panel (Panel) reviews these settings every four years. As part of its 2022 Reliability Standard and Settings Review (RSS Review), the Panel has recommended increasing the MPC and CPT over three years from 1 July 2025, to “$21,500/MWh and $2,193,000 respectively.” The Panel considers the current settings are “too low to support the investment needed to achieve the reliability standard over the long term.” Specifically, the settings would not support investment in the lowest cost marginal new entrant required to meet demand in New South Wales, the first region to face reliability issues in the Panel’s modelling.

The recommended increases are designed to “minimise the extent of change in this review period” while supporting reliability, providing “a gradual transition” to required levels and “incrementally improving incentives for storage investments.” The Panel considers its recommendation “may represent a first step in a longer-term transition to levels necessary to support a full mix of new entrant technologies in each NEM region.” Additional changes may be needed in future reviews should current levels prove insufficient for other new entrant types and in other regions.

In recommending an increase to the APC from $300/MWh to $500/MWh, the Panel aimed to reduce reliance on the administered pricing compensation mechanism during high gas price events. The Panel considers the current APC is “too low for a significant part of the thermal generator fleet to recover its variable costs”, as evidenced during the recent market suspension. An increase would “make the NEM more robust to possible future high fuel price periods” and limit pass through of “un-hedgeable compensation payments” to consumers.

The Panel recognises its recommendations would increase costs to consumers and sought to “limit increases while also encouraging necessary investment.” Modelling indicates a 3% increase in end-user bills during the final year of the review period, incurred progressively over the three-year period. The Panel considers costs are necessary to support reliability and investment, with benefits outweighing costs to consumers of additional expected unserved energy under current settings.

In considering this rule change request, the Australian Energy Market Commission (AEMC) must determine whether the proposed rule promotes the national electricity objective, to “promote efficient investment in, and efficient operation and use of, electricity services for the long-term interests of consumers.” The AEMC will consider the rule change against criteria including whether it would enable reliable energy provision at efficient cost, achieve the right balance of costs and benefits, align with principles of market efficiency and good regulatory practice, and support decarbonisation.

The AEMC will assess the costs to consumers versus benefits of reduced unserved energy. It will consider the role of other mechanisms like jurisdictional schemes in supporting new investment, whether MPC and CPT increases effectively support new entry via contract markets, and if further analysis on key issues is needed. The AEMC may make an alternative rule and will consider any required changes for the Northern Territory. Stakeholder feedback on the proposed rule change, costs and benefits, and the AEMC’s approach will be key inputs to the AEMC’s decision-making process.

Submissions are due by 22 June 2023. View the proposal here.

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