Proposal to change methodology and process for calculating compensation payments during administered pricing periods. Commission accepted some proposed changes, but added others where it considered these would further promote the National Electricity Objective.

Background

The Australian wholesale electricity market operates such that following a period of high prices, in order to limit the financial risks of market participants administered prices are invoked. The operation of the administered prices, which is defined in Rule 3.14 of the National Electricity Rules (Rules), includes the following three parts:

• the Cumulative Price Threshold (CPT), the threshold for an administered price period which is triggered in a region when the cumulative spot price over the previous 336 trading intervals (seven days) exceeds the CPT;
• the Administered Price Cap (APC), which caps the regional price in the affected region during an administered price period; and
• the generator compensation arrangements that allow scheduled generators to seek compensation where they are dispatched during an administered price period when their offer is higher than the APC.

The level of the CPT was reviewed by the Reliability Panel as part of its Comprehensive Reliability Review. The Reliability Panel published its Final Report for the Comprehensive Reliability Review on 21 December 2007, and recommended that the CPT be increased from $150,000 to $187,500. The Reliability Panel indicated in its Final Report that it intends to submit a Rule change proposal to the Commission to increase the CPT level in the first half of 2008.

The schedule for the APC was amended by the Commission on 21 May 2008, in accordance with clause 3.14.1(a) of the Rules. The Commission has determined that the APC be set at $300/MWh for all regions in the NEM, for all time periods. This APC schedule also replaces the Tasmanian derogation under clause 9.45.2 of the Rules. The revised APC schedule became effective from the trading interval ending 4:30 AM Eastern Standard Time on 25 May 2008. View further information on the revised APC schedule.

EnergyAustralia indicated in a letter dated 5 September 2007, that it was preparing a Rule change proposal for consideration by the AEMC in relation to the compensation arrangements that apply under a period of administered prices that occur following a breach of the cumulative price threshold (CPT). A copy of the letter can be found below.

On 10 December 2007, the Commission received a Rule change proposal from EnergyAustralia, relating to compensation provisions following the application of an administered price, value of lost load (VoLL) or a market floor price. EnergyAustralia’s proposal seeks to:

• Ensure that compensation to generators following an administered price period is based on their generating costs rather than on their offer prices;
• Clarify the process and criteria for determining whether compensation is to be awarded and the calculation of a fair and reasonable amount; and
• Introduce a consultation process, whereby the Commission must publish any received submission on a draft expert panel report and take these submissions into account in its determination.

On 20 December 2007 the Commission published a notice under section 95 of the NEL advising of its intention to commence the Rule change process and initial consultation on this Rule change proposal. First round consultation on this Rule change proposal closed on 22 February 2008.

On 10 April 2008, the Commission published a notice under section 107 of the NEL extending the period for publication of the draft Rule determination for EnergyAustralia’s Compensation arrangements under administered pricing Rule change proposal. The Commission extended the publication period for its draft Rule determination to 5 June 2008.

The Commission considered that it was necessary to extend the publication period of the draft Rule determination due to a material change in circumstances, following the breach of the CPT and application of administered pricing in South Australia on 17 March 2008. The Commission considered that an extension of time was necessary to sufficiently analyse and address issues arising from this event against the hypotheses EnergyAustralia raised in its Rule change proposal relating to the behavioural incentives of market participants during administered price periods. The breach of the CPT on 17 March 2008 in South Australia is the first time in the NEM’s history that the CPT has been breached.

On 29 May 2008, the Commission published a notice under section 107 of the NEL extending to 7 August 2008, the period for publication of the draft Rule determination on EnergyAustralia’s Compensation arrangements under administered pricing Rule change proposal.

The Commission extended the publication period of the draft Rule determination to enable it to further consider a number of complex issues raised in submissions. In particular, the Commission is considering the impact of inter-regional flows during administered price periods on the operation of the APC and eligibility for compensation under clause 3.14.6 of the Rules. The Commission has requested technical advice on this matter from Intelligent Energy Systems (IES), to assist it in preparing its draft Rule determination. A copy of the final report by IES, ‘Regional Settlement Prices During Administered Pricing’ can be found below under Supplementary Material.

On 31 July 2008, the Commission published a notice under section 107 of the National Electricity Law (NEL) to extend the publication period of the draft Rule determination for EnergyAustralia’s Compensation arrangements under administered pricing Rule change proposal. The Commission will now publish its draft Rule determination by 9 October 2008.

The Commission considered it necessary to extend the publication period for its draft Rule determination to further consider a number of complex issues raised in first round submissions. The Commission considered the practicalities of including the opportunity costs of claimants in the matters to be considered by the expert panel, when it makes recommendations to the Commission on the level of compensation that should be awarded.

On 25 September 2008, the Commission gave notice under section 99 of the National Electricity Law (NEL) of the making of the draft Rule determination and draft Rule on a Rule change proposal submitted by EnergyAustralia relating to compensation arrangements under administrative pricing. The Commission accepted some of EnergyAustralia’s proposed changes, but added other changes where it considered these would further promote the National Electricity Objective. The most significant change is in the methodology for calculating compensation. The Commission believed that costs should be reflective of a firm’s short run marginal cost and should therefore incorporate both direct generating costs and opportunity costs.

Also on 25 September 2008, the Commission published two reports from Concept Economics. The first paper is titled “Estimating Opportunity Cost for Energy Limited Plants”. The second is titled “Risk Assessment of Alternative Compensation Options”.

On 18 December 2008, the Commission published a notice under section 102 and 103 of the National Electricity Law (NEL) of the making of the National Electricity Amendment (Compensation Arrangements under Administered Pricing) Rule 2008 and related Rule determination. The Rule commenced operation on 1 January 2009. The Rule confirms the positions of the Commission’s draft Rule, which adopted some of EnergyAustralia’s proposed Rule changes in part with some modifications and enhancements where they were shown to promote the NEO.