Australia's National Electricity Market: Bidding rules, market power and wholesale electricity prices

Abstract

Wholesale prices for the generation of electricity markedly increased in 2022 and 2023. These costs, the most significant component of the final electricity price paid by consumers, were estimated, by the Australian Energy Regulator, to be 30-40% of a typical residential bill in 2022-2023 and 50-60% in 2023-2024. This substantive rise has been driven by increases in wholesale charges of up to 68% in 2023-2024 and follow increases of up to nearly 50% the previous financial year. These wholesale price increases have been driven by: • Generation companies exercising market power through the supply bidding and rebidding rules governing Australia’s National Electricity Market, and • Generation companies negotiating contracts in the parallel markets for financial contracts which inform the prices these companies bid to supply generation capacity. The Australian Energy Market Commission, and affirmed by the Australian Energy Regulator, interprets the National Electricity Law—that underpins the market’s bidding and rebidding rules—as permitting the transient (temporary) exercise of market power not sustained market power over a period of time. These two regulators, which administer the National Electricity Rules (NER) and review the performance of the National Electricity Market (NEM) respectively, are not transparent about their definitions of ‘transient’, ‘sustained’, or ‘period of time’. Market power is market power, transient or sustained. The exercise of market power, over any period, produces outcomes contrary to a competitive market which is supposed to yield the lowest possible prices for consumers. The NEM was purportedly designed to be a competitive market. It is a market, however, with high concentrations of generation capacity across all its regions which make it fertile ground for uncompetitive behaviour. The vulnerability of the NEM to market power, and its persistence since the NEM commenced in December 1998, has been recognised by regulators, market participants and all Australian governments. Changes have been made to the NEM’s supply bidding and rebidding rules and new forms of market performance monitoring have been implemented. Yet these have not prevented the record increases in wholesale electricity prices during recent years. Bidding behaviour to supply generation capacity, in conjunction with the speculative behaviour of generation companies in the financial contract markets about future electricity prices in the NEM, present exemplary evidence of ongoing price gouging and unfair pricing practices.