On 19 December 2019 the Commission made a more preferable final rule to amend a provision of the national electricity rules (NER) which determines whether AEMO should implement "intervention pricing" when it intervenes in the market. This provision is known as the “regional reference node test” (RRN test). The more preferable final rule extends the application of the RRN test to the reliability and emergency reserve trader (RERT) and clarifies the circumstances in which intervention pricing should and should not apply.

The Commission’s more preferable final rule makes clear:

• that the RRN test applies to directions and the RERT 
• that intervention pricing should apply where an intervention responds to a region wide scarcity of a market traded commodity 
• the circumstances in which a localised deficiency of a market traded commodity should trigger intervention pricing 
• that intervention pricing should not apply in circumstances where the reason for the intervention is to obtain a service that is not traded in the market
• the approach to be adopted when multiple intervention events coincide  

The Commission’s final rule determination is to make a more preferable rule which seeks to create transparency, predictability and consistency for the market and remove any ambiguity for AEMO in determining how to apply the RRN test. It will help reduce costs to consumers and market distortion associated with AEMO interventions while preserving efficient prices and signals to market participants and investors.

Background

Intervention pricing is a practice used by AEMO to minimise market distortion when it intervenes in the market by activating the RERT or issuing a direction. It does this by setting prices at the value which, in AEMO’s reasonable opinion, would have applied if the intervention had not occurred.

Previously, the RRN test applied only to directions – meaning intervention pricing was implemented every time the RERT was activated. By contrast, when AEMO issued a direction, it applied the RRN test to determine whether to implement intervention pricing. 

The old test essentially asked whether issuing a direction to a plant at the RRN would have avoided the need for the direction actually issued. It was confusing, difficult to apply in practice, and not well suited to deliver consistent pricing outcomes across the NEM.

On 17 December 2018, AEMO submitted a rule change request seeking to extend the application of the RRN test to the RERT and amend the wording of the test to improve clarity. 

On 4 April 2019, the AEMC initiated the rule making process for the rule change request with the publication of the consultation paper for the Investigation into intervention mechanisms and system strength in the NEM. Submissions in response to the consultation paper can be found here, along with information regarding the Interventions investigation. 

A draft determination was published on 15 August 2019. Submissions on the draft rule determination closed on 26 September 2019 and can be found below.  

On 19 December 2019 the Commission published a final determination and more preferable final rule. The revised RRN test makes clear when intervention pricing should and should not apply. It also extends the test so it applies to both the RERT and directions. This will increase consistency and avoid higher costs to consumers associated with intervention prices when there is no economic rationale for the use of intervention pricing.

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.

As noted above, 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. 

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. Further information is available here. 

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 the National Electricity Amendment (Application of the regional reference node test to the Reliability and Emergency Reserve Trader) Rule 2019 No. 11 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.