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Western Australian vs National Electricity Market – Different Rules Same Challenges

I'll get over you, I know I will

I'll pretend my ship's not sinking

And I'll tell myself I'm over you

'Cause I'm the king of wishful thinking

(King of wishful thinking)

I am the king of wishful thinking

Go West, 1990

They like to do things differently over in Western Australia compared to the rest of the country. While most people focus on daylight savings or Sunday trading hours, it doesn’t stop there, the WA electricity system is also completely different.

By population, the WA electricity system is dominated by the South West Interconnected System or SWIS. This grid covers Perth and the surrounding region going as far east as the goldfields. However, as the chart below shows, it actually only covers a small portion of the state (by area) with the smaller towns and regional centers outside the SWIS on microgrids provided by Horizon Power (a state-owned entity that is responsible for electricity delivery outside the SWIS). Beyond town power the Pilbara mining operations are substantial load centers in their own right so have onsite generation.

The SWIS has no interstate links – the sheer distance from Perth to SA, and the resultant line losses, make interstate links uneconomic.

Geography aside the key players in the WA electricity market are:

  • Western Power: the sole transmission and distribution provider (eg poles and wires). They control grid connections and are regulated by the Economic Regulation Authority ( the equivalent of the AER in the NEM)

  • Synergy: a WA Government owned electricity retailer. They are the largest owner of generation in WA with circa 50% of generation capacity. They have an effective monopoly over residential customers (100% market share) and serve more than 50% of small business customers. They are the largest retailer by a country mile.

  • AEMO – market operator same as for NEM but under different rules.

The biggest difference between the WEM and the NEM is capacity payments. The capacity market mechanism is focused on ensuring there is sufficient generation (capacity) to meet peak demand. Under the WEM rules, generators have two principal income streams rather than one (plus LGCs for renewable projects). Projects earn capacity credits based on an assessment of the dispatchable capacity they provide to the grid. For traditional fossil fuel fired generators, these credits are issued on a 1 credit for 1MW of capacity basis. For renewable generators, it is more complicated. Renewable generators are issued capacity credits on a proportionate basis based on an assessment of the correlation of their output with periods of peak demand. This is estimated by looking at the average level of generation by that generator over the last five years during the 12 highest half hour periods of demand for “Load for Scheduled Generation”. This is defined as underlying electricity demand net of supply provided by intermittent generation (ie wind and solar).

By definition, periods of high load net of renewable generation tend to occur at periods of low renewable generation. For example, the relevant time periods in 2021-22 were all between 5:30pm and 7pm in summer (December, January and February). The result of this is that wind and solar generators get relatively small amounts of capacity credits. For example, the 40 MW Greenough River solar farm was only issued 4MW of capacity credits for the 2023-24 years, and the 22MW Collgar wind farm was issued 25MW of capacity credits for the 2023-24 year. Capacity credit issuance for renewable generators has trended down over time and, so represent a small revenue stream for renewable generators. By contrast, there are number of gas peaker projects whose principal revenue source is capacity credit payments and only operate extremely rarely.

Generators that receive capacity credits can sell these credits for capacity credit revenue. The price of each credit is set in two stages. The first step is the benchmark capacity credit price – which is the notional revenue required to sustain capex and fixed opex for a benchmark 100MW gas fired peaker. This is calculated by the WA Economic Regulation Authority each year. The second stage focuses on the number of capacity credits issued compared to the target level of capacity sought by AEMO given demand forecasts. This works through the application of a sliding scale. If actual capacity exceeds target capacity, the capacity price falls and if there is 10% excess capacity the actual capacity credit price is reduced to half of the benchmark price. Conversely, if target capacity is higher than actual, then the maximum actual capacity credit price is 1.3x the benchmark price. This results in capacity credit revenue that is highly sensitive to excess capacity. Historically actual capacity credits have average 26% below the benchmark price over the last 15 years (see chart below).

In summary, under the WEM rules, capacity credits provide a direct compensation for dispatchable capacity and the design of those rules has been structured to favour fossil fuel plants, and more recently, batteries.

