November 01, 2016

Report by Brattle Economists Reviews Market Power Mitigation Mechanisms for Wholesale Electricity Market in Western Australia

A report authored by Brattle economists evaluates mechanisms for mitigating market power in the reformed wholesale energy market scheduled for July 2017 implementation in Western Australia’s South West Interconnect System. Prepared for the Public Utilities Office of the Government of Western Australia’s Department of Finance, the report offers several recommendations:

  • Amend the wholesale electricity market rules to more clearly define prohibited pricing behavior as “offering above short-run marginal costs (SRMC) when the supplier has market power and their behavior raises prices above competitive levels.” Setting the SRMC as the standard for energy offers recognizes that a complementary capacity market will provide additional fixed cost recovery to attract and retain sufficient total capacity to meet reliability objectives.
  • Clarify the definition of SRMC as “all costs that a supplier without market power would include in forming its profit-maximizing [energy] offer,” including all costs of generating energy that are “marginal” over a dispatch cycle in that they would not have been incurred if the generator had been available but not running.
  • Consider increasing the current offer cap so generators can more reliably recover their SRMCs.
  • Continue to use screening analyses as part of a behavioral market power mitigation approach focused on ex post observed deviations from SRMC. Ex post screens are necessary in an energy market with one-part energy offers and non-transparent fuel markets. Screens can identify possible violations and trigger further investigation.
  • Consistent with the above revisions, mitigate the real-time balancing market, the day-ahead Short-Term Energy Market (STEM), and the ancillary services markets.

In addition, the report analyzes several options for the future of the STEM, including retention, amendment, replacement, and removal. The report concludes that the STEM is an efficient mechanism to provide buyers with competitive, liquid, low-cost day-ahead hedging opportunities and that rolling the STEM into the National Electricity Market systems has low development cost and risk.

The report, “Market Power Mitigation Mechanisms for the Wholesale Electricity Market,” is authored by Brattle Principals Samuel Newell, Toby Brown, and James Reitzes, Associates Walter Graf and Kai Van Horn, and Research Analyst Henna Trewn. To read the report in its entirety, please visit the Government of Western Australia’s Department of Finance website.