By virtue of its design (i.e. being an energy-only market), the NEM is sure to deliver the price volatility so essential to the incentivisation of new generation development. We fully support the need for this volatility, by the way.
The vast majority of times when prices are high, we see (through NEM-Watch, and our other software products) that these spikes are due to interconnector constraints binding, and hence transient economic islands being created, with prices separating and spiking high on one side, or the other. On most of these occasions, we see that the spare capacity NEM-wide is more than sufficient to meet the demand, plus reserve requirements. It’s just that it can’t “get to market” across the constrained interconnector in
order to moderate the high prices.
That’s what made the situation on 19th and 20th June 2007 so interesting – as we saw that the NEM-wide Instantaneous Reserve Plant Margin (IRPM) had dropped to an amazingly low value of 7.62% during the evening winter peak in demand – which was much lower than it had ever been before, and hence meant that prices rose sky-high, right across the NEM.
As a result of this drop in reserve plant margin, an article was written in the Australian Financial Review by Duncan Hughes, and has been referenced on our company website here:
Because of the uniqueness of this situation, we spent some time in the days following this event having a look at IRPM in more detail, and have included our analysis here:
To keep an eye on NEM-wide IRPM yourself in future, you might choose to use NEM-Watch (www.nem-watch.info)