The AEMC today made a final rule enabling the Australian Energy Market Operator (AEMO) to provide a platform for secondary trading of settlements residue distribution units.

The final rule, which follows a rule change request from Westpac Banking Corporation:

• enables auction participants to offer their previously purchased units for sale at subsequent auctions facilitated by AEMO
• requires AEMO to distribute auction proceeds to either the relevant transmission network service provider (TNSP) or auction participant
• requires secondary sellers to provide a margin at the same time as they submit offers to the auction. In case of a default, AEMO must apply that margin to the amounts owing to AEMO by the defaulting party.
• requires TNSPs to be responsible for any shortfall in auction proceeds payable to the secondary sellers arising from a buyer default.

Enabling AEMO to provide a platform for secondary trading of units will, if implemented, improve liquidity in the market for these units. This improved liquidity is likely to increase interstate trade of electricity, improve risk management and increase competition.

The final rule, which is a more preferable rule, addresses the same issues as Westpac's proposed rule, but takes a different approach in relation to the consequences of counterparty default in the secondary market.

Media: Prudence Anderson, Communications Director, 0404 821 935 or DL (02) 8296 7817

EXPLAINER

Regions of the national electricity market (NEM) have different levels of demand and differently priced generation, which leads to different wholesale prices. Price separation between regions generally occurs when there is not enough interconnector capacity to equalise the spot price flowing from a lower to higher priced region. The difference between the price paid in the importing region and the price received in the exporting region, multiplied by the amount of flow for each interconnector for a trading interval, results in surplus inter-regional settlements residue.

AEMO auctions the rights to a share of this settlements residue on a quarterly basis, which provides auction participants with an additional hedging tool to help manage inter-regional price risk. While secondary trading of previously purchased settlements residue distribution units is not prohibited by the National Electricity Rules (NER), Westpac’s rule change request proposed a new platform for secondary trading based on an AEMO-facilitated auction.