Market Structure
The structure and processes that constitute the Market are established through the Wholesale Electricity Market Rules (Market Rules). These were developed by the Office of Energy with substantial support from a number of expert teams comprising representatives from industry and Government.
A full set of the Market Rules can be downloaded from the Market Rules page of this website.
The Market design that has been developed comprises a wholesale electricity trading component and a capacity component.
Electricity Trading
The electricity trading component commenced on 21 September 2006.
Most electricity is traded through bilateral contracts between Market Generators and Market Customers who, at the wholesale level, are mainly retailers on-selling electricity to end use customers.
Participants need flexibility to respond to fluctuations in demand resulting from less predictable factors such as the weather which can lead to a change in supply or demand. This is provided through a day-ahead Short Term Energy Market (STEM).
Each day, Participants advise the IMO of their bilateral contract position and make bids to buy and offers to sell electricity in each trading interval on the following day relative to their bilateral position. A generator, for example, may offer to supply increasing quantities into the Market, beyond its contractual position, as the price rises. It may also bid to purchase energy where the price is less than its own production cost.
Similarly, a retailer may offer to purchase increasing quantities as the price moves lower or less if the price increases.
The IMO combines all of the bids and offers for Participants to determine the STEM price for each half hour.
The bilateral contract and STEM processes determine the quantity of electricity that will be provided by each generator in each trading interval.
Verve Energy is required to balance the inevitable real-time variations in IPP generation and customer demand from its portfolio of generation plant. In the event that Verve Energy owned plant is unable to fully cover any system imbalance, IPPs can be called on to either increase or reduce generation to help match demand.
One feature of the Wholesale Electricity Market is that the design has been developed so as to accommodate the specific requirements of renewable energy generators.
The Wholesale Electricity Market has been designed to accommodate renewable energy generation.
In particular:
- Intermittent generators, such as wind farms, are not required to follow a production schedule (resource plan).
- Intermittent generators may also spill their entire output into the Market and receive payment at the prevailing half-hour market price. This avoids the need for intermittent generators to fully contract their output before commencing production.
- The level of Certified Reserve Capacity for intermittent generators recognises the non-dispatchable nature of their operation and is based on average production levels.
System Capacity
A key feature of the Market in Western Australia, and one that distinguishes it from the National Electricity Market (NEM) operating in the eastern states of Australia, is the provision of a separate capacity mechanism.
In many markets, economic forces determine when new generators enter the market. The entry of new capacity is usually driven by high energy prices. A stronger focus on capacity adequacy has been adopted in the SWIS. This is largely driven by the size of the SWIS and its isolation from other electricity jurisdictions.
The Reserve Capacity Mechanism, which is the set of capacity related processes adopted in the SWIS, requires the IMO to centrally determine the capacity requirement and facilitate adequate capacity onto the system.
At the heart of this process is the concept of recognising that generators and DSM providers must be rewarded for providing reliable capacity.
Most capacity is procured through bilateral contracting arrangements between Market Generators and Market Customers (retailers). A market price for capacity is also determined so that providers of capacity can receive payment for capacity even without a bilateral contract.
Capacity Credits and Obligations
To ensure sufficient capacity is installed in the SWIS, the Market Rules include the concept of a Capacity Credit. A Capacity Credit is a notional unit of capacity that can be traded between Market Participants. Capacity Credits are valid for a particular Reserve Capacity Year and are allocated to a specific generating plant or DSM facility.
The IMO prepares forecasts of the quantity of electricity that it expects consumers within the SWIS will use on an annual basis over the next ten years. The IMO then determines how much generation capacity is required to meet this demand and provide an adequate reserve margin to cover plant outages or other contingencies.
Generators, and providers of DSM, can earn Capacity Credits by providing capacity into the SWIS. Market customers are assigned Capacity Credit obligations based on their expected contribution to system maximum demand, plus a contribution to the system wide reserve margin.
The reserve margin comprises three components:
- The largest portion is required to cover either a margin of 8.2% or the potential failure of the largest generating unit on the system.
- The second component is provided to ensure that the power system frequency can be adequately controlled at times of system peak.
- The third component provides stand-by coverage for embedded generators associated with intermittent loads (these are loads that are served by generators located at the same site).
If, for example, the maximum demand is forecast to be 3,000 MW during a particular year, and the required reserve margin is 300 MW, then a total of 3,300 MW of capacity must be provided. To do this, the IMO must ensure that generators and DSM providers provide 3,300 Capacity Credits during that year. To ensure that this capacity is funded, the IMO places 3,300 MW of Capacity Credit obligations on customers.
Generators can follow one of two processes to be assigned Capacity Credits. The first option is for the generator to advise the IMO that it is trading its Capacity Credits bilaterally with a customer or customers. This allows the customer to cover its obligations, possibly for a number of years, at a price determined between it and the bilateral counterparty (which is likely to differ from the prevailing Reserve Capacity Price).
The alternative is for the generator to offer its capacity into the Reserve Capacity Auction. However, the IMO will only call an auction if insufficient Capacity Credits have been assigned through bilateral trades. In the auction, the IMO will commit to purchase the outstanding number of Capacity Credits it requires.
As a consequence, the number of Capacity Credits that the IMO purchases from generators at least meets the quantity that customers need to purchase each year.
Current Market Design Documents
More detail can be found in the following publication:
Original Market Design Documents (21 September 2006)
Refer also to the Market Rules page on this website.