The other half of the market design is the spot price for electricity (called the balancing price in the WEM compared the pool price in the NEM). The balancing price is determined on a half hourly basis in a broadly similar fashion the NEM. The key difference is that while the NEM spot price can vary between minus 1,000/MWh and $14,700/MWh, the WEM balancing price is capped between minus 1,000/MWH and $324/MWh. The net of this is that maximum prices in the WEM are massively lower than the NEM. This reduces any opportunity for generators to earn large amounts of revenue from dispatching at rare peak price events. In theory, generators are compensated for their capacity via the capacity credit mechanism, and the pool price is more focused on providing a reward for marginal operating costs.

The chart below shows the frequency histograms on NEM pool prices vs WEM balancing prices over the 12 months to May.

The histograms highlight that WEM price outcomes are much more clustered than for the NEM, with no long right tail of rare but very high price outcomes. The table below further draws out the differences. In simple terms, WEM balancing prices are:

  • Lower, both on average and for the evening peaks

  • Less right skewed




Average Price



Bottom Quartile



Top Quartile



Top 5%



Simple average 9am - 3pm



Simple average 6pm - 8pm



there are a few other notable differences between the WEM and the NEM, including:

  • single policy framework. Like it or hate it, a key advantage of the WEM is that there is a single government that makes the rules and owns the key players (Western Power and Synergy). This avoids the mish mash of different State Government and Federal Government influences in the NEM.

  • Cheap gas. Under the arrangements that underpin the various North West shelf gas export facilities, there is an obligation for gas exporters to reserve gas for domestic users (and gas fired generation is a large share of the fossil fuel fired segment of the electricity market). These reservation policies effectively provide relatively large volumes of cheap (by east coast standards) gas for electricity generation. The rules for the WEM have been built around gas fired generators (e.g. full entitlement to capacity credit revenues).

  • Expensive coal. While there is currently significant coal fired generation in WA it is in a fundamentally different competitive position compared to east coast coal. WA coal has been unprofitable versus gas for some time (for example, Bluewaters Power Station has been in financial difficulties for a number of years). This is driven by a poorer coal resource in WA. For example, there is no coal export industry in WA, currently the only coal mined in the state is for power generation. The WA Labor government has a plan to shut all coal plants by 2029 but it could happen more quickly given the commercial pressures on these operators – see below.

  • Rooftop generation. While grid scale solar is a very small market segment in the WEM, with only a handful of solar farms in the state, residential rooftop solar is massive, partly driven by relatively high electricity prices and favourable feed in tariff regimes. The growth in rooftop solar is expected to result in forecast minimum demand going negative (ie during periods of minimum demand, all electricity requirements could theoretically be met with just rooftop solar with no need for any grid scale fossil fuel fired or utility scale renewable generation) by 2026-27. For example, see below for the latest forecast of minimum demand from AEMO’s statement of opportunities report for WA.

The key issues for renewable investors in the WEM is the coal shutdown. The existing coal fired generation in the WEM is likely to be shut relatively. The WA government is trying to manage this process from an electricity system stability perspective, as well as trying to deliver an orderly and just transition for the workers involved. This is part of the reason behind the flood of battery announcements in WA over the past few months.

However, for renewable investors, how this is managed and the consequences for electricity prices are critical. A key point to watch is that every time that a government steps in and provides direct subsidies outside of existing market frameworks, those interventions result in lower revenues and reduced incentives to invest for every existing market participant who doesn’t benefit from those subsidies.

Thus, while government intervention can be well intentioned and directed at real problems, it can often spill over into other areas causing unintended consequences. Within this issue, a key market to watch is the capacity credit market. There will be a substantial exit of existing capacity credit owners as part of the coal shutdown. If mobilising capital to replace this capacity requires subsidies outside of the capacity credit mechanism, that would be a sign to me that that mechanism isn’t working as intended.

This brings me to my last point – the WEM interventions provide important analogues for the NEM (and many other electricity markets globally). There are a range of interventions in play or mooted for the NEM right now – e.g. the LTESAs in NSW, recreated the SEC in Victoria, Offshore wind in NSW and VIC, the Federal Government’s Capacity Investment Scheme and the Rewiring the Nation program. All policies have good intentions behind them, but there will be a range of unintended consequences with winners and losers.

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