What is the impact of market intervention?
Comparison of Frequency Co-optimised Essential System Services (FCESS) prices in Western Australia's Wholesale Electricity Market (WEM) pre and post market intervention on 22 May 2024.
Introduction
One of the significant changes introduced into the WEM on 01 October 2023, as part of a wider suite of reforms, was the introduction of FCESS. Alongside new terminology and the addition of a service that valued inertia came the general shift to a more 'market' approach to procuring ESS that, prior to reform, were largely procured through contractual arrangements.
Alongside the introduction of FCESS was the significant increase in associated costs, which have become a much more material portion of total market costs for both consumers and generators, and thrust FCESS prices into the spotlight. To mitigate these cost increases the Minister for Energy intervened and established an interim price cap of $500/MW/h* to apply from the 22 May 2024 to 20 Nov 2024. Intervention is no small feat and the price cap is a reduction in the order of 75% from the previous value of $2,038 - but has it been followed with a proportional decrease in costs for consumers?**
*Or $/MWs/h in the case of the RoCoF Control Service
**Focus of this article is the cost to traditional consumers (i.e. loads) and as such the complete suite of FCESS costs aren't covered, however there is some cross-over with costs to generators which themselves are consumers of sort when it comes to ESS
Regulation Lower
The average time-of-day Market Clearing Prices, which are indicative of generator revenue, for Regulation Lower are compared below. Pre-intervention is considered as 01 Oct 2023 to 22 May 2024 and post-intervention as 22 May 2024 to 01 Oct 2024.
The chart shows minor variations between the two average time-of-day profiles but otherwise pricing appears relatively similar across both periods. A comparison (not shown) of the average Market Clearing Prices further supports this, with an average post-intervention price of around $55/MW/h, a reduction of $5/MW/h from the pre-intervention value.
It is worth noting that for the most noticeable variation between the two periods, the lagging morning climb of the post-intervention price, seems likely a result of seasonal differences more so than market intervention. While the impact of intervention can't be excluded here, this occurence seems a natural outcome of higher morning energy prices in Winter combined with the generally inverse relationship between energy and ESS prices, particularly for lower services.
While it is a key piece of the puzzle the Market Clearing Price is only part of the story as cost recovery isn't as straightforward for ESS as it is for energy. However, with the appropriate inclusions and calculations the cost to consumers before and after intervention is captured below.
Similar to the previous chart, the average time-of-day trends are reasonably consistent between the two profiles albeit with a noticeably higher post-intervention peak in the middle of the day. Overall, the average cost to consumers increased from $3.10/MWh to $3.50/MWh, a counterintuitive outcome considering that the average Market Clearing Price decreased over then same period.
Combined consumer FCESS charges
While Regulation Lower provides some useful observations and insights it doesn't tell the entire story. To understand the total charges borne by consumers the relevant FCESS charges (Regulation Lower, Regulation Raise, Contingency Lower and the minimum offtake portion of RoCoF Control Services - all of which can be seperately viewed in the full report (PDF)) are combined and compared in the below chart.
Again we see trends with more similarities than differences, however the larger post-intervention peak during the middle of the day stands out and is the main driver in an overall increase in average FCESS consumer charges from $10/MWh to $11/MWh.
Ignoring the slight increase, that pre and post-intervention charges remain similar is a surprising outcome when considering that a 75% reduction in the price ceiling is currently in effect - so what explains this?
FCESS uplift payments
Intervention may have reduced the FCESS price ceiling, however it has had no effect on FCESS uplift payments which exist to make an ESS-accredited facility whole in the event that the Market Clearing Price of energy is not high enough to cover their operational costs.
With the exception of August, monthly FCESS uplift payments jumped post-intervention and remain significantly higher than previous levels. This flows through to consumer charges, offsetting any reductions in the Market Clearing Price and resulting in consumers currently paying much the same cost for FCESS as they did before intervention.
Summary
This article seeks to quantify the impact on FCESS costs borne by consumers as a result of market intervention and ultimately to answer the question - are consumers better off as a result of intervention and to what extent?
Given the range of moving parts in the new WEM (eg. rule changes, participant adaptation) and the limitations of this analysis (eg. no seasonal consideration, consumer focus) it doesn't feel appropriate to say that the interim FCESS price ceiling has had no impact at all. For instance, it is entirely possible that it has limited further increases in cost or has been effective for reducing costs to specific Facility classes. However, it is clear that FCESS costs haven't materially reduced for consumers since intervention and it feels safe to say that any change that has occured is unlikely consistent with expectations from a 75% reduction of the FCESS price ceiling.
It is worth pointing out that Energy Policy WA (EPWA) and supporting agencies are currently investigating an array of policy issues and refinements. One such example is the FCESS Cost Review Amendments which seeks to entirely remove the FCESS uplift payment from the RoCoF Control Service market and, like all things new WEM, that means this landscape is likely to continue to evolve.
To check out the full suite of charts you can download the full report (PDF).
