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
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
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
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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Australian Energy Market Commission (AEMC) has asked us to review how demand response (DR) participates in wholesale electricity markets in a range of jurisdictions...
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