Consultations

The explanatory paper was republished on 8 August 2011 to correct information in paragraph 6.4(a). The consultation paper was republished on 28 July 2011 to correct some of the formulas in the proposed new schedule 13.3A, in Appendix 3.

The Authority is progressing a number of priority projects to improve the performance of the electricity market. The proposed introduction of a scarcity pricing mechanism is one of these projects.

Scarcity pricing is designed to address concerns that spot prices are likely to be suppressed when non-price mechanisms are used to curtail demand. Non-price mechanisms may include requests for voluntary conservation by consumers or, in more extreme cases, mandatory demand restraint through co-ordinated rolling power outages. It is important during supply emergencies that spot prices provide efficient signals, otherwise efficient investment in last resort generation and voluntary demand-side response will be undermined.

The Authority released a consultation paper on a proposed scarcity pricing design and associated disclosure mechanism in March 2011. A number of modifications have been made to those proposals in light of issues raised in submissions, feedback from the Scarcity Pricing Forum and Scarcity Pricing Technical Group, and further analysis by the Authority.

The main changes are to narrow the scope of emergency events covered by scarcity pricing, and to alter the form of application from a price floor to a combined price floor and cap in load shedding situations. In essence, the changes should provide clearer signals for participants, and help to ensure that scarcity pricing will be durable over time.

Changes have also been made to the proposed disclosure mechanism discussed in the previous consultation paper. This mechanism is now referred to as the 'stress testing regime'. The key substantive changes are to simplify the required disclosures, and modify the regime to avoid public release of identifiable participant information. Instead, a summary report will be published which does not identify individual parties.

In addition to Consultation paper, the Authority has published an explanatory paper, 'Summary of Scarcity Pricing and Related Measures', which contains a brief background to and explanation of the technically complex issues raised in the consultation paper. Note that this companion paper will not form part of the formal consultation on scarcity pricing. The Authority has also published two spreadsheets that provide more detail on the CBA contained in the consultation paper.

The Authority is progressing a number of priority projects to improve the performance of the electricity market. The proposed introduction of a scarcity pricing mechanism is one of these projects.

Scarcity pricing is designed to address concerns that spot prices are likely to be suppressed when non-price mechanisms are used to curtail demand. Non-price mechanisms may include requests for voluntary conservation by consumers or, in more extreme cases, mandatory demand restraint through co-ordinated rolling power outages. It is important during supply emergencies that spot prices provide efficient signals, otherwise efficient investment in last resort generation and/or voluntary demand-side response will be undermined.

The former Electricity Commission previously consulted on options that included both scarcity pricing and compulsory contracting mechanisms to address these concerns. The Electricity Commission received and reviewed submissions on the October 2009 consultation paper and has undertaken development work on scarcity pricing mechanisms throughout 2010, including through work undertaken by the Scarcity Pricing and Default Buy-back Technical Group. The Authority took over this project in November 2010.

This consultation paper includes a definition of the problem being addressed and a description of and rationale for the proposed scarcity pricing design. A companion paper, "Summary of Scarcity Pricing" contains a brief background to and explanation of the technically complex issues raised in the consultation paper. Note that this companion paper will not form part of the formal consultation on scarcity pricing.

Public briefing

The Authority held a briefing on Tuesday 19 April 2011, on scarcity pricing and locational price risk.

Responses to requests for more information

The Authority has published responses to requests from participants for more information on the cost benefit analysis developed for scarcity pricing.

There are concerns that existing market arrangements are failing to provide adequate measures to support security of supply - particularly in dry years.

Two options to address these concerns - scarcity pricing and compulsory contracting - are now being consulted on.