Wholesale Pricing Explained

1. What is wholesale contract regulation in Tasmania?

Electricity is sold by generators to retailers on the wholesale National Electricity Market. However, to manage market risks, generators and retailers enter into short, medium and long term financial contracts. Under the Tasmanian wholesale contract regulatory framework, the Tasmanian Economic Regulator regulates a number of electricity contracts that Hydro Tasmania must offer to sell to other electricity market participants. Hydro Tasmania can also offer unregulated contracts.

Regulation includes the setting of maximum prices that Hydro Tasmania can charge for these regulated contract products. Under the Wholesale Contract Regulatory Instrument, Hydro Tasmania is required to:

  • offer to retailers operating in Tasmania a number of contract products that are broadly consistent with the standard products offered in the National Electricity Market;
  • offer standard terms and conditions for each regulated contract product;
  • offer these contract products at prices that are produced from an approved pricing methodology; and
  • make available sufficient volume of the regulated contract products to enable retailers operating in Tasmania to adequately manage the wholesale spot price risk associated with their Tasmanian customers.

2. How does wholesale contract regulation affect the price I pay for electricity?

Wholesale electricity purchase costs make up one component of the end price paid by customers, either through regulated standing offer contracts or market contracts. Other components include networks costs, retail costs and costs of renewable energy policies. Wholesale contract regulation ensures a maximum regulated price for wholesale financial contracts, which places a limit on the effect of wholesale energy costs on the end price of electricity paid by customers.

3. What does wholesale contract regulation mean to small customers

Electricity wholesale costs flow through to the end price paid by all electricity customers. These costs flow through to both market contract prices and the regulated standing offer prices that are available to small customers that choose not to enter into a market contract. Wholesale contract regulation places a limit on the effect of wholesale energy costs on the end price of electricity paid by customers. All other regulated terms and conditions designed to protect small customers are maintained and are not affected by wholesale contract regulation.

4. Why regulate wholesale contracting in Tasmania?

No other National Electricity Market (NEM) jurisdiction is quite like Tasmania in terms of the reliance on hydrological inflows for the generation of electricity. Similarly, in no other NEM jurisdiction is a single company responsible for such a significant proportion of all generation output within the region, with control of interconnector (Basslink) flows, and is the dominant counterparty for wholesale contracts.

Hydro Tasmania's market position presents a number of potential risks to retailers, which are unique to the Tasmanian region of the NEM. While there is no evidence to date which shows Hydro Tasmania has used this unique market position to its advantage, it may create a perception that wholesale market risk is higher in Tasmania than in other NEM regions, which may deter the entry of some private sector retailers into the Tasmanian market.

Wholesale market regulation has been introduced to provide confidence to retailers that the risks in Tasmania are no different from other states.

5. Why regulate wholesale contracts instead of actual wholesale prices?

Wholesale prices in the National Electricity Market (NEM) are determined periodically based on available generation capacity and electricity usage by customers. The market process determines which generators produce electricity and therefore determines actual physical flows of energy to ensure that demand is met and system security is maintained.

In this environment, where the wholesale market determines actual system outputs, it is not considered feasible to regulate wholesale electricity prices directly.

Regulating wholesale financial contracts is consistent with the use of those contract products by retailers as the main form of risk management across the NEM. It is important to ensure consistency with current NEM practices so that the risks to market participants of operating in the Tasmanian market are no greater than those in other jurisdictions in the NEM.

6. What is the Regulator's role in wholesale contract regulation?

The Tasmanian Economic Regulator is responsible for:

  • administering wholesale contract pricing, including monitoring Hydro Tasmania's compliance with the Wholesale Contract Regulatory Instrument and investigating Hydro Tasmania for suspected non-compliance if necessary;
  • investigating and determining future wholesale contract pricing instruments (the first instrument was made by the Minister for Finance); and
  • collecting a range of information from Hydro Tasmania, and making public some of this information, to support the operation of the wholesale contract regulatory framework and the development of full retail competition more broadly.

7. What powers/functions does the Regulator have under the wholesale contract regulatory framework?

The Electricity Supply Industry Act 1995 provides extensive powers for the Regulator in relation to wholesale contract market regulation. For example, the Act provides for the Regulator to investigate Hydro Tasmania's compliance with the Wholesale Contract Regulatory Instrument. The Regulator may take responsibility for determining the prices for regulated contracts in the event that Hydro Tasmania is non-compliant. The Regulator also has existing powers to obtain any information from Hydro Tasmania that the Regulator considers necessary to administer the wholesale contract regulatory framework.

8. When did wholesale contract regulation commence in Tasmania?

1 January 2014.

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