Scarcity pricing

What is scarcity pricing?

Electricity supply and demand must always be in balance to maintain quality of supply to consumers. At rare times, there may not be enough generation to meet the level of demand on the power system. At these times, the system operator will take action to reduce demand to the level that can be supplied. This is known as emergency load shedding.

However, as soon as demand is reduced, without any further intervention, the market prices will fall to more ‘normal’ levels removing the signal to generators and consumers to invest in new resources to meet the increased level of demand in the future.

The economic and market rationale for scarcity pricing is discussed in our consultation to update the scarcity pricing settings.

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.

The scarcity pricing settings in the Code, as implemented in the system operator’s market system, ensure that:

• scarcity situations are accurately reflected in forecast schedule pricing to incentivise immediate responses to an emerging shortage situation
• final prices are representative of the actual grid conditions at the time and efficient investment signals are preserved for the long-term benefit of consumers.

How does scarcity pricing work?

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). These prices increase, as the level of scarcity increases, to reflect the worsening situation on the power system.

Principles and implementation

Watch our webinars to learn more about scarcity pricing principles and implementation.