SO Information Sheet
Shortage Situations and
Scarcity Pricing
SO Document ID: GL-SD-417
Version
Date
Change
1.0
19/11/2014
Initial Issue
2.0
26/5/2017
General Update
Position
Prepared By:
Hamish McKinnon
Reviewed By:
Murray Henderson
Date
IMPORTANT
Disclaimer
The information in this document is provided in good-faith and represents the opinion of Transpower New Zealand
Limited, as the System Operator, at the date of publication. Transpower New Zealand Limited does not make any
representations, warranties or undertakings either express or implied, about the accuracy or the completeness of the
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Transpower New Zealand Limited reserves all rights, in its absolute discretion, to alter any of the information provided
in this document.
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Address:
Transpower New Zealand Ltd
96 The Terrace
PO Box 1021
Wellington
New Zealand
Telephone:
+64 4 495 7000
Fax:
+64 4 498 2671
Email:
[email protected]
Website:
http://www.transpower.co.nz
SO Information Sheet: Shortage Situations and Scarcity Pricing
1 WHAT IS SCARCITY PRICING?
Scarcity Pricing is an Electricity Authority initiative to ensure prices are not inefficiently low during
periods of shortage of generation capacity in the wholesale market. Prior to the introduction of
Scarcity Pricing, if a shortage of generation lead to demand management (involuntary load reduction),
the market price calculation remained on the same basis as non-shortage situations; pricing was
determined using the metered load (electricity used). Consequently, a possible market outcome was
price suppression and the price might not adequately reflect the shortage of supply in the market.
Scarcity Pricing addresses this anomaly by introducing a price floor and ceiling to signal the cost of
involuntary load shedding.
This document describes the process by which a Scarcity Pricing situation could eventuate, starting
with the development of a Shortage Situation. It also discusses how the system operator (SO)
manages the power system in real time. If a situation develops that requires load curtailment then the
SO will declare a Shortage Situation. The Pricing Manager then invokes the Scarcity Pricing function
to adjust final prices.
1.1 SHORTAGE SITUATIONS
The system coordinators declare a Shortage Situation if the SO has issued an island-wide instruction1
to disconnect load. It can result when an island power system is operating near generation capacity
and there is insufficient generation available to meet demand for energy and/or reserves. During
normal operation, the system coordinators take steps in real time to mitigate the shortage of
generation, such as sending Warning Notices2 (WRN) and Standby Residual Check3 (SRC) notices to
inform the market and request more offers.
The coordinators can take operational measures to manage the balance between generation and
load, such as re-dispatching frequency keeping reserve providers if a frequency keeping constraint is
constraining-off potential generation. In extreme situations, system coordinators can instruct network
companies and directly connected loads to switch off or reduce load (manage demand).
An Island Shortage Situation can result from two scenarios, described below.
The system coordinators typically become aware of a developing shortage situation from analysis of
the relevant NRSL (particularly the 04:00 for the morning peak and the 14:00 for the evening peak). In
these events the coordinators will consider parameters such as:

The possibility of generators tripping off (due to sustained low frequency)
“Island wide instruction” reflects the ability for load reduction anywhere in the affected island to
alleviate the shortfall. This determination is made on a best endeavours basis. Additionally the “Island
wide instruction” may not be literal in all instances; the load shed may be less equitably instructed for
operational expedience.
2 Warning Notices are sent by the system coordinators to notify the market of a situation which may
develop into a Grid Emergency without changes to participant behaviour e.g. increasing energy and
reserve offers.
3 The Standby Residual Check is a security forecasting tool. It calculates the expected shortfall in
energy and reserve following an event to allow the coordinators to re-dispatch the system to a secure
state (i.e. a full complement of reserves). Notices are automatically sent if capacity shortfall is greater
than 100 MW or energy shortfall is greater than 1 MW.
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SO Information Sheet: Shortage Situations and Scarcity Pricing



The potential effect of load bids4 reducing demand (differences between NRSL and PRSL or
NRSS and PRSS)
Changing the frequency keeper if the current provider is constraining-off available generation
The possibility of transient load peaks within a trading period.
System coordinators will attempt to signal a developing shortage situation to the market by:


