Final Determination

On 4 February 2016, the AEMC made a final rule to change the compensation arrangements following the application of an administered price cap or administered floor price.

The final rule will amend provisions in Chapter 3 of the National Electricity Rules (NER). The key features of the final rule are:

• to introduce new eligibility criteria such that participants can claim compensation from the first trading interval when the wholesale pool price is set by the administered price cap or administered floor price, and continue until the last trading interval of that day, instead of the assessment of compensation on a trading interval basis;

• to amend the purpose of compensation, such that the only objective relates to reliability and security of supply during an administered price period, as opposed to also having a purpose of compensation relating to encouraging investment;

• to improve the flexibility, efficiency and transparency of the compensation assessment process, including additional changes to what the rule change request proposes;

• to include eligibility for ancillary service providers to make a claim for compensation following the application of an administered price period; and

• to amend the process by which compensation costs are recovered from customers to improve certainty.

The Commission’s final rule is a more preferable rule. Where it differs from the rule change request it better contributes to the NEO than the rule change request. The final rule enhances the reliability and security of the electricity system; increases the transparency and reduces the administration costs of the assessment process; and contributes to efficient recovery of compensation costs from consumers.

The final rule will commence on 29 September 2016.

Background on rule change

On 17 October 2013, the COAG Energy Council submitted a rule change request to the AEMC seeking to amend the NER in relation to compensation arrangements following the application of an administered price cap and administered floor price.

The rule change request is in response to the AEMC’s recommendations in the 2013 Review of Compensation Arrangements following an Administered Price, Market Price Cap and Market Price Floor.

On 7 May 2016, the AEMC initiated its assessment of the proposed rule with the publication of a consultation paper for stakeholder comment.

On 13 August 2015, the AEMC published its draft rule determination to make a more preferable draft rule in relation to this rule change.

On 5 November 2015, the AEMC extended the period of time for making a final rule determination until 4 February 2015. This related to changing conditions in the National Electricity Market and the first ever application of an administered price cap in an ancillary services market, which occurred in October 2015.

On 26 November 2015, the AEMC published its additional consultation paper on specific issues relating to eligibility for ancillary services providers to claim compensation following the application of an administered price cap.

Background on compensation after administered price periods

An administered price cap occurs after a sustained period of high wholesale pool prices in the National Electricity Market. By limiting wholesale prices, the cap reduces volatility and limits the risks for market participants of high prices. However, it can also cause some market participants to incur a loss, such as where they supply services at a time when the cap applies and their costs are higher than the cap. This may create a disincentive for them to supply services, which can impact reliability and security. To minimise this disincentive, the National Electricity Rules provide for compensation in some circumstances for participants who have incurred a loss under an administered price limit event. The AEMC is the body that manages the compensation process and determines the amount of compensation.

Administered price periods occur rarely. Until September 2015, there had only been five administered price periods in the history of the NEM, which were all triggered in the market for energy and therefore applied in both the market for energy and markets for ancillary services. In October 2015, the first ever application of an administered price limit event in a market for ancillary services occurred. Over October and November 2015, there were a total of 16 administered price periods in the NEM, which all applied only in markets for ancillary services. There has only been one compensation claim made to date.