The Australian Energy Market Commission (AEMC) has published a final rule which narrows the circumstances in which compensation is payable in connection with Australian Energy Market Operator (AEMO) intervention events. The final rule provides that compensation will no longer be payable to participants who are affected by an intervention (i.e. dispatched differently) if that intervention does not trigger “intervention pricing” under the revised “regional reference node test”. 

The practical effect of the final rule is that affected participant compensation is no longer payable if the intervention is to obtain a security service that is not traded in the market (e.g. system strength). 

This final rule follows an AEMO rule change request which actioned a recommendation made by the Commission in the final report of its Investigation into intervention mechanisms in the NEM. The Commission recommended that affected participant compensation should not be payable in connection with security related interventions. This final determination and rule give effect to that recommendation.

Background

When AEMO intervenes in the market by issuing a direction, it is required to compensate market participants who are directed to provide services. AEMO is also required to compensate certain participants who are “affected”, or dispatched differently, due to AEMO issuing a direction or activating the reliability and emergency reserve trader (RERT). Such compensation is designed to put participants in the position they would have been in but for the intervention. 

The Commission’s Investigation into intervention mechanisms in the NEM considered whether affected participant compensation should continue to be payable in connection with security related interventions. The Commission noted that no such compensation is payable when a participant’s dispatch targets are altered as a result of a constraint, rather than an intervention, to maintain system security. It also noted that, where the intervention responds to a security issue, the dispatch targets used to calculate affected participant compensation (and intervention pricing) are not feasible, meaning they would never be realised in practice. Finally, the Commission noted that participants can optimise their position with respect to affected participant compensation, and this can impose higher than necessary costs on consumers.

Accordingly, the Commission recommended that AEMO submit a rule change request to narrow the circumstances in which affected participant compensation is payable. In particular, the Commission recommended that such compensation only be payable where an intervention triggers “intervention pricing” under the “regional reference node test” (RRN test).

The RRN test is used by AEMO to determine when intervention pricing should be implemented in connection with an intervention. Intervention pricing is a practice designed to minimise market distortion when AEMO intervenes in the market. 

Final determination and rule

On 19 December 2019, the Commission determined to make the final rule as proposed by AEMO to narrow the circumstances in which affected participant compensation is payable in connection with "AEMO intervention events". While affected participant compensation will remain payable in connection with interventions that trigger intervention pricing, it will no longer be payable in connection with interventions that do not trigger intervention pricing.

Consultation paper

On 24 October 2019 the AEMC published a consultation paper seeking stakeholder input on the proposal to narrow the circumstances in which compensation is payable in connection with AEMO intervention events. 

Submissions closed on 21 November 2019. The AEMC received six submissions, which are available below. 

Expedited process

As this rule change request was considered non-controversial and no objections were received, the AEMC assessed it under the expedited rule making process.

Key dates, reflecting this expedited process, were:

• Commencement of this rule change process:  24 October 2019
• Submissions to the consultation paper closed on 21 November 2019
• Publication of final determination:  19 December 2019

Related rule changes 

This rule is part of a package of three rules published by the Commission on 19 December 2019. The rules relate to the intervention pricing and compensation frameworks that are triggered when AEMO intervenes in the market. 

This package of rules limits the use of intervention pricing and the payment of affected participant compensation, and changes the compensation threshold which previously limited the payment of compensation to affected and directed participants. Together, these rules increase clarity and consistency, reduce market distortion and costs to consumers, and strike a better balance between the interests of market participants and consumers.

Given their inter-related nature, the three rules will all commence on 20 December 2019. However, if a direction is in effect at the time the rules commence, the old provisions of chapter 3 of the NER will continue to apply in respect of the AEMO intervention event corresponding with the direction until such time as the direction ends.

The interaction of these three rules is set out below.

The RRN test rule extends the RRN test to encompass the RERT in addition to directions, and clarifies the operation of the test. The revised RRN test sets out the circumstances when intervention pricing will apply and makes clear that intervention pricing will not apply when the purpose of the intervention is to obtain a service for which there is no relevant market price. For example, system strength directions will no longer trigger intervention pricing. This will reduce market distortion and costs to consumers. Further information is available here.

As noted above, the affected participant compensation rule narrows the circumstances in which affected participant compensation is payable and provides that affected participant compensation will no longer be payable in connection with intervention events that do not trigger intervention pricing in accordance with the revised RRN test. For example, affected participant compensation will no longer be payable in connection with system strength directions. 

Finally, the compensation threshold rule changes the compensation threshold which previously limited the payment of compensation to affected participants and to directed participants who lodged a claim for additional compensation. While the previous threshold applied on a per trading interval basis, the final rule amends the threshold so that it applies per event.  This means that, where affected participant compensation remains payable (namely, in connection with interventions that trigger intervention pricing), affected participants will not incur loss due to the application of a per trading interval threshold. For directed participants, the revised threshold will help make sure they do not incur loss if they lodge a claim for additional compensation. Further information is available here. 

Publishing all three rules together facilitates a streamlined approach to implementation. As noted above, transitional provisions have been included in the RRN test rule so that, if a direction is in effect when the rules commence, the unamended version of chapter 3 will continue to apply in respect of the AEMO intervention event corresponding with the direction until that direction ends. 

As a result, if a direction is in effect at the time of commencement, the old (unamended) intervention pricing and compensation provisions in chapter 3 will continue to apply in respect of the AEMO intervention event corresponding with the direction until such time as the direction has ended. In this way, all three rules will commence at the same time but not in a way that creates operational complexity.

Note: Schedule 2 of the National Electricity Amendment (Application of compensation in relation to AEMO interventions) Rule 2019 No. 13 will commence operation on 1 October 2021 as a result of the amendments made under the National Electricity Amendment (Delayed implementation of five minute and global settlement) Rule 2020 No. 10.