[SMM Analysis] Western Australia Economic Regulation Authority Determines Peak and Flexible Benchmark Reserve Capacity Prices for 2027/28

The Economic Regulation Authority (ERA) of Western Australia recently announced the peak and flexible Benchmark Reserve Capacity Prices (BRCPs) for the 2027/28 period, set at AU$360,700 per MW per year, approximately US$224,898. This pricing strategy is a key component of the Western Australian electricity market, aimed at ensuring the South West Interconnected System (SWIS) has sufficient installed capacity to meet electricity demand.

The BRCP and Reserve Capacity Prices are part of the Reserve Capacity Mechanism (RCM) in the Western Australian Wholesale Electricity Market (WEM), designed to ensure that SWIS has adequate installed capacity to meet electricity demand. The RCM provides price signals to capacity providers, such as generators, incentivizing them to enter the market and provide capacity. Revenue from providing capacity, combined with income from electricity generation and essential system services, delivers overall returns to investors.

In determining the BRCP, the ERA followed the scale and type of generator defined in the market procedure, as well as the methodology for calculating the BRCP. The 2027/28 BRCP is based on the cost estimation of constructing and connecting a hypothetical 160 MW open-cycle gas turbine (OCGT) generator to the SWIS.

When determining the 2025 BRCP, the ERA considered factors such as debt risk premium, corporate tax rate, and the Weighted Average Cost of Capital (WACC). The indicative nominal pre-tax WACC for the 2025 BRCP is 10.10%, higher than the 9.54% for the 2024 BRCP. This increase reflects the shift from gas turbine technology to battery energy storage systems (BESS), which involve higher risk levels and require higher returns.

This decision by the ERA will have profound implications for Western Australia's electricity market, particularly in terms of technology choices and investment returns. As the transition from gas turbines to battery energy storage systems progresses, market participants will need to reassess their investment strategies to adapt to the new market environment.

The peak and flexible Benchmark Reserve Capacity Prices set by the ERA for the 2027/28 period not only provide clear price signals for the electricity market but also ensure the security and sustainable development of Western Australia's electricity supply.

SMM New Energy Industry Research Department

Cong Wang 021-51666838

Xiaodan Yu 021-20707870

Rui Ma 021-51595780

Ying Xu 021-51666707

Disheng Feng 021-51666714

Yujun Liu 021-20707895

Yanlin Lü 021-20707875

Zhicheng Zhou 021-51666711

Haohan Zhang 021-51666752

Zihan Wang 021-51666914

Xiaoxuan Ren 021-20707866

Yushuo Liang 021-20707892

Jie Wang 021-51595902

Yang Xu 021-51666760

Boling Chen 021-51666836