Market surveillance and monitoring
Investigation into the events of 4 August
NECA has conducted an investigation, under clause 3.13.7 of the Code, into the events of 4August when the spot price in the New South Wales and Snowy regions peaked at $4,880/MWh for the despatch interval ending at 6.50am. The New South Wales spot price for the trading interval ending at 7am was $3,275/MWh. This represented a significant variation from forecast which had ranged from $42/MWh based on initial bids to $333/MWh one hour ahead of despatch.
As part of our investigation, we requested written evidence and invited discussions with Delta Electricity, Macquarie Generation, NEMMCO, Pacific Power and Snowy Hydro Trading Proprietary Limited.
The events
The maximum forecast temperature on the morning of Wednesday 4 August was 17°C, following an overnight minimum of 7°C, compared to the monthly average of 7.8°C. The forecast price in New South Wales for the trading interval ending at 7am, based on initial bids, was $42/MWh. This compared with average weekday prices for that same trading interval over the preceding month of $32/MWh, within a range of $17-52/MWh (excluding the previous peak price of $118/MWh on 2 August). The forecast increased to $89/MWh at 11pm on 3 August and then to $333/MWh from the 11.30pm predespatch schedule onwards. There were also clear indications of extreme price sensitivity to even small changes in market conditions. The increase in the forecast price from 11.30pm followed a rebid by Macquarie Generation at 11.14pm. The rebid moved 830MW of capacity from its initially bid prices of $32 to 2,900/MWh to a minimum price of $4,780/MWh for that trading interval.
Forecast interregional flows on the Snowy-NSW link had remained stable at approximately 1,100MW. Forecast Victoria-Snowy flow was of the order of 550MW. A binding constraint on the Victoria - Snowy interconnector had also been forecast for the trading interval ending at 7am, as it had been for that same period on 2 and 3 August.
As NSW demand increased, the level of transfer from Victoria to New South Wales via Snowy became constrained. The spot prices between the Victorian and NSW/Snowy regions separated, as high cost generation was despatched in New South Wales.
Figure 1summarises the prevailing system conditions in NSW.
Figure 1: prevailing NSW system conditions
Dispatch interval / NSW5 minute
demand
(MW) / NSW
30 minute
demand forecast/
actual
(MW1/2hrs) / Import
into NSW
(MW) / Export from VIC (MW) / NSW
5 minute
price
($/MWh) / VIC
5 minute
price
($/MWh)
06:35 / 8556 / ~8920/8962 / 1036 / 650 / 50.66 / 45.61
06:40 / 8803 / 1219 / 776 / 117.85 / 102.63
06:45 / 8950 / 1230 / 794* / 4860.22 / 94.72
06:50 / 9099 / 1226 / 786* / 4880.14 / 135.11
06:55 / 9192 / 1229 / 785* / 4880.14 / 139.08
07:00 / 9173 / 1212 / 764* / 4861.09 / 136.21
* Victoria-Snowy interconnector binding
All the constraints invoked were system normal constraints or constraints invoked to deal with routine outages. These latter constraints, however, had no material effect on the transfer capability from Victoria to Snowy. Despatch prices in the New South Wales and Snowy regions were calculated correctly.
Eight rebids were made in the hour between 6am and 7am in respect of the trading interval ending at 7am by Snowy Hydro Trading Proprietary Limited (SHTPL), Southern Hydro Limited, Ecogen Energy and Hazelwood Power. Only four, submitted between 6.18am and 6.24am, were included in the predespatch forecast published at 6.36am. The first and most significant was by SHTPL in respect of the notional units Snowy 1 and 2. This rebid increased SHTPL’s initially scheduled generation by 10MW but reduced the level of capacity priced at or below $320/MWh from 1,260MW to 450MW. The remaining 810MW was rebid at prices above $4,988/MWh. Total SHTPL availability remained unchanged at 3,500MW.
The other rebids, which followed the SHTPL rebid and were all submitted by Victorian generators, included a reduction of 10MW in Southern Hydro Limited’s available capacity across two notional units, a reduction of 5MW/min in the ramp down capability of Newport and withdrawal of 60MW of capacity at Jeeralang. Both Hazelwood Power and Jeeralang also rebid some available capacity at lower prices.
There were no rebids submitted by NSW generators for the trading interval ending at 7am, after the Macquarie Generation rebid at 11.14 pm the previous night.
Issues arising
Five key issues arise from these events: the basis for NEMMCO’s demand forecast; the adequacy of the reasons for rebids provided by market participants; the timing of rebids, in particular rebids that are made so close to actual despatch that they preclude an effective competitive market response; the need for appropriate long-term price signals in the market; and the scope of the existing exclusions from participation in the settlements residue auction process.
