Is now the time to consider an operating reserve service?

This summer has already seen a number of instances of tightening supply/demand balance across the National Electricity Market (NEM), resulting in a range of reactions from the market operator (AEMO) and other market stakeholders. The extreme weather events combined with fluctuating supply and disruptions saw AEMO activate its Reliability and Emergency Reserve Trader (RERT) in Victoria on 30 December and NSW on 4 January, in both instances the regional price reached the Market Price Cap of $14,700/MWh. Additionally, in SA, the energy minister triggered the Retailer Reliability Obligation (RRO) to support reliability in the first quarters of 2022 and 2023.

There is concern for the future of the Victorian supply/demand balance. The draft determination released before Christmas by the Australian Energy Market Commission (AEMC) reflects this by allowing AEMO to enter into multi-year RERT contracts. This would be a time-limited derogation until June 2023 to address the short and medium-term reliability challenges in the state.

Given the functioning of an energy only market such as the NEM, high market prices are to be expected when there are shortages in supply, and this provides an incentive for generators to ramp up accordingly. As a result, instances of peaky prices and instance hitting the Market Price Cap may be more common than in other electricity market jurisdictions where there are other mechanisms for dealing with shortages in supply such as operating reserves or capacity markets for both generation and demand response. Interestingly, the latest review of the Value of Customer Reliability (VCR) by the Australian Energy Regulator (AER) found a NEM wide representative VCR of $40,990/MWh, which is more than 250% higher than the current Market Price Cap. By constraining the Market Price Cap at less than the VCR, customers are getting a discount and generators are receiving constrained revenues.

AEMO does, however, have tools beyond the wholesale market price signals to ensure frequency remains at 50 ± 0.15hz and maintain system reliability. But there are perhaps other options to consider (see Figure 1), such as: fast reserve, delivering active power within 5 minutes and potentially running for a few hours (e.g. pumped storage); short term operating reserve with slower response (e.g. 5-20 minutes) more suited to reciprocating engines and OCGTs; or demand turn up for major users (for times of low demand, such as those seen recently in SA). These services could be designed to focus on generation or load already active in the market by providing headroom or, alternatively, for those not active in the market.

Given the energy only design of the NEM, it may be sensible to incentivise players that otherwise would not be active in the market to provide services (including reciprocating engines, demand response, or even exiting aging plant). While the NEM still needs an emergency reserve mechanism such as the RERT, if reserves are going to be activated frequently and increasing as part of the day-to-day functioning of the NEM, this should be developed as a transparent market mechanism that could assist to limit the impacts of peakier power prices on retailers and consumers and help ensure system reliability/ security. The operating reserve could be procured on a regional basis and help to ensure there is a buffer to mitigate the risk of unserved energy and potentially avoid the RRO being triggered.