Scarcity pricing
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What is scarcity pricing?
Electricity supply and demand must always be in balance to maintain quality of supply to consumers. At extremely rare times, there may not be enough generation to meet the level of demand on the power system. Price signals for these periods are known as scarcity prices.
If the system operator forecasts a potential shortfall of supply, they will communicate ahead of time to encourage immediate responses to the emerging situation. The associated forecast high spot prices in the market schedules also provide a strong signal to incentivise immediate responses. Electricity prices on the spot market (including forecast spot prices) reflect the supply and demand balance and will be very high during periods of extremely tight supply.
If there is still not enough supply in real time, the system operator will act to reduce energy demand to the level that can be supplied. This involves instructing lines companies to shut off supply to some customers and is known as emergency load shedding.
However, when energy demand is reduced, spot prices will fall to more ‘normal’ levels as a new demand-supply balance is reached. This fall in spot prices weakens the signal to generators and consumers to invest in new resources to better manage future demand peaks.
This is where scarcity prices come in – by holding spot prices higher for the relevant period – to maintain the price signal and provide incentives to invest to manage future scarcity situations.
How does scarcity pricing work?
Scarcity prices are set high to provide important price signals to maintain a stable and reliable electricity system.
| Horizon | Price type | Incentive | Desired outcome |
|---|---|---|---|
Short term |
Forecast prices (up to one week ahead of real time) |
To encourage generators and batteries to increase offers of energy and reserves for the peak to maintain the balance of supply and demand To encourage spot-exposed consumers to reduce or shift their electricity usage away from peak |
To avoid emergency load shedding and ensure there is enough electricity to meet consumer needs |
Short term |
Real time and final prices |
To incentivise last-resort resource to respond to scarcity price signals |
To prevent prices from collapsing when emergency load shedding occurs to:
|
Long term |
Historic prices |
To signal to the market the need for more investment in flexible capacity such as demand response, batteries and fast-start generation |
To maintain a reliable electricity supply in the long term |
Scarcity pricing is automatically applied in the market schedules when there is not enough generation or instantaneous reserve offered into the market to meet the forecast demand (or actual demand in the case of the dispatch schedules).
The prices for different levels of scarcity are defined in the Code (see Part 13 of the Code, Clause 13.58AA).
Principles and implementation
More information on the rationale for the original mechanism for scarcity pricing implemented in 2013 can be found at: Scarcity pricing and related measures – proposed amendments to the Code.
Watch our webinars to learn more about scarcity pricing principles and how their implementation changed with the introduction of real time pricing in 2022.