Capacity in the SWIS
Overview
In addition to operating an energy market, the WEM also features a capacity mechanism. This capacity mechanism is designed to incentivise the investment in sufficient capacity to meet the needs of users in the SWIS. This mechanism operates on a two-year ahead cycle, and has been running since 2005. Further information on the processes within the Reserve Capacity Mechanism can be found on the Process Overview page.
The Reserve Capacity Mechanism (RCM) has contributed to the delivery of sufficient generation and demand side management (DSM) capacity to meet the stringent reliability standards set for the SWIS.
Between market commencement and 2012/13, the SWIS will have seen the introduction of approximately 2900 MW of new generation and DSM capacity. By placing an obligation on retailers to procure sufficient capacity the RCM now provides the backbone for this procurement to take place. By design, much of this capacity will be delivered through bilateral contracting arrangements.
The figure below shows how much capacity has been procured through the RCM.
Competition
The numbers of capacity providers and the proportion of capacity provided by Independent Power Producers have each grown considerably since the commencement of the Wholesale Electricity Market, driven in part by the Reserve Capacity Mechanism and the Capacity Cap Direction applying to Verve Energy. This growth is shown in the figures below, and highlights the increasing level of competition within the market.
The first graph shows the number of Market Participants that were awarded Capacity Credits for each Capacity Year.
The second graph shows the proportion of Capacity Credits assigned to each Market Participant with a minimum of 1% market share. This shows that the share of capacity provided by Independent Power Producers has grown frmo 11% in 2005/06 to 44% for 2012/13.
Fuel Diversity
Capacity in the SWIS is made up of traditional generation plant and DSM capacity. In an isolated system such as the SWIS, fuel diversity is a key factor in providing reliable capacity. As can be seen below, end users within the SWIS enjoy the benefit of substantial fuel diversity.
Capacity Type and Load Characteristics
Electricity demand is often referred to as Base Load, Mid Merit, or Peaking Load. To meet the varying needs of users, Base Load plant traditionally operates with a high capacity factor, while Peaking plant will only be used on the highest of demand days. To capture these characteristics for the SWIS, the amount of Base Load, Mid Merit and Peaking plant has been plotted against the actual load characteristics seen within the SWIS.
The choice of how to classify plant (and load) can be difficult, but for the above figure, base load is defined as the load that was being supplied more than 75% of the time, mid merit load as being used between 25% and 75% of the time and peak load as any load on for less than 25% of the time.
Capacity Credits
The RCM is built around the concept of a Capacity Credit. This is a notional unit of Reserve Capacity provided by a generator or DSM provider. Each year, the IMO prepares an assessment of the amount of capacity that is required to meet the forecast demand. If, in a particular year, the IMO determines that 100 MW of capacity is required, it will seek to ensure that this is provided by offering to purchase 100 Capacity Credits from generators and DSM providers.
Capacity Credits have significant value. Capacity Credits can either be traded bilaterally or through the market. In return for receiving this payment, generators are required to offer their capacity into the market at all times (unless undergoing scheduled maintenance).