What the future looks like for retailers and generators
8 min read
The Energy Security Board (ESB) included a proposed capacity mechanism as one of the reform pathways set out in its final advice on the post-2025 redesign of the National Electricity Market (NEM). The capacity mechanism has received the most attention of all pathways contained in the final advice, and the need for such a market mechanism has arguably been heightened by the suspension of the NEM in June 2022.
That same month, the ESB took the next step in relation to the capacity mechanism by releasing a high-level design paper which sets out its vision for a capacity mechanism in further detail (the Paper).1 According to the ESB, the proposal seeks to address energy security by ensuring we have the right amount, and the right mix, of capacity available in the market, when and where it is needed.
With so much recent commentary on the perks and pitfalls of a capacity mechanism, this Insight takes a step back and unpacks what we know about the proposal and what it will look like for both generators and retailers in the future.
What will the capacity mechanism look like?
The Paper includes a number of departures since the ESB first proposed a capacity mechanism in its final advice to ministers in August 2021.2 For a summary of that initial proposal, and what the hypothetical future might have looked like then, see our previous Insight here. Now that we have more information, let’s again look ahead to 2028, from a generator’s and retailer’s perspective, and this time with the benefit of the clearer picture provided by the ESB.
At this stage it appears most likely that AEMO will be tasked with forecasting energy requirements for each year and will procure capacity from the market for that year through centrally run auctions. Both new and existing capacity providers will be eligible to participate in the auctions and will be paid:
The costs incurred in procuring capacity will be passed through to consumers via retailers.
What will the market look like for generators?
Whilst the focus of this section is on generators, this information applies to all capacity providers.
What will the market look like for retailers?
AEMO will recover the costs of procuring capacity through retailers, possibly on a ‘per MWh’ approach using AEMO settlements. Costs will be passed through as set out in the diagram below.
What role could retailers play in procuring capacity?
Despite its preference for a centralised approach, the ESB is considering involving retailers in procurement of capacity under the following options:
- Option 1: AEMO purchases certificates at an initial auction which retailers then acquire to meet their own projected requirements. This would provide visibility of retailer forecasts and would transfer forecasting error risk to retailers. However, AEMO would still need to recover costs of any surplus certificates it had purchased, and retailers would also need to be able to purchase additional certificates outside of the centrally procured pool in the unlikely event that their forecast capacity was higher than AEMO’s.18
- Option 2: retailers are allowed to participate as buyers alongside AEMO in the capacity auction. This means retailers could indicate their future capacity requirements and increase transparency. However, AEMO would need to procure capacity to meet the projected demand, irrespective of the retailer participation in order to support reliability. The ESB notes that this option is likely to increase the administrative costs of the mechanism.19
Interested parties should make submissions on the Paper by 25 July 2022.
After consultation is complete, the ESB will commence the detailed design process based on stakeholders’ input to present to Energy Ministers in December this year.