Demand forecast. The forecast demand published by NEMMCO for the New South Wales region for the trading interval ending at 7am had remained essentially unchanged at some 8,920 MWs since the initial forecast was published. This forecast proved in the event to be within 40MW of actual demand for that half hour. The forecasts for the trading intervals ending at 6.30am and 7.30am were similarly accurate. It is not obviously apparent, however, even if these forecasts had been less accurate, that this would have led to different strategies on the part of market participants, and therefore different outcomes. Nonetheless, NEMMCO has acknowledged the need to improve the accuracy of its demand forecasts more generally. It is currently working with participants on a number of initiatives to deliver improvements to those forecasts and to introduce a five minute pre-despatch forecast. We welcome those initiatives. It has also emerged during our investigation that there was a genuine misunderstanding on the part of SHTPL and a number of other market participants about what the demand forecast represents. NEMMCO should as quickly as possible clarify its published procedures to put beyond doubt that its forecasts represent an average for each trading interval.
Reasons for rebids. Clause 3.8.22 of the Code requires a market participant that submits a rebid to record the reason for the rebid and to notify NEMMCO of that reason and provide NEMMCO with such substantiation as it may reasonably require. This disclosure is essential to ensure both a fully informed market and subsequent accountability.
The reason provided by Macquarie Generation for its 11.14pm rebid on 3 August was despatch rearrangement. The reason provided by SHTPL for its rebid at 6.18am on 4 August was water management. SHTPL has explained that it uses this term to encompass the utilisation of its limited energy resource in order to optimise its future risk and commercial return position. It is conventionally the reason provided by SHTPL for the vast majority of its rebids. Neither of these reasons is, in our view, sufficiently explanatory.
More generally, many of the reasons provided by market participants for rebids are clear and self-explanatory, notwithstanding the time and other constraints within which they are required to be provided. Many others, however, are vague and inappropriate, eg ‘moving bands’ and ‘plant or market conditions’. The reasons provided for rebids have too often become routine and uninformative. Clause 3.8.22 of the Code should be tightened to ensure the reasons for rebids are substantive and self-explanatory. In particular, and consistent with the objective of accountability, those reasons should be capable of standing alone and not require further essential explanation if the rebid itself is subsequently subject to scrutiny for whatever reason.
Breaches of the rebidding provisions of the Code are currently unclassified in the National Electricity Regulations. This still allows a case to be mounted before the National Electricity Tribunal. Failure to provide an adequate reason for a rebid nonetheless should be classified in its own right, in view of its importance, as either a category B or C breach. Category B breaches attract initial penalties of up to $50,000 (and category C breaches initial penalties of up to $100,000) plus fines of $10,000 for each day the breach continues. A finding of breach by the Tribunal would also allow it to impose orders, including as regards future conduct.
Timing of rebids. The ability for market participants to rebid in response to physical conditions, eg forced generator outages, or changes in demand forecasts is essential to the proper operation of the market. Rebidding for non-physical reasons, including to reflect participants’ dynamic contractual positions and indeed in response to rebids by other participants, is equally essential to the fully efficient and effective operation of the market. This was recognised by the ACCC, in its final determination on the Code, by its clear statement that imposing restrictions on rebidding risked introducing distortions into the market, imposing costs on the market, introducing inequities in the treatment of generating plant and providing perverse incentives for demand-side participation. We endorse this assessment. Indeed, we argued strongly for this outcome during the ACCC’s approval process. This flexibility is, however, predicated on the ability for the wider market to provide a competitive response.
The focus in our investigation of the events of 4 February was on rebidding which takes place so close to actual despatch that it precludes the scope for an effective competitive response. The first effective opportunity for such a wider competitive response in the spot market to SHTPL’s rebid on 4August, in relation to the trading interval ending at 7am, was when the next predespatch forecast was published by NEMMCO at 6.36am. SHTPL pointed to the rebids by Victorian generators that followed its rebid to argue that a response was nonetheless possible, and indeed occurred. Not all those rebids were, however, obviously in response to SHTPL’s rebid. Whilst a number could be said to have been in response to that rebid, the very short time that was available in which to consider those responses before prices in Victoria and NSW/Snowy separated meant that the net effect was to exacerbate the effect of the constraint.
SHTPL also argued that, in any case, it needs to be able to manage its risk management instruments(including vesting contract exposure to the level of net imports to Victoria) right up to actual despatch in order to provide a minimum cost service. We note, however, that it is open to SHTPL to manage its exposure equally effectively using alternative bidding and rebidding strategies which would have allowed the market to be better informed, and other participants (including Victorian generators) to present a more competitive response. The strategy it chose on 4 August triggered unacceptable outcomes in the wider market.
