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 upon to either increase or reduce generation from their plants.
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.
In particular:
- Intermittent generators, such as wind farms, are not required to follow a production schedule.
- Intermittent generators may also spill their entire output into the market and receive payment at the prevailing half-hour price. This avoids the need for such 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 their average production.
A more detailed description of the market is available in the document, entitled Wholesale Electricity Market Design Summary (PDF, 79 pages, 618Kb).
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 is the provision of a separate capacity mechanism.
In many markets, including the NEM, economic forces determine when new generators enter the market encouraged by high energy prices. A stronger focus on capacity adequacy has been adopted in the SWIS due to the small system size and, in particular, the inability to draw supplies from neighbouring power systems.
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 the provision of reliable capacity.
Maximum capacity payments are set such that they are sufficient to fund a typical peaking gas turbine plant in the event that insufficient capacity is brought on line through bilateral contracts.
Capacity Obligations and Credits
To ensure that sufficient capacity is installed in the SWIS, the market rules include the concept of Capacity Credits. 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.
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 maximum demand, measured during periods of system peak demand,
plus a contribution to the system wide reserve margin.
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 10 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.
The reserve margin comprises three components:
- The largest portion is required to cover 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 must place 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 an assured price (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. It is expected that most trading of Capacity Credits will be through bilateral trades with a smaller proportion being traded through the IMO.
Trading of Capacity Credits |
