NECA: Investigation into the events of 28 August – 1 September 2000
NECA has conducted an investigation into the events of Monday 28 August to Friday 1 September. The spot price peaked at over $4,000/MWh in New South Wales, Victoria and South Australia for the trading interval ending at 7am on 28 August. There was a similar spike in New South Wales and Victoria for the same trading interval on the following day and prices were significantly above average in that trading interval across all three southern interconnected regions for the remainder of the week. The report of that investigation is available to download.
The report concludes that the cause of the spikes was the early introduction of daylight saving in the ACT, New South Wales and Victoria. This effectively brought the build-up to the early morning peak forward to a period that was colder and darker than is normally the case when daylight saving is introduced nine weeks later. As a result, there was a 1,700 MW (11.2 per cent) increase in demand at 7am across the southern interconnected regions compared to the previous week. It appears, however, that sufficient contracts had not been purchased in the market to accommodate that increase.
With a few exceptions, the full effect of the early introduction of daylight saving was not generally anticipated by market participants. Nor was it signalled by predespatch. The predespatch forecast for the trading interval ending at 7am on 28 August published by NEMMCO twelve hours ahead underestimated demand by 600 MW. The forecast published four hours ahead represented an even greater underestimate – by almost 900 MW. Forecast prices for the trading interval ending at 7am in both of those predespatch runs were around $100/MWh. This is broadly in line with normal prices for that trading interval.
The result of the significant and unanticipated increase in demand was to expose the market to the very steep supply curve, beyond the capacity they need to make available to cover their contract positions, established by the New South Wales and South Australian generators. We drew attention to the existence of this steep curve in our report into the events of August 1999. It arises because those generators bid at prices up to around $100/MWh to cover their contract positions but at close to VOLL for most of their uncontracted capacity. Whereas the market’s exposure to the consequent very high prices in August 1999 was the result of generator rebidding so close to actual despatch that it precluded the scope for an effective competitive response, however, this was not the case in relation to these latest events.
For 28 and 29 August, Snowy Hydro Trading Pty Ltd (SHTPL) departed from its conventional bidding structure for the trading interval ending at 7am by shifting some 700 MW of capacity habitually bid at between $50 and $500/MWh and bid most of it at prices over $4,000/MWh. It did so, however, as part of its initial bid and therefore well ahead of despatch. Loy Yang Power rebid 100 MW of capacity into higher price bands on 29 and 31 August and 1 September but with more than 12 hours’ notice. Moreover, although SHTPL’s revised structure and Loy Yang’s rebid might have had a direct effect on the spot price if the increase in demand had been less extreme, in the event the extent of the increase in demand meant that the price would anyway have risen very close to the levels experienced.
From 29 August onwards, there was a number of rebids by Flinders Power, TXU SA, Macquarie Generation and Eraring Energy much closer to despatch and in many cases too late to be included even in the latest predespatch forecast published for the trading intervals ending at 7am on those days. The stated reasons for those rebids included financial optimisation and price/volume trade off. This underlines the urgency of implementing the proposed changes to the code to strengthen its provisions on rebidding, developed in line with the events of August 1999, that we put forward to the ACCC on 13 March.
These latest events also highlight the need for NEMMCO further to improve its demand forecasts. The Code Change Panel is currently consulting on draft changes to the code aimed at helping to achieve that objective.
