Wholesale electricity cap leads generators to withdraw supply capacity
However, this price is significantly lower than the wholesale electricity price and producers have reacted by withdrawing their supply offers.
“What is happening now is wild. If you are a gas producer and have a marginal cost of production of $400 or $500, you don’t want to lose money, then your auction will be unavailable. It makes sense,” said Dylan McConnell, a researcher at the University of Melbourne’s Faculty of Climate and Energy.
“There is a compensation mechanism designed as an incentive not to do this and AEMO reminded market participants of this last week. It reminded them that it includes direct and opportunity costs. generators do this other thing, which is very problematic, they take away capacity to be controlled by AEMO.
McConnell said the market is more familiar with this AEMO compensation package and it is calculated differently.
“It’s not about direct costs or opportunity costs. It’s based on the 90th percentile of last year’s prices, and producers are currently behaving in a way that allows them to access this compensation scheme,” McDonnell said.
Reins of Uncertainty
The different compensation plans have fueled uncertainty in the market, leaving producers uncertain as to which is the most lucrative.
There is also uncertainty about how the AEMO will define opportunity costs, deterring some from withdrawing capacity bids as well.
Traders also pointed to clauses in the rules that give the Australian Energy Markets Commission the ability to rewrite sections on clearing, fueling further uncertainty.
“There’s not a lot of certainty about how people are going to get paid, which means their behavior is to pull out of the market until direction comes,” said Joshua Stabler, chief executive. from energy advisor Energy Edge.
“We are in the depths of the rules, people are reading these parts of the rules for the first time. The market has never seen this kind of situation before. Nobody wants to be the power plant that is paid $300/MWh when it costs them $400/MWh. Whoever makes that decision could be fired.
Not knowing how to proceed, the market reacted by removing large volumes of capacity, which in turn increases the threat of outages, albeit on paper.
“The prediction of breakdowns is extremely artificial. Overnight, around 3 gigawatts of capacity were withdrawn in New South Wales and 2 gigawatts in Victoria. Normal systems would project shortages and outages. But the reality is the capability is just there, waiting to be directed,” McConnell said.
The withdrawal of capacities will also prolong the crisis.
As generators continue to hold back capacity, the cost of wholesale electricity is rising behind the scenes.
This so-called shadow price is rising and shows little sign of falling below the cumulative price threshold. As a result, the cap will remain for the foreseeable future, incentivizing producers to continue holding back capacity – becoming a self-fulfilling prophecy.
“There’s little incentive to act in a way that would help the market return to normal prices, so it’s plausible it could last up to six weeks,” Stabler said..