Archive - Scarcity Pricing

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.