The Australian Energy Market Commission (AEMC) has made a rule to remove the prohibition on offsetting of trading amounts and reallocation amounts in the prudential margin calculation. The prudential margin is a key component of the National Electricity Market (NEM) prudential settings, which are used by the Australian Energy Market Operator (AEMO) to determine a market participant’s credit support.

The prudential margin for each market participant is based on that participant's trading amounts and reallocation amounts. Trading amounts are the positive or negative dollar amounts resulting from consuming or generating electricity. Reallocation amounts are the positive or negative dollar amounts, in respect of a market participant’s reallocation transaction. A reallocation transaction represents an off-market trading relationship (such as a bilateral hedging contract) between two market participants.

The Commission has made a more preferable Rule, which the Commission is satisfied will, or is likely to, better contribute to the achievement of the National Electricity Objective than the proposed rule. The key features of the Rule are as follows:

• removal of the prohibition in clause 3.3.8(e) of the National Electricity Rules on offsetting of trading and reallocation amounts in the prudential margin calculation with effect from 20 October 2017;
• introduction of a new clause that stipulates that the prudential margin cannot be a negative amount in order to eliminate any prudential risks associated with a prudential margin being less than zero;
• retains AEMO's discretion in relation developing the methodology to determine the prudential settings to apply to market participants, including the extent to which it takes account of prospective reallocation amounts in the calculation of the prudential margin; and
• imposes (through transitional rules) a requirement for AEMO to amend and publish the Credit Limit Procedures, reallocation procedures and the reallocation timetable (as required) to take into account the final Rule (by 1 July 2017).

The final Rule may reduce the level of credit support provided by market participants to AEMO and may result in cost savings for market participants.  This supports competition in the NEM by potentially reducing barriers to entry and barriers to expansion for market participants. The final Rule is aligned with the AEMC’s strategic priority related to markets and networks, by encouraging efficient investment in the NEM.