Issuing WRN and SRC notices
If a potential shortage situation persists, a Grid Emergency (GEN) can be declared enabling
changes to offer quantities within the gate closure period.
The coordinators will attempt to maintain a surplus of 50 MW over and above the frequency keeper
band.
4
Depending on the extent of the shortage and whether the shortage is in energy or reserve offers,
demand may be managed if there is either an energy shortfall and eroding system frequency, or there
are insufficient reserves available to cover the ECE risk. If demand has been managed island-wide,
the coordinators will declare an Island Shortage Situation (ISS). When there is sufficient generation
available to restore all the managed demand, the coordinators will declare the ISS has ended.
Contingent events (CE) are defined events in the Electricity Industry Participation Code (‘the Code’)
for which reserves are procured. Examples of a CE include the loss of the largest generator currently
operating, or a HVDC pole. An extended contingent event (ECE) (AUFLS event) is the loss of both
HVDC poles or a bus with multiple generating units.
Following an event of sufficient magnitude, interruptible load reserves (IL) and automatic underfrequency load shedding (AUFLS) may operate in order to arrest a fall in frequency. The system
operator may set the Reserve Adjustment Factors5 (RAFs) to zero in order to re-dispatch the power
system without reserve procurement. An island shortage situation may result if there is insufficient
generation available to meet island load following a CE or ECE. In this case, the System Operator
undertakes island-wide demand management to allow the load which tripped under IL or AUFLS to be
restored, within the limits of each participant’s demand allocation.
Once there is sufficient generation available to allow the power system to be re-dispatched to n-1
security the system coordinators declare the Island Shortage Situation ended.
The decision to manage demand at the island or national level is made by the system coordinators. It
is determined based on whether the HVDC link is constrained or not. For example, if there is a
shortage in the North Island, South Island load could be shed if the HVDC is unconstrained and more
electricity can flow from the South Island to the North Island. In this case, a national shortage situation
will be declared. If the HVDC was constrained and (for a North Island shortage) reducing South Island
demand wouldn’t help, then an Island Shortage Situation would be declared for the North Island.
4
Both non-conforming load (NCL) bids and difference bids. Only bid quantities (not prices) are used
for the NRS schedules. Difference bids are excluded entirely from the NRS schedules.
5 RAFs are effectively a binary on/off switch for the scheduling of reserve in the schedules.
SO Information Sheet: Shortage Situations and Scarcity Pricing
1.2 SCARCITY PRICING SITUATIONS
Following a Shortage Situation the Pricing Manager determines whether a Scarcity Pricing Situation
has existed. A Scarcity Pricing Situation requires:



An Island Shortage Situation to be declared by the System Operator
No binding constraints exist in the island in which the ISS was declared (excludes HVDC)
Either the HVDC link is in service and prices are concordant with flow (e.g. Benmore prices
less than Haywards for northward flow), or the HVDC link is out of service
If a Scarcity Pricing Situation exists the Pricing Manager will calculate the generation-weighted
average price (GWAP). If the GWAP sits below the floor of $10,000/MWh or above the ceiling of
$20,000/MWh a scaling factor must be calculated to move the GWAP to the closest bound. The
scaling factor is then applied to energy and reserve prices. The scaled prices become the interim
prices.
The scaling factor calculation is applied on an island or national basis as per the determination of the
Scarcity Pricing Situation. It is also independently calculated for each trading period in which a
Scarcity Pricing Situation exists.
A Cumulative Price Threshold exists so that if the average GWAP for the previous week (336 trading
periods) is greater than $1,000 per megawatt-hour, Scarcity Pricing is not applied.
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SO Information Sheet: Shortage Situations and Scarcity Pricing
1.3 FURTHER INFORMATION
The Scarcity Pricing Code Amendment was made on 26 October 2011. The substantive Code
provisions are found in:



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Part 8 Schedule 8.3 Technical Code B, which defines the Island Shortage Situation
Part 13 clauses 13.135A – 13.135C, which specifies the requirements of the Pricing Manager
to notify a Scarcity Pricing situation and defines the methodology for the Pricing Manager to
follow in this circumstance
Part 13 Schedule 13.3A, which details the calculation of interim prices in a Scarcity Pricing
situation.
SO Information Sheet: Shortage Situations and Scarcity Pricing
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