The Reserve Capacity mechanism is intended to ensure that the South West Interconnected System has adequate installed capacity available from generators and demand-side management options at all times in order to:
- Cover expected system peak demand, including additional capacity to cover the failure of the largest generator on the system and a capability to respond to frequency variations.
- Remove the need for high and volatile energy prices in the Wholesale Electricity Market.
The Australian Energy Market Operator (AEMO) administers the Reserve Capacity mechanism.
A Benchmark Reserve Capacity Price is set for each Capacity Year and determines the expected cost of new entrant peaking plant and other costs required to establish plant capable of supplying electricity to the South West Interconnected System. The ERA is required to review AEMO's report that proposes a revised value for the Benchmark Reserve Capacity Price. As part of this review, the ERA is only required to consider if the revised value reasonably reflects methodology specified in the Wholesale Electricity Market Rules and whether an adequate public consultation process has been conducted.
The Benchmark Reserve Capacity Price was renamed from the Maximum Reserve Capacity Price as a result of amendments to the Market Rules that commenced on 1 July 2016 as part of the Electricity Market Review.