The AER monitors and reports on the performance of the NEM under the NEL. We analyse and identify whether there is effective competition in the wholesale market and whether there are market features that may be detrimental to effective competition or the efficient functioning of the market.
This 2020 report is our second report covering all NEM regions. It presents a comprehensive picture of the state of wholesale competition in the NEM. It also analyses how the performance of the NEM has changed since our inaugural report released in 2018.
The market is transitioning from a system dominated by large thermal generators to one that incorporates an increasing volume of widely dispersed renewable generators. Since our last report in 2018, this has continued with significant new entry of large-scale solar and wind generation and further adoption of grid scale batteries. Over the past year, NEM prices have fallen from historic highs, as falls in input costs and increased competition from large-scale solar and wind generation have been reflected in lower average generator offers. In addition, our analysis suggests that while prices have fallen, they remain at levels sufficient to encourage further investment in new generation and storage.
This transformation has slightly lessened market concentration, as well as affected how participants offer their capacity, price signals for new investment, and markets for managing fluctuations in frequency. Flexible generation is becoming more important in firming fluctuations in intermittent renewable generation, and is now setting the price more often in the peak demand periods. While in this report we did not find concerning exercise of market power by generators, there are still elements of the market that are vulnerable to the exercise of market power.
The AER will continue to monitor the performance of the wholesale market as it evolves, with a focus on the implications for competition and efficiency of increased penetration of intermittent renewable generation and the role of flexible generation particularly in evening peaks. We aim to request information on revenues and costs from generators to further our assessment of operating earnings. We will also monitor and report on how major policy reforms and interventions are changing competitive dynamics in the NEM.
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