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The Wholesale Electricity Market (WEM)

 

In 1993, the Australian Federal Government reformed the electricity industry and created the National Electricity Market (NEM). Due to its geographical distance, Western Australia could not be physically interconnected with the other states. Instead, the industry was dominated by a single player called Western Power, which was a vertically integrated utility and State Government owned corporation. Due to the lack of competition and high generation costs, Western Australian businesses were paying significantly more than the other states for electricity.

In 2001, the Electricity Reform Task Force was established by the State Government, to review the structure of the Western Australian Electricity Market. From 2003-2006, the Task Force and Cabinet implemented reforms, one of which was the disaggregation of Western Power on the 1st April 2006 into the four government-owned corporations; Verve (generation), Western Power (transmission and distribution networks), Synergy (retail) and Horizon Power (regional supply). Subsequently, on the 21st September 2006 the Wholesale Electricity Market (WEM) was established in the South West Interconnected System (SWIS) of Western Australia.

Since 2006, the WEM has facilitated greater competition and encouraged private investment in the generation and the retail sectors of the electricity industry. This is considered a prerequisite for the Western Australian electricity market to become more reliable, sustainable and minimise the cost of electricity to customers in the SWIS.

Within the WEM, there are three mechanisms for energy trading; Bilateral Trade of Energy (Bilateral Contracts), Short Term Energy Market (STEM) and the Balancing Mechanism. In order to implement the WEM in accordance with the Market Rules, the Independent Market Operator (IMO), a government body, was established in 2004 to oversee its administration and operation.

For information on the WEM Rules http://www.imowa.com.au/market_rules.htm

 

The Structure of the Wholesale Electricity Market (WEM)

 

Nolan, A. (IMO), 2007, The Western Australian Electricity Market – The Quiet Revolution

 

Bilateral Contracts – Long Term Energy Commitments

Private contracts (agreements) are produced and entered into between generators (Independent Power Producers - IPPs) and consumers (retailers and large end users), for the provision of energy and capacity.

These contracts are referred to as Bilateral Contracts and they specify the negotiated price, level of service as well as the terms of trading being that of hours, days, weeks or years. The IMO has no authority or influence over these contracts; these are agreements and settlements primarily between the suppliers and consumers based on commercial purposes.

Generators are required to submit Bilateral Submissions (information on their energy transactions from bilateral contracts) to the IMO the day before the actual Trading Day is to begin, so as for the transactions to be scheduled in the market. The IMO needs to know how much energy the generator is supplying and how much is being consumed, within every half hour period of that trading day. A requirement of these bilateral submissions is that the energy being supplied must equal and match the energy which is to be taken from the network and consumed.


The Short-Term Energy Market (STEM) – The day before the Trading Day

The Short-Term Energy Market (STEM) relates to an ‘energy-only forward looking market’ which is operated by the IMO everyday, to assist energy trading between generators and retailers and their bilateral contract positions.

The STEM runs on a half hourly basis referred to as Trading Intervals, within a Trading Day.  Everyday, and for each trading interval, the IMO determines a STEM price. The IMO also has to establish that the quantities of energy being sold and purchased via their organization is balanced, so as for the IMO to have no net exposure and a neutral stance in the energy market.

Participation in the STEM is not compulsory but it is open to all market participants. It allows those trading under bilateral contracts to alter their position by allowing them the opportunity to either purchase additional energy from the IMO or sell additional energy to the IMO, during specific trading intervals/times of the day. For example, a generator may decide to supply more energy into the market than is stated in its bilateral contract if market prices were high. Or, a retailer may decide to purchase larger quantities of energy from the market, if the market price was low. The STEM also allows those who are not trading under bilateral contracts the opportunity to participate in the energy market.


Balancing Mechanism – Real-Time adjustments from Bilateral Contracts

Prior to Real-Time (the Trading Interval(s) of the Trading Day), it’s common for there to be a difference between supply and consumption on the physical system. In these situations System Management, a sub-section of Western Power, calls upon the company Verve Energy to balance the variations in the market.

If Verve Energy is unable to fully cover the systems imbalance, then System Management calls upon other market participant generators to either reduce or increase generation from their power stations. The generating facilities assisting in balancing the system are paid a price which they previously submitted to the IMO as “Standing Data”.

