New Prudential Standard and Framework in the NEM

Rule Change: Completed

Overview

The benefit of the rule is that it will, or will be likely to, contribute to the achievement of the National Electricity Objective (NEO) because it facilitates improved economic utility of the prudential framework, improves transparency of the market arrangements and provides greater certainty for participants and AEMO. This will, all else equal, reduce barriers to investment, facilitate competition and thereby lower the long-term price of electricity for consumers. The impact of the rule will be to change the individual pattern and level of credit support provided by participants, to align more closely with the risk posed by their possible default.

This rule amends the prudential framework in the NEM, by introducing a new statistical standard that will be used to calculate collateral requirements for participants.

On 18 October 2012, the AEMC published its final determination and rule as made. The rule is the same as that drafted in the draft determination, with minor consequential amendments. The rule does not include the additional amendments proposed by AEMO in their response to the draft determination, as consulted on in the second consultation paper published on 27 August 2012.

Background
On 27 July 2011, AEMO submitted a Rule change request entitled ‘New Prudential Standard and Framework in the NEM'.

AEMO submitted this rule change proposal to give effect to the first set of conclusions from its recently concluded Energy Market Prudential Readiness Review. Specifically, the Rule change request proposes to:

Remove references to the ‘reasonable worst case' within the prudential requirements;
Replace ‘reasonable worst case' with a new definition for a Prudential Standard, defining it as a 2% probability of incurring a loss or shortfall in the event of participant default;

Modify various aspects of its calculation process, including:

a) use of individual load profiles and seasonal adjustments in calculating participant prudential obligations;
b) removal of the option for a Reduced Maximum Credit Limit;
c) modification of the methodology used to calculate the Maximum Credit Limit and Prudential Margin.

The Commission has published a final determination to make the rule as proposed by the proponent, with some clarifying amendments. The Commission’s reasons are laid out in the final determination paper. The rule as made is published alongside the paper.

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