AER publishes report on high ancillary service prices in South Australia on 8 July 2018

The Australian Energy Regulator (AER) monitors and reports on wholesale electricity markets. As part of this role, we report on events that result in wholesale electricity spot prices exceeding $5000 per megawatt hour (MWh) and frequency control ancillary services (FCAS) prices exceeding $5000 per megawatt (MW). Our reporting on energy market outcomes promotes market transparency, sometimes revealing potential compliance matters.

Today the AER is publishing a report into prices in the FCAS market in South Australia on 8 July 2018.

According to our analysis, a combination of factors led to the high prices. Prior to 8 July:

  • The market operator (AEMO) announced a planned outage affecting the Heywood interconnector would occur on 8 July, requiring 35 MW of regulation FCAS to be sourced locally in South Australia for the duration of the outage.
  • AEMO directed gas plant in South Australia to operate from 4 to 8 July to maintain system security. In accordance with the Rules, this necessitated special pricing arrangements to be in place across the NEM for energy and all FCAS.

As a result of the special pricing arrangements, Hornsdale wind farm's low priced regulation services were materially reduced on numerous occasions on 8 July. When this occurred, capacity priced above $5000/MW was required to satisfy the 35 MW requirement.

Our report: 8 July 2018 provides detailed analysis of why the high prices occurred.

The requirement for AEMO to source 35 MW of regulation services locally in South Australia was one of the key reasons for the high FCAS prices on 8 July. AEMO announced on 5 October that, effective from 12 October, the 35 MW requirement would be removed. Consistent with this, the circumstances that gave rise to the high FCAS prices on 8 July are unlikely to occur again.   

Most customers are not directly exposed to wholesale electricity and ancillary services price spikes. Although some extremely large businesses and industrial customers purchase direct from generators, energy retail companies are the main buyers in the wholesale electricity market. The somewhat unique circumstances that occurred on 8 July that caused the high FCAS prices are unlikely to reoccur as AEMO has concluded that other system security actions taken by them have replaced the need for the 35 MW local regulation requirement. Furthermore, it should be noted that consumers are not directly exposed to FCAS prices.

Generators and retailers manage their exposure to wholesale price variations by locking in, through hedge contracts, the price for the electricity they produce or buy. This helps provide price stability for their customers.

Issued date: 
22 November 2018
AER reference: 
AC 145/18