For those participants who have deviated from their contractual positions, the “balancing” price they pay is equal to the STEM price. In situations where participant’s situation is significantly different from their contractual position, then the “balancing” price they pay is adjusted accordingly by the IMO, so as to incorporate penalties.


The Reserve Capacity Mechanism (RCM)

The Reserve Capacity Mechanism is a fundamental feature of the Western Australian Energy Market which distinguishes it from the National Energy Market (NEM), situated in the Eastern States of Australia.

The SWIS is a much smaller power system compared to overseas international markets and as a result of its geographical isolation from other networks in the Western Australian Region such as the North West Interconnected System (NWIS) and Regional Power (RP) and networks of Eastern and Southern Australia, in October 2005 the Reserve Capacity Mechanism was established as a back up system (reserve margin) to the SWIS.

Every year the IMO predicts capacity for the next 10 years, taking into consideration that generation capacity must be sufficient to meet factors such as plant failures and outages of the largest generating unit on the SWIS (which is located in Collie), peak loads and intermittent loads such as wind farms etc. To ensure that sufficient capacity is provided, the IMO allocates Capacity Credits to generators and DSM facilities (Demand Side Management). A Capacity Credit is a notional unit of capacity that can be traded between market participants. For example, in the period 2007-2008, the IMO estimated the capacity requirement as being 4000MW however; assigned capacity credits to 11 companies were able to provide generation and DSM capacity for 4115.4MW. Capacity Credits relate to and are only valid for a particular Reserve Capacity Year at a Reserve Capacity Price.

In order to be able to meet their individual Reserve Capacity requirements, each retailer must obtain adequate Capacity Credits. They can obtain Capacity Credits through Bilateral Trading with Generators and DSM capacity providers or they can also purchase them from the IMO.

In order for the energy market to make use of the capacity, Generators and DSM capacity providers must first register their Capacity Credits with the IMO. Registration compels providers to make that capacity obtainable and accessible by the energy market.

Further information on Bilateral Contracts, STEM & STEM pricing, the Balancing Mechanism and the Reserve Capacity Mechanism can be found in the following publications:

- The Wholesale Electricity Market Design Summary – September 2006 (PDF, 79 pages, 618Kb) http://www.imowa.com.au/Attachments/MarketSummarySeptember2006.pdf
- Market Structure (IMO Website) http://www.imowa.com.au/market_structure.htm
- The South West Interconnected System Wholesale Electricity Market : An Overview (PDF, 15 pages, 241Kb) http://www.imowa.com.au/Attachments/ShortBrochure.pdf

 

Other Entities which play a role in the Governance of the WEM:

Economic Regulation Authority – ERA
- This is the independent economic regulator for Western Australia. Its primary function in respect of the electricity market is regulatory and market surveillance of the WEM to ensure that it is meeting the Market objectives.
http://www.era.wa.gov.au/

The Minister for Energy
- On 1st October 2004, the WEM Rules were initially established by the Minister for Energy, since then other amendments have been made to the Market Rules and Procedures. The Minister for Energy is also responsible for appointing the board of the IMO. http://www.eriu.energy.wa.gov.au/3/3086/3073/market_rules.pm

The Energy Review Board
- This is the primary appeals body. They impose penalties for breaches of Market Rules and primarily act as an adjudicator for appeals.
http://www.era.wa.gov.au/1/54/43/energy_gas_revi.pm

The Market Advisory Committee
- This is a committee convened by the IMO, which consists of rule participants and consumer representatives who ultimately advise the IMO on issues relating to proposed market rule, procedural changes and general market operation issues.
http://www.imowa.com.au/market_advisory_committee.htm


Other Important Government Bodies:

The Office of the Renewable Energy Regulator – ORER
- The Office of the Renewable Energy Regulator (ORER) is a statutory authority established to oversee the implementation of the Australian Federal Government's mandatory renewable energy target (MRET).
http://www.orer.gov.au/

The Office of Energy – OOE
- The Office of Energy is a change agent that leads the development and implementation of policy to meet the State's energy needs.
http://www.energy.wa.gov.au/