In response to a request for advice from the Council of Australian Governments’ (COAG) Energy Council , the AEMC has published its final report on the National Electricity Market (NEM) financial market resilience review. The final report’s recommendations will now be considered by the COAG Energy Council.

The Commission recommends a range of measures to improve the resilience of the NEM be progressed by the COAG Energy Council. Further work is also proposed to be undertaken by jurisdictional energy departments in consultation with Commonwealth, state and territory treasuries.

Final recommendations

In undertaking this Review, the Commission identified that the failure of a large participant in the NEM with a significant retail customer base could have significant flow-on effects to other participants. This could threaten the financial stability of the NEM, result in disruptions to consumers, and affect public confidence.

In response to this finding, the Commission recommends the COAG Energy Council implement new measures to improve the market's ability to manage and respond in the event of the failure of a large market participant, including:

• managing the response to such a failure from a single decision making point, with decisions made by the Chair of the COAG Energy Council, in close cooperation with State and Territory energy ministers; and
• that decision making be supported by the provision of co-ordinated advice by relevant market regulatory bodies.

The Commission also recommends the COAG Energy Council implement  changes to existing arrangements to:

• enable the Retailer of Last Resort (ROLR) Scheme to be more effective in a broader range of circumstances when a retailer fails; and
• clarify the framework in which the Australian Energy Market Operator may not suspend a participant. This may assist in maintaining financial stability in the NEM where a participant is under external administration and its generation assets are allowed to continue operating.

The Commission has published a drafting paper setting out the changes required to the National Energy Retail Law and National Electricity Rules to implement these changes to the existing arrangements.

Further work to be undertaken by jurisdictional energy departments and treasuries

It is also recommended that COAG Energy Council request jurisdictional energy departments undertake further work, in consultation with Commonwealth, state and territory treasuries, to develop the design of alternative arrangements to the ROLR Scheme that could apply in the event of a large participant failure. This would involve a form of special administration or management and would increase the options available to effectively manage the consequences of a large participant failure.

Benefits of the final recommendations

The focus of the Commission’s recommendations is to minimise disruptions to consumers and maintain financial stability in the NEM and public confidence if a participant fails, rather than preventing an individual participant from failing or leaving the market. These recommendations would enable more timely, proportionate and suitable decisions to be made when a risk to the financial stability of the NEM arises.  

Advice on G20 reforms for OTC contracts

The COAG Energy Council also asked the AEMC to provide advice on the potential application to electricity market participants of the Group of 20 (G20) measures for over-the-counter (OTC) electricity derivative contracts.

The AEMC considers that currently the case for implementing the G20 OTC derivatives reforms for electricity market participants operating in the NEM has not yet been made when considered against the National Electricity Objective.

Background to the Review

Advice requested by COAG Energy Council

In June 2012, the COAG Energy Council requested that the AEMC provide advice on the following issues:

• the risks to financial stability in the NEM arising from financial interdependencies between market participants;
• whether the existing mechanisms to mitigate risks to financial stability in the NEM are adequate; and
• if necessary, options to strengthen existing  mechanisms  and minimise the identified risks and their consequences.

AEMC’s process over the Review

The COAG Energy Council's request for advice has been approached in three main stages over the course of the AEMC’s Review:

• Stage one focussed on risks that could arise if a large retailer experienced financial distress and triggered the operation of the ROLR Scheme.

Further information on stage one is detailed in the issues paper, the stage one options paper and the first interim report.

• Stage two examined other potential sources of financial instability in the NEM to assess whether there are any material potential risks to the stability of the NEM arising from financial interdependencies between market participants.

Further information on stage two is set out in the stage two options paper.

• Stage three brought together the analysis outlined in stages one and two and  set out the AEMC's advice in relation to the potential risks to financial stability in the NEM and recommendations to improve the resilience of the NEM to manage and respond to the financial distress and failure of participants.

The AEMC’s draft advice and recommendations for stage three were set out in the second interim report.  The AEMC also published a paper setting out some of the major regulatory reforms that have occurred in the financial sector since the global financial crisis and the implications of this for the AEMC’s advice.

The AEMC’s final report sets out the AEMC's final advice and recommendations after considering stakeholder views on the second interim report.