The events of 4 February and 4 August damaged the reputation of the market. Those and other similar, albeit less dramatic, events convince us of the need urgently to consider the options for further amendments to the Code, in addition to the strengthening of the information provisions we have already proposed, to impose specific conditions on rebidding, either absolutely or within a defined period prior to despatch, expressly in order to ensure the opportunity for a competitive market response.
Long-term price signals. SHTPL’s rebid meant that the NSW and Snowy regions were exposed to the very steep supply curve established by the NSW generators. They had bid at prices up to $100/MWh, presumably to cover their contract positions, but at close to VoLL for most of their uncontracted capacity. The main exception was 90 MW bid by Pacific Power at approximately $600/MWh and which was in the event despatched. This price structure was established as a result of the three NSW generators’ initial bids, although Macquarie Generation’s rebid at 11.14 pm on 3 August cemented that structure. Figure 2 illustrates the NSW regional supply curve (excluding imports), incorporating Macquarie Generation’s rebid, for the trading interval ending at 7am on 4August.
Figure 2: NSW regional supply curve for the 7am trading interval on 4 August
This structure had developed only relatively recently as progressively more capacity was priced at very high levels. It is also in marked contrast to the structure presented even for the succeeding trading interval. Figure 3 illustrates the NSW regional supply curve for the trading interval ending at 7am on 30 June. Figure 4 illustrates the supply curve for the trading interval at 7.30am on 4 August.
Figure 3: NSW regional supply curve for the 7am trading interval on 30 June
Figure 4: NSW regional supply curve for the 7.30am trading interval on 4 August
Delta Electricity, Macquarie Generation and Pacific Power characterised the price structure for the trading interval ending at 7am on 4 August as a rational response to commercial opportunities and, in particular, to the relatively grainy time profiling of the principal contracts which had created an under-contracted position for the trading interval ending at 7am. The volume in these contracts is set on a month by month basis and is based on the average demand for the month. The volume also varies during the day and increases from off peak levels after 7am.
It would be premature and inappropriate to snatch at conclusions about structures based on one or two incidents. This is especially so at this very early stage of the development, and therefore maturity, of the national market and even more so in relation to an incident from which the market should and indeed must learn significant lessons. There needs to be a much closer correlation between contract and spot price in order, amongst other things, to ensure more efficient risk management arrangements. This is the only efficient and effective, and therefore sustainable, price structure.
Settlements residue auction. As a result of the events of 4 August, the settlements residue on the Victoria - Snowy link totalled approximately $1 million for the trading interval ending at 7am. Those events serve to heighten concerns about the narrow scope of the existing exclusions from participation in those auctions. The ACCC should urgently consider whether there should be broader exclusions from market participants’ ability to participate in the settlements residue auction process, based on their ability to influence the timing and extent of those residues. Consideration of such broader exclusions, however, needs to recognise the legitimate need for individual participants to cover their market exposures, for which those residues represent a natural hedge, and the broader benefits to the market overall of those arrangements.
Conclusions
The immediate trigger for the spot price of $3,275/MWh in NSW for the trading interval ending at 7am on 4 August was a very late rebid by SHTPL which exposed the NSW region to the very steep supply curve in that region. Generators in NSW had bid at prices up to $100/MWh, presumably to cover their contract quantities, but at close to VoLL for most of their uncontracted capacity. SHTPL’s bid structure had masked the potential for high prices but its rebid removed this protection. A normal network constraint between Victoria and Snowy prevented additional lower cost supply from Victoria into NSW. These events confirm the need to strengthen the Code’s existing provisions on rebidding. They also raise questions about the adequacy of the existing exclusions from the settlement residue auction. As a result of those events:
NEMMCO should as quickly as possible clarify its published procedures to put the basis for its demand forecast beyond doubt;
clause 3.8.22(c) of the Code should be amended to require clear and unambiguous reasons for rebids to be provided at the time rebids are made;
the National Electricity Regulations should be amended to make failure to provide such reasons a category B or category C offence under those regulations;
we shall urgently consider, and consult on, the options for further amendments to the Code to impose conditions on rebidding, either absolutely or within a defined period prior to despatch. These restrictions should be aimed at ensuring the opportunity for a competitive market response to such rebids. Breach of these new provisions should be a category C offence; and
the ACCC should consider whether there should be broader exclusions from market participants’ ability to participate in the settlements residue auction process, based on their ability to influence the timing and extent of those residues.
National Electricity Code Administrator
September 1999