Two alternate theories of why capacity was withdrawn

Who’s talking about this theory?

Pretty much everyone!

In simple terms it seems that this has quickly become the generally quoted theory for why participants withdrew significant volumes of capacity offered into the market

… but just because it’s most talked about, that does not necessarily mean it’s correct in all cases!

Not many people at all, it seems, had even thought of this one (though a number of people have relayed to me their thanks for writing about it).

…. but that does not necessarily mean it’s incorrect!

Brief description of the theory

This theory is based on the underlying consideration that the Administered Price Cap under Cumulative Price Threshold (which is currently set at $300/MWh) is insufficient to cover short-run marginal costs (SRMC) for ongoing operations.

These costs are largely:

1)  driven by fuel costs, for thermal plant … which have been driven up in the ‘2022 Energy Crisis’ by external and internal pressures; or

2)  driven by opportunity cost of energy stored, for battery storage and hydro … which have been driven up in the ‘2022 Energy Crisis’ by factors including the above.

In both cases, there would be an allowance for variable O&M costs for each MWh of energy production (e.g. chemicals and other input materials consumed onsite).

This theory holds that this places the participant in an invidious position – whereby the participant is effectively confronted with a choice between two compensation regimes:

Compensation Regime #1 is one via the AEMC that is supposed to operate under Administered Pricing … which will have been used rarely in the past:

(a)  given that CPT triggers are rare; and

(b)  this situation even rarer, if you think about occasions when $300/MWh Administered Price Cap would not cover  operating costs!

Compensation Regime #2 is one via AEMO for compensation under Direction

… which has been used much more frequently.

This theory holds that some participants have been:

1)  opting or Regime #2 by withdrawing capacity from the price stack and waiting to be directed;

2)  with the motivation being that they want Compensation Regime #2 (and not Compensation Regime #1).

—

Assuming this theory is correct (at least in the case of some DUIDs) … and note that this is an assumption in this thought bubble exercise … then my next question would be to wonder what’s better about Regime #2 than Regime #1:

1)  Is it that it’s just more well known, and so viewed as ‘less subject to risk’?

2)  Are the timeframes for payment more attractive?

3)  Are the (likely) magnitudes of payment more attractive?

4)  Is it for some other reason?

I don’t know the answers to these questions, but will be interested to learn more.

On 16th June 2022, partly in response to a question I’d received online and partly as a result of a briefing on GenInsights21 to the EUAA Electricity Committee, I posted ‘Trended bidding from BESS discharge (NEM-wide) … highlighting APC and Market Suspension’.

In that article I wrote:

‘This means that, if a battery were to bid itself available for any period in the market, NEMDE would take all if could give and run it dry without any consideration of whether that energy would be better saved for later.’

My sense was that this had been the first time a number of readers had thought of this alternate interpretation of events … unfortunately.

The following day, Allan looked more broadly with ‘Stepping to suspension’ and in that article explained:

‘Generators with limited supplies of fuel or water generally manage supply levels by re-bidding market offers to higher prices as their remaining fuel or water stocks drop, which normally reduces their market dispatch levels as lower-priced generation is dispatched before them. This still leaves their re-priced capacity available to run in the market if necessary.

But once enough generators start withdrawing significant capacity offered to the market, this can require remaining generators to “pick up the slack”, and re-pricing of offers might become a less effective mechanism for managing fuel or water levels. This can end in a “rush for the exits” or prisoners’ dilemma, as more generators withdraw volumes from the market in response to rundown of fuel or water stocks, essentially forcing remaining “energy-limited” generators to follow.’

At the end of his article, Allan explains:

‘The NEM dispatch process has no inbuilt recognition of cross-temporal energy constraints and doesn’t seek to internally optimise limited energy reserves.  Normally generators manage their fuel or water position through pricing of their market offers, repricing upwards – even to the market cap – if fuel is scarce. But in periods where there is a near-deficit of generation – because of withdrawn capacity – everything offered available to the dispatch process would be dispatched and offer price may no longer be an effective rationing mechanism for generators with limited fuel or water. So if too many generators have already “headed for the exits” by withdrawing capacity, remaining energy-limited generators may almost necessarily have to do the same.’

For more discussion

With particular reference to Theory #1 (about potential trade-offs between Compensation under APC and Compensation under Direction) this prior article from 15th June 2022 is a good place to start.

 … then follow that through to two articles on LinkedIn from Christiaan Zuur and Farhad Billimoria that seem to deliver value in explaining some of the considerations with this respect.

With respect to this theory:

1)  it seems no coincidence that the AEMC published ‘how to lodge a claim for compensation’:

(a)  it’s unfortunate that this occurred on 13th June …  after the CPT had been breached in QLD and just prior to NSW, SA and VIC;

(b)  in the reviews after this event, it may well  that recommendations will be made with respect to:

i.  Better ‘war gaming’ to identify scenarios that might unfold; and

ii.  A more proactive communications regime to support this possibility

…. in writing this I am thinking back to the ‘NOUS Report’ into the blackout of January 2007 that flagged a number of communications improvements to be implemented.

2)  it’s also not much of a stretch to imagine that a number of participants were belatedly reaching for the rule book in the days prior around this time to understand how the process works … as they will likely never have used the process before.

3)  Worth remembering that some smart readers asked the question ‘What would happen if…?’ about this very thing back on 30th May 2022 (and there were useful comments made on the related thread on LinkedIn as noted in that article)  … but even then this was only 2 weeks prior to it occurring.

In addition to the coverage above on WattClarity, worth also highlighting the Ben Kefford wrote ‘Caught between a rock and a reservoir – why withdrawing capacity in the market made unfortunate sense of some generators’ on LinkedIn… specifically with respect to the Snowy Hydro operations.

Ben flags both Theory #1 and Theory #2 in his article as possible reasons why Snowy did what it did.