Bruce Layman Chief Economist Economic Regulation Authority To benefit the WA community by promoting an efficient and customer focused economy 1
WEM Market Rule 7A.2.17 a Market Participant must not, for any Trading Interval, offer prices in its Balancing Submission in excess of the Market Participant’s reasonable expectation of the short run marginal cost of generating the relevant electricity by the Balancing Facility, when such behaviour relates to market power. To benefit the WA community by promoting an efficient and customer focused economy 2
Market Power Mitigation in the WEM • Consumer and Competition Law • Electricity Market Regulation – Why? • US Experience • Market Rule 7A.2.17 • Proposed Changes To benefit the WA community by promoting an efficient and customer focused economy 3
Competition and Consumer Act (2010) • s46: Misuse of Market Power • s50: Mergers To benefit the WA community by promoting an efficient and customer focused economy 4
Differences • CCA 2010 • Protecting competition • Electricity Markets • Reduce participants using market power – e.g. withholding To benefit the WA community by promoting an efficient and customer focused economy 5
Competition and Consumer Act • Substantial Market Power • Ability to price without constraint from competition To benefit the WA community by promoting an efficient and customer focused economy 6
Competition and Consumer Act • Substantial Market Power • Not transient • Potential competition/ new entrants relevant • Two years [AGL v ACCC] • LRMC To benefit the WA community by promoting an efficient and customer focused economy 7
S46: Competition and Consumer Act (2010) • Take Advantage of • Whether a “profit maximising firm operating in a workably competitive market could in a commercial sense profitably engage in the behaviour” [ACCC v Cement Australia Pty Ltd ] • Effects Test To benefit the WA community by promoting an efficient and customer focused economy 8
Electricity Markets • Inelastic Demand • Demand = Supply – always • Short-term damage substantial with long-term implications To benefit the WA community by promoting an efficient and customer focused economy 9
USD / Mwh 100 150 200 250 300 350 California Electricity Prices To benefit the WA community by promoting an efficient and customer focused economy 50 0 Jan-00 Feb-00 Mar-00 Apr-00 May-00 17 Months Jun-00 Jul-00 Aug-00 Sep-00 Oct-00 Nov-00 Dec-00 Jan-01 Feb-01 Mar-01 Apr-01 May-01 Jun-01 Jul-01 Aug-01 Sep-01 Oct-01 Nov-01 10 Dec-01
Electricity Markets • Inelastic Demand • Demand = Supply • Short-term damage substantial • Capacity markets To benefit the WA community by promoting an efficient and customer focused economy 11
North America • Structural (e.g. PJM) • Conduct and Impact (e.g. MISO, NYISO) To benefit the WA community by promoting an efficient and customer focused economy 12
WEM Market Rule 7A.2.17 a Market Participant must not, for any Trading Interval, offer prices in its Balancing Submission in excess of the Market Participant’s reasonable expectation of the short run marginal cost of generating the relevant electricity by the Balancing Facility, when such behaviour relates to market power. To benefit the WA community by promoting an efficient and customer focused economy 13
Rule 7A.2.17 Interpretation • CCA 2010 • Interpretation Act (WA) • Market Objectives To benefit the WA community by promoting an efficient and customer focused economy 14
WEM Objectives • Economic efficiency, safe and reliable electricity production • Encourage competition • Avoid discrimination between technologies • Minimise long-term cost to customers • Encourage energy efficiency To benefit the WA community by promoting an efficient and customer focused economy 15
WEM Objectives • Economic efficiency, safe and reliable electricity production • Encourage competition • Avoid discrimination between technologies • Minimise long-term cost to customers • Encourage energy efficiency To benefit the WA community by promoting an efficient and customer focused economy 16
WEM Market Rule 7A.2.17 a Market Participant must not, for any Trading Interval, offer prices in its Balancing Submission in excess of the Market Participant’s reasonable expectation of the short run marginal cost of generating the relevant electricity by the Balancing Facility, when such behaviour relates to market power. To benefit the WA community by promoting an efficient and customer focused economy 17
Market Power • No “Substantial” • Rule capable of being applied to any Trading Interval • Refers to SRMC • Rule can’t be toothless • Other capacity markets i.e. Short-term/transient covered To benefit the WA community by promoting an efficient and customer focused economy 18
WEM Market Rule 7A.2.17 a Market Participant must not, for any Trading Interval, offer prices in its Balancing Submission in excess of the Market Participant’s reasonable expectation of the short run marginal cost of generating the relevant electricity by the Balancing Facility, when such behaviour relates to market power. To benefit the WA community by promoting an efficient and customer focused economy 19
Short-run Marginal Cost: Economics Textbook $ / MWh 110.00 100.00 90.00 80.00 70.00 60.00 50.00 40.00 0 30 60 90 Marginal Cost Average Cost To benefit the WA community by promoting an efficient and customer focused economy 20
Short-run Marginal Cost: Electricity Generation $/MWh 75.00 70.00 65.00 60.00 55.00 50.00 45.00 40.00 0 30 60 90 Marginal Cost Average Cost To benefit the WA community by promoting an efficient and customer focused economy 21
Short-run Marginal Cost • SRMC ~ AVC; or • P > SRMC may not relate to market power To benefit the WA community by promoting an efficient and customer focused economy 22
WEM Market Rule 7A.2.17 a Market Participant must not, for any Trading Interval, offer prices in its Balancing Submission in excess of the Market Participant’s reasonable expectation of the short run marginal cost of generating the relevant electricity by the Balancing Facility, when such behaviour relates to market power. To benefit the WA community by promoting an efficient and customer focused economy 23
Capacity Market • Proposed steep demand curve To benefit the WA community by promoting an efficient and customer focused economy 24
Questions / comments? To benefit the WA community by promoting an efficient and customer focused economy 25
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