The state government agency which oversees Western Australia’s deregulated wholesale electricity market has proposed cutting the maximum price paid for peak-hour power by more than 30 per cent.
Energy industry players have warned that lowering the peak wholesale price could threaten new power generation projects that have based their feasibility studies on the existing price.
According to some industry insiders, the Independent Market Operator’s Maximum Reserve Capacity Price (MRCP) offers similar assurance for peaking power station developers as off-take agreements do for base-load power station developers to secure debtor and equity finance.
The IMO has drafted a MRCP of $166,100 per megawatt per year for 2014-15, almost 31 per cent lower than the $240,600 MRCP set for 2013-14.
But the IMO’s chief executive, Allan Dawson, played down the impact of the new price, which is designed to cap the cost on days of exceptional demand.
Mr Dawson said the primary purpose of the MRCP was to establish a capped price for the reserve auctions that take place in peak demand in the South West Interconnected System (SWIS) and it formed the basis of a regulated price for capacity.
Prices have fluctuated since the first price of $150,000 was set when the market was deregulated in 2006; that was in place until 2008 when the MRCP was set at $122,500, then to $142,200 for 2009-10, $173,400 for 2010-11, $164,400 for 2011-12 before it jumped to $238,500 for 2012-13 and at its highest $240,600 in 2013-14.
No price fluctuation has ever been as dramatic as the proposed 31 per cent drop though.
The MRCP is established by evaluating the cost to develop a 160-megawatt open-cycle gas turbine power station in the relevant capacity year and the $74,000 jump between 2011-12 and 2012-13 was attributed by the IMO to a $45,300 increase in transmission cost estimations.
The IMO’s transmission cost estimations for the year 2014-15 were cut by 14 per cent and Mr Dawson said that was due to the adoption of Western Power’s weighted actual costs rather than estimated costs for transmission.
So far the majority of anecdotal feedback to the IMO has been in relation to the estimations of funding costs for projects.
“I think there was some comment made from the industry with regard to the value of the WACC – weighted average cost of capital,” he said.
“Given the financial turmoil, some of our participants questioned that component of the calculation and we are in the process of providing an opportunity for those participants to meet with the organisation that gave us advice on that.”
Asked whether the cuts to the MRCP would lead to fewer power projects coming online, Mr Dawson said there were myriad issues affecting the number of projects, like the carbon tax, volatile markets, access to the grid and fuel supplies and securing finance.
The IMO will lodge its final price with the Economic Regulation Authority by the end of January and will take submissions from industry on the draft price until the middle of the month.
Mr Dawson said that unless something in the assumptions used in the calculations and incorporated in the MRCP materially changed, it was unlikely the final price would alter from the draft.
“Currently, the markets are pretty much in turmoil, so there is always a risk that things change. We would like to think they weren’t going to change, but there has been significant change since last year so you couldn’t discount the possibility of further change, up or down,” he said.
