The Reliability Panel (The Panel) has published its final report on the review of the key reliability standard and market settings (2022 RSS review) aimed at maintaining a reliable power supply.
As the energy sector undergoes unprecedented change in the transition to net zero, it is vital that financial incentives are sufficient to support the investment necessary to provide reliability outcomes consistent with consumer willingness to pay. Getting the right standard and settings in advance of further thermal generation retirements is essential for efficiently promoting the interests of consumers.
The 2022 RSS review considered whether the existing form of the standard and settings are adequate given the transformation occurring in the electricity market. The standard and settings aim to encourage investment in generation or demand response capacity while protecting the market from risk.
The final report sets out the Panel’s final recommendations for the reliability standard and settings needed between the period of 1 July 2025 to 30 June 2028. They need to be submitted as rule changes to the Australian Energy Market Commission for any changes to be made to the existing standard and settings.
In determining whether the reliability standard and settings needed to be updated, the Panel considered its requirements, along with stakeholder submissions feedback. It also had regard to and balanced a range of trade-offs to determine the need for change for the review period, as well as what may be needed outside the review period as the market transitions. The Panel particularly had regard to consumer concerns about increasing market settings and electricity costs and its final recommendations, specifically the MPC and APC to achieve a trade-off between cost increases and limiting consumer bill impacts while supporting outcomes consistent with the reliability standard.
- No change to the current form or the level of the reliability standard for the period of 1 July 2028 to 30 June 2028. The current level of the standard is 0.002% expected unserved energy (USE) in a region over a financial year.
- The Panel considers that due to the energy transition and the growth of variable renewables, there is a need to change the way the reliability standard is applied and to capture more information about future reliability risks. The Panel considers changing the form is a better way than tightening the level of the standard.
- On that basis, the Panel will undertake a further review of the form of the reliability standard to take account of the increased ‘tail risk’ that is likely to emerge from 1 July 2028. The Panel considers that a change to the form of the standard should be known by the time the next RSS period starts, which is 1 July 2028.
- The reliability standard is based on expected unserved energy in a national electricity market region and set at a level that balances delivering reliable electricity supplies and maintaining reasonable costs for customers.
Market Price Cap (MPC) and Cumulative Price Threshold (CPT)
- The Panel’s final recommendation is for a progressive adjustment in the level of the MPC and CPT to achieve an MPC of $21,500/MWh and a CPT of $2,193,000 (corresponding to 8.5 hours of market prices at the recommended MPC).
- The Panel has recommended three progressive annual changes over the review period to achieve the recommended level by the end of the review period.
- Together, these price settings are considered sufficient to support investment outcomes, consistent with the reliability standard, while also limiting potential systemic financial risks.
- The form of the MPC and CPT are recommended not to change for the review period.
Administered Price Cap (APC)
- The Panel’s final recommendation is to adjust the level of the APC from $300/MWh to $500/MWh.
- The Panel considers consumers’ long-term interests are better served if the APC is raised. This will minimise the likelihood of repeated undue reliance on the compensation process resulting in significant compensation costs being passed through to consumers via their retailers who may be unprepared for these costs as they cannot hedge against compensation.
- The Panel recommends that changing the form of the APC from a fixed to dynamic value should be considered in the follow-up review alongside the form of the reliability standard.
Market Floor Price (MFP)
- The Panel’s recommendation is to retain the existing level and form of the MFP at -$1,000/MWh. Analysis demonstrated that adjusting the level is not warranted in the absence of clearly identifiable benefits, and there are unacceptable risks associated with a lower level.
The Panel notes the recent Energy Ministers meeting on the path forward for considering any further work related to a capacity mechanism. The merits and design of a capacity mechanism were out of scope for this review as was consideration of the interim reliability measure which the AEMC is required to review by 1 July 2023.
Visit the 2022 reliability standard and settings review for more information and contact details.