New compensation framework for electricity spot market suspension events open for comment

The Australian Energy Market Commission (AEMC) has proposed a draft rule which amends the National Electricity Rules (NER) to introduce a new framework to compensate market participants who incur loss during a suspension of the electricity spot market (which is the centrepiece of the National Electricity Market (NEM)).

The rule proposed by the AEMC's draft rule determination for the proposed Participant Compensation Following Market Suspension Rule is intended to remove the incentive for generators to await direction from the Australian Energy Markets Operator (AEMO) rather than voluntarily participating when prices are too low during a market suspension event to cover a generator's costs.

The AEMC is seeking submissions from stakeholders on the new compensation framework by 4 October 2018.

When is the electricity spot market suspended?

AEMO can suspend the spot market when:

• a black system event occurs;
• it is directed to do so by a jurisdiction in a state of emergency; or
• it determines that it has become impossible to operate the market in accordance with the NER (eg. due to a major IT failure).

Such suspensions don't happen very often – in fact, they have only occurred twice since the NEM commenced in 1998. However, the most recent suspension in September-October 2016 following a black system event in South Australia resulted in the SA region of the NEM being suspended for nearly two weeks.

How are prices currently set when the spot market is suspended?

When the market is suspended, AEMO currently has two options for setting electricity and ancillary service prices. If possible, prices are to be set using normal dispatch pricing. If AEMO considers that it is not practicable to operate normal dispatch pricing, then prices will be set by the Market Suspension Pricing Schedule (MSPS) (which is based on average prices in the preceding four weeks).

The NER does not provide compensation to market participants for losses incurred during a market suspension when the MSPS applies. As prices in the MSPS are known in advance, generators who are not willing to supply at those prices may withdraw or reduce their availability for dispatch, allowing them to seek compensation if later directed by AEMO. If directed by AEMO to provide services, a generator will receive compensation at the 90th percentile of spot prices or ancillary service prices in the previous 12 months.

Key features of the Participant Compensation Following Market Suspension draft rule

The new compensation framework set out in the draft rule is intended to apply when prices are set by the MSPS. It is intended to incentivise generators to voluntarily provide services during a market suspension. The key features of the draft rule of which you need to be aware include:

1. Eligible Claimants: Eligible Claimants for compensation would be scheduled generators or ancillary service providers (which are also scheduled generators), as these are the participants who would typically be directed by AEMO in the event that they did not provide services voluntarily.
2. Automatic compensation: The framework sets out that an Eligible Claimant who provides services during an MSPS period is automatically entitled to compensation if the prices in the MSPS are not sufficient to cover its estimated costs.
3. Calculating compensation: Estimated costs would be determined by AEMO using a benchmark value (based on the average short run marginal costs for scheduled generators in each category and region), accompanied by a 10% premium to account for discrepancies between estimated and actual costs.Where the estimated costs exceed revenue earned by the generator under the MSPS, compensation is automatically paid to cover the gap.It should be noted that compensation is limited to direct costs, and excludes loss of revenue.
4. Additional compensation: Where automatic compensation is insufficient to cover an Eligible Claimant's direct costs of participating in the market, a claim for additional compensation can be lodged with AEMO.
5. Interaction with direction compensation: If AEMO is required to direct an Eligible Claimant to provide services during the MSPS period, the compensation automatically paid will be based on the MSPS compensation framework, rather than the directions framework.This is designed to reduce the risk that participants will withdraw and await direction in order to maximise the amount of compensation they can claim (compensation is higher under the direction compensation framework).

If you are an electricity generator…

If you are a scheduled generator, you will be impacted by these proposed changes. As a result of the draft rule, there will no longer be an incentive to await direction from AEMO during a MSPS period, because you will not have access to direction compensation (even if directed by AEMO to provide services). The only available compensation to scheduled generators during an MSPS period will be through the new compensation framework, which will automatically apply when the prices in the MSPS are too low to cover your direct costs.

Non-scheduled generators will not have access to the new compensation framework. This recognises that AEMO has only ever directed scheduled generators. Accordingly, if directions are issued to non-scheduled generators during an MSPS period, they would be entitled to be compensated for their services in accordance with the directions compensation framework. However, in the unlikely event that a non-scheduled generator incurs a loss during an MSPS period (and has not been directed by AEMO) they will not be entitled to any compensation under the new framework.

If you are an electricity consumer…

The draft rule seeks to strike a balance between incentivising generators to voluntarily participate during a market suspension, and managing the impacts on consumers. AEMO considers that the draft rule will contribute to achieving the National Electricity Objective by promoting the reliability and security of the electricity market. Ultimately, however, the cost of compensation payments is recovered from market customers (ie. electricity retailers) so ultimately it will be electricity consumers who will bear the costs of compensation payments under the draft rule.

The next steps to finalising the Participant Compensation Following Market Suspension draft rule

4 October 2018 is the deadline for written submissions on the new compensation framework.

If you want to better understand the potential impact of the draft rule on your organisation's business or you require assistance in preparing a submission, please get in touch.