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ASX stops cap trading from July 2021

The Australian Energy Market Commission (AEMC) recently changed the rules governing electricity prices in the National Electricity Market (NEM). Instead of being paid on a 30 minute basis, the market will be paid on a 5 minute basis.

The main benefits of moving to 5 minute prices are greater participation of demand side management including batteries and less opportunities for gaming the market. For a full discussion see the AEMC website: http://www.aemc.gov.au/Rule-Changes/Five-Minute-Settlement

One of the main concerns over the change to 5 minute markets is that it will be difficult for traditional peaking plant to ramp up fast enough during high prices. Many of these peaking plants sell what is known as $300 caps which protects the buyer from prices above $300/MWh by paying the positive difference between the spot price and $300/MWh. As a price spike will only last for 5 minutes they are unable to capture the price in time and are no longer able to cover their position.

We saw a reaction from the Australian Stock Exchange (ASX) yesterday (22 January 2018) announcing that they would delist their caps starting 1 July 2021 when the new rule will take effect. It is uncertain what this will do to the business model of open cycle gas turbines and other peaking plants seen as necessary for our transition towards higher renewable penetration. For now, they are unable to sell caps through the exchange and will need to take a higher merchant risk or restructure a new product which works better with renewable energy.

This may act as a disincentive for investment in gas fired power stations though AGL is still looking to replace their Torrens A power station with a new gas fired power plant which will be more flexible to respond to change in demand according to AGL. It is hoped that sufficient demand response and batteries can come online in time to firm up the renewable generation. If that is not the case, energy prices will remain elevated for longer.

If you would like to know more about the AEMC and the impacts of this rule change, please contact Edge on (07) 3232 1115 or 1800 334 336.