Locally net-pivotal generation: market performance review
The Authority has published a market performance review into the competition and efficiency impacts of locally net-pivotal generation. The review was prompted by two occurrences earlier this year where a transmission outage caused a small part of the power system to be 'islanded' from the rest of the grid. The islanded load was supplied by a local generator, and on both occasions the local generator offered their generation at $3000/MWh.
A particular generator that must be dispatched to prevent non-supply is known as 'pivotal'. If a pivotal generator generates more energy than its contracted load, it is known as 'net pivotal'. This means it will have the ability and incentive to set high spot market prices regardless of whether there is truly a shortage of capacity to supply. When the net-pivotal status only applies in respect of a small portion of the grid, the generator is 'locally net pivotal'.
The market performance review has identified that approximately 0.2% of traded energy on the spot market may be subject to reliance on a locally net-pivotal generator. Although net pivotal pricing occurs for only a small proportion of volumes on the spot market these events can have a significant financial impact. The Authority recognises that periods of high prices can be important to the market as providers of last-resort plant earn most of their revenues from short periods of activity when spot prices are high. On the other hand, the Authority also recognises that if prices during net pivotal situations are inefficiently high this will lead to inefficient demand responses, or reduction in retail competition in the affected areas. Hedging using contracts is not an effective means of managing price risks from inefficient pricing during locally net pivotal situations as the only rational party who would offer hedge contracts is the net pivotal party itself and its profit maximising strategy is to factor in to the price its expected returns from the net pivotal situation.
The report demonstrates that a number of remedies might be considered to ensure efficient pricing by locally net pivotal generators. These range from controls on prices and/or offers, to options that introduce more competitive pressure on the pivotal generator by increasing the ability of those attempting to contract with the generator to adopt credible alternative arrangements.
The market performance report is available at: