Wholesale Electricity Market

Electricity market opportunities

Wholesale Electricity Market (WEM) participants in Western Australia interact to supply and purchase electricity. The average electricity price on the WEM has increased significantly during the past 12 months, with “peak” periods progressively lasting longer and attracting higher prices, as can be seen in the chart on the right  (peak denotes 4pm-9pm).

Will WEM prices continue to be supported?

In June 2024 AEMO, which is responsible for managing the electricity and gas systems and markets across Australia, released its annual Electricity Statement of Opportunities (ESOO or Report).

This Report plays an important role in the Reserve Capacity Mechanism process on the WEM as it includes the 10-year Long Term Projected Assessment of System Adequacy for the SWIS. The primary purpose of the Report is to identify the investment in capacity from generation, storage, and demand side management needed to ensure a secure and reliable electricity supply for the SWIS over the coming decade.

The Report highlighted that, while the near-term supply-demand balance has improved since the 2023 WEM ESOO, substantial and sustained investment in new generation, storage, demand side programs and transmission capacity is still needed, particularly from 2027 onwards.

Achieving balance in 2026/27 requires an additional >1,460MW capacity (the bulk of which is new utility scale batteries) to come on stream by then. This is ~34% of current capacity.

This forecast assumes significant growth in home solar PV installations, which are forecast to grow by 9% per annum over the next decade.

The report highlights that timely delivery of these committed projects is critical to ensuring the capacity requirement is satisfied. AEMO flags that various factors impact the delivery of planned projects across Australia, including global supply chain and labour constraints. As such, AEMO is monitoring the progress of committed projects and encouraging proponents to take early actions to mitigate any potential delays.

A further challenge to supply is outages of the current fossil fuelled fleet. The ESOO highlights unplanned outages of fossil-fuelled generators above 19% in January – March 2024.

Whilst there are multiple factors highlighted in the Report affecting both supply and demand, the key drivers are:

• Increased business, industrial and electrification (Demand) – Demand is forecast to grow significantly due to growth in business electrification, along with growth in cooling load (air-conditioning), electric vehicles, and the expansion of industrial loads. Demand is now forecast to grow at an average annual rate of 4.6% and reach 27.9TWh per annum in 2033-34, a 57% increase over 10 years. In the High Scenario, demand is forecast to grow 11.7% annually or 202% over 10 years.
• Renewable Energy Transition (Supply) – the transition to deploy renewable energy has been accelerated significantly over the past 12 months. In September 2022, the Australian Federal Government legislated to lower emissions by 43% by 2030 and achieve net zero emissions by 2050. In WA, the State Government targets are to reduce government emissions by 80% below the 2020 level by 2030, and to meet net zero by 2050. This has seen the WA State Government announce the closure of coal-fired power generation in WA by 2029.

The ESOO identifies that substantial and sustained investment in new capacity will be required beyond existing and committed capacity, with 391 MW required in 2027-28 increasing to 2,880 MW by 2033-34.

Reserve Capacity Credits – Reserve Capacity Credit payments are payments made by the Energy Market Operator to electricity generators to ensure there is sufficient generation capacity in the SWIS to satisfy demand at peak times. The Reserve Capacity Mechanism (RCM) is unique to WA and not available in other Australian jurisdictions.

Under the RCM, electricity generation plants and storage facilities are certified and allocated capacity credits based on the size of the facility capacity. Electricity retailers are required to purchase capacity credits in proportion to their share of the electricity load in peak trading intervals. The retailers may meet this obligation by either purchasing capacity credits directly from generators under bilateral contracts or by procuring capacity credits via the AEMO at an administered price (known as the Reserve Capacity Price or RCP).

A benchmark RCP (BRCP) is set each year by the Economic Regulation Authority (ERA), with reference to the cost of adding generation capacity, to inform the RCPs received by generators. New generators are able to lock in the initial RCP, escalated by CPI, for five years.

BRCP is determined two years in advance of the energy generation period. The BRCP has increased over recent years, with the latest BRCP rising to $230,000 per MW for the 2026/27 year. The reference technology that the ERA used to determine this is an open-cycle gas turbine.

When the market is forecast to be in deficit, an additional 30% premium is applied to this price. This occurred for the 2025/26 capacity year and the actual 2025/26 RCP is $251,400/MW, a 30% premium to the BRCP of $193,400/MW.

The BRCP of $230,000 for the 2026/27 capacity year will be adjusted for shortfall or surplus on a sliding scale to determine the RCP that Frontier will receive for each Reserve Capacity Credit. Should there be any shortfall, the premium is set at 30% which would imply an RCP of $299,000/MW.

The trade-off for this payment is a lower energy price cap, $738/MWh currently and 1,500/MWh on the WEM from 2025 onwards, compared to $16,600/MWh currently on the NEM. Despite a lower price cap, the average wholesale price on the WEM over FY24 was $87/MWh, compared to $97/MWh on the NEM.  This average WEM price excludes the RCP payment.