The Wholesale Electricity Market (WEM) for the South West interconnected system of Western Australia (SWIS) commenced operation in on 21 September 2006 following a decision by the government of the day to reform the state's electricity industry. The electricity reform process, initiated in 2001, included disaggregating the state-owned and run Western Power Corporation into four separate entities (link) and implementing a WEM.
The WEM aims to facilitate greater competition and private investment and allow generators and wholesale purchasers of electricity (such as retailers) greater flexibility as to how, and with whom, they sell or procure electricity.
The specific objectives of the market are:
to promote the economically efficient, safe and reliable production and supply of electricity and electricity related services in the South West interconnected system;
to encourage competition among generators and retailers in the South West interconnected system, including by facilitating efficient entry of new competitors;
to avoid discrimination in that market against particular energy options and technologies, including sustainable energy options and technologies such as those that make use of renewable resources or that reduce overall greenhouse gas emissions;
to minimise the long-term cost of electricity supplied to customers from the South West interconnected system; and
to encourage the taking of measures to manage the amount of electricity used and when it is used.
The WEM in Western Australia
The WEM operates in the south-west region of Western Australia where most of the population live (estimated at just over 2 million). The SWIS has a summer peak demand of approximately 4000MW.
Western Australia’s geographical isolation from other electricity markets in Australia makes the WEM unique. It is for this reason that the design of the WEM is centred around ensuring self sufficiency as the state of Western Australia can not rely on the eastern states’ National Electricity Market in times of short supply or an emergency.
The WEM is broadly managed as follows:
The IMO is responsible for the operation and development of the WEM, including administering the rule change process and undertaking long term generation adequacy planning to support the Reserve Capacity Mechanism (RCM).
System Management (a segregated unit of Western Power) is responsible for operating the SWIS in a secure and reliable manner, including short and medium term system planning and dispatching the power system.
Western Power is the Network Operator for the transmission and distribution network in the SWIS
The Economic Regulation Authority is the regulator of the WEM
The Public Utilities Office, responsible to the Minister for Energy, advises on electricity related policy issues.
The WEM has a separate capacity and energy mechanism
It is a net bilateral market with respect to capacity and energy
The IMO trades capacity and energy not covered by bilateral contracts
System Management manages balancing and ancillary services in real time
For more detailed information, click here Market Structure (http://www.imowa.com.au/market-structure)
Energy Trading – Three mechanisms exist for trading energy in the WEM:
Bilateral Contracts: these are agreements between wholesale market suppliers and consumers for the provision of energy. The market has no role in how these contracts are formed or on the conditions contained within these contracts.
The Short Term Energy Market (STEM): the STEM is a daily forward market for energy that allows Market Participants to trade around their bilateral energy positions (established in 2006).
The Balancing Market: this market is used to determine actual dispatch in the WEM. Market Participants provide balancing submissions for each trading interval, specifying prices at which their facilities may be dispatched and by how much. The IMO uses these prices to construct the Balancing Merit Order, used by System Management for real time dispatch (established in July 2012).
The WEM also supports the operation of Demand Side Programmes, which provide load reduction in times of peak demand on a pay as bid basis.
Reserve Capacity Mechanism (RCM) - A key component of the WEM is the Reserve Capacity Mechanism. To ensure Western Australia has an adequate supply of electricity, particularly during peak periods, the RCM was introduced in 2005 prior to the commencement of the WEM. In 2005, the state had a capacity shortage of around 200-300MW.
The RCM was designed to incentivise investment to ensure that there is adequate generation and Demand Side Management capacity available each year to meet peak system requirements (link to RCM overview page) http://www.imowa.com.au/reserve_capacity_overview
Verve Energy is the default supplier of Ancillary Services in the WEM.
Ancillary Services may also be provided by other participants through Ancillary Service Contracts, if Verve Energy is unable to provide a service or another participant can provide the service at a lower cost.
In July 2012 a competitive market for Load Following Ancillary Services was introduced in the WEM.
Why have a Wholesale Electricity Market? – a background
Wholesale electricity markets are needed when competing generators are willing to offer their electricity output to competing retailers.
In Western Australia, as in many other jurisdictions, electricity was traditionally delivered almost exclusively by an integrated utility that owned and operated electricity generators and the transmission and distribution network. The utility also managed the retail sale of electricity.
Towards the end of 2000 however, a trend was being seen in developed countries whereby greater private investment and competition were starting to be encouraged to reduce costs to the taxpayer for funding the production of electricity, while creating downward pressure on prices to electricity consumers.
The inability to store electricity and the complexity of managing electricity systems meant that this only became possible when computer technology reached a certain level of sophistication.
The UK was the first government to deregulate its electricity supply industry and the process was later followed by many other countries. The electricity markets in the eastern states of Australia and the WEM in Western Australia are cited as successful electricity markets.
For more information on the background of the WEM please click here.