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Scarcity pricing, stress testing & customer compensation

Scarcity pricing, stress testing, and customer compensation are terms used to describe arrangements in the wholesale market to reduce the chance of forced power cuts and increasing incentives for wholesale market participants to make prudent electricity purchasing arrangements, invest in greater levels of voluntary demand response, and build more generation.

Scarcity pricing

The Authority amended the Code on 26 October 2011 to provide more certainty about spot prices during instances of widespread emergency load shedding. These amendments will apply if forced power cuts are required because there isn’t enough generation to meet electricity demand in one or both islands.

From 1 June 2013 onward, if scarcity pricing is triggered, the generation weighted average spot price (GWAP) will first be calculated for the affected island(s) based on existing pricing processes.  If the GWAP is lower than $10,000/MWh, all prices within the affected island(s) will be scaled up so that the GWAP reaches $10,000/MWh.  If the GWAP based on existing pricing processes is more than $20,000/MWh, all prices will be scaled downwards so that GWAP is $20,000/MWh.

The price floor has been set at the level roughly equivalent to the price required to cover the costs of a last-resort generation station. Setting a price floor at this level should give investors in last-resort resources confidence that emergency load shedding will not undermine the business case for investing in those resources.  This promotes reliable supply by the electricity industry. The price cap reflects an upper estimate of the value of forgone consumption during emergency load shedding. It has been adopted to address consumer concerns that imposing a price floor for emergency load shedding situations may embolden providers of last-resort plant to charge prices above what would occur in a workably competitive market.

In combination, the floor and cap mechanism during scarcity will give improved revenue certainty for providers of last resort resources (generation and demand response), while also giving more assurance to wholesale purchasers that spot prices in emergency load shedding will not settle well above the level expected in a workably competitive market. Scarcity pricing will increase incentives for consumers and net-retailers to enter into hedge arrangements with providers of last resort resources, increasing competition in the provision of these resources.

A stop-loss mechanism is also provided in the Code that will halt the application of scarcity pricing if the average price in the last 336 trading periods is greater than $1,000/MWh. If the average price exceeds this threshold, normal pricing processes would apply.

Finally, the Code amendment also limits prices following the resolution of infeasibilities caused by a shortage of reserve to the higher of:

• three times the highest scheduled energy offer price; and
• the highest-priced offer scheduled of the reserve product that is short.

Stress testing

The Authority has implemented a stress testing regime, with relevant participants being required to provide quarterly disclosure statements starting with the July 2012 quarter. Information about who is involved and the quarterly process can be found at stress testing regime page.

For information about the design and initial implementation of stress testing see the stress testing implementation page.

Second consultation on scarcity pricing

A consultation paper on the scarcity pricing design was published on 29 March 2011. Consultation closed on 29 April 2011 and 19 submissions were received, 18 of which were published.

Some correspondence has taken place between Authority staff and submitters to clarify issues raised in submissions. This correspondence has been published below.

A second consultation paper containing draft Code amendments, including amendments to introduce a stress testing regime, was published on 26 July 2011. Consultation closed on 26 August 2011 and 18 submissions were received and published.

On 28 October 2011, the Authority gazetted amendments to the Code to provide for scarcity pricing when an electricity supply emergency causes forced power cuts (called emergency load shedding) throughout one or both islands.

Consultation on customer compensation

A consultation paper was published on 9 October 2009. Nineteen submissions were received.

A further consultation on customer compensation was published on 14 December 2010. Submissions closed on Thursday 13 January 2010 and twelve submissions were received by the closing date. These have been published along with a summary of submissions document.

The Authority considered all submissions received and provided its response in the paper Customer Compensation Scheme: Response to Submissions - December/January 2011 consultation. This can also be found on the submissions page.

First consultation on scarcity pricing

A consultation paper on the scarcity pricing design was published on 29 March 2011. Consultation closed on 29 April 2011 and 19 submissions were received, 18 of which were published.

Some correspondence has taken place between Authority staff and submitters to clarify issues raised in submissions. This correspondence has been published below.

A second consultation paper containing draft Code amendments was published on 26 July 2011. Consultation closed on 26 August 2011 and 18 submissions were received and published.

This page is related to: Priority Projects.

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