The case for a new capacity mechanism in the UK electricity market--Lessons from Australia and New Zealand

The UK Government plans a capacity mechanism to ensure sufficient reserves as the share of intermittent generation increases. This article reviews the use of last resort capacity mechanisms in two other energy-only markets, Australia and New Zealand. The Australian National Electricity Market has infrequent price spikes up to A$12,500 (£7800)/MWh. Option contracts have supported significant investment in peak capacity. The system operator also has an ability to contract reserve up to 9 months before projected shortfalls. Reserve has been contracted on two occasions but never dispatched. The New Zealand electricity market includes a reserve energy scheme which allows the system operator to contract and dispatch reserve capacity. One plant has been contracted under the scheme. The plant is currently offered into the market at NZ$5000 (£2300)/MWh. In both markets there have been concerns that reserve schemes could reduce the frequency of high prices and damage price signals for peak investment. Following a Ministerial review in 2009 the New Zealand scheme is being closed down and the plant is for sale. The Australian scheme is to be closed down in 2013. This experience raises concerns about the possible impact of a new capacity mechanism in Great Britain.