On 15 November 2018 the Commission made a final rule establishing a new compensation framework so that certain market participants who incur a loss during a market suspension event can be compensated.  This responds to a rule change request from AEMO in the wake of the late 2016 market suspension in South Australia.

Final determination

The new compensation framework is designed to strike a fair and efficient balance between the interests of market participants and consumers. The compensation framework will apply if, during a market suspension, prices are set by the Market Suspension Pricing Schedule (MSPS) rather than by the normal central dispatch and pricing process. 

The aim of the framework is to ensure that, when prices in the MSPS are too low to cover generators’ short run costs, compensation is available so that generators do not incur a loss. This is designed to remove the current incentive for generators to withdraw from the market and await direction by AEMO when MSPS prices are low.

The key features of the final rule are:

• Compensation will be payable to scheduled generators and ancillary service providers (who are also scheduled generators) if prices in the MSPS are not sufficient to cover their estimated costs.
• Compensation will also be payable to scheduled generators in neighbouring regions in the event that price scaling under clause 3.14.5(f) results in prices that are too low to cover estimated  costs. 
• Estimated costs will be calculated using "benchmark values": regionally-averaged estimated short run marginal costs for scheduled generators in each category (e.g. black coal, brown coal, open cycle gas, combined cycle gas, hydro, batteries) supplemented by a 15 per cent margin to account for divergences between estimated and actual costs.
• If estimated costs exceed market revenue earned under the MSPS, compensation will automatically be paid to cover the gap - thereby reducing the risk that generators and ancillary service providers may incur loss due to low MSPS prices. 
• Benchmark values will be calculated annually by AEMO using data already collected for planning purposes. 
• If automatically calculated compensation or - where no compensation is automatically payable - revenue earned under the MSPS proves insufficient to cover a scheduled generator’s direct costs of participating in the market, a claim for additional compensation can be lodged with AEMO.

The Commission considers that the final rule achieves AEMO's objective, minimises the potential for perverse incentives that could lead to inefficient outcomes, and achieves a fair balance between the interests of market participants and consumers. As a result, the final rule will, or is likely to, contribute to achieving the National Electricity Objective as it promotes the reliability and security of the supply of electricity in the long term interests of consumers.

Background

The AEMC received this rule change request from AEMO on 25 July 2017. A consultation paper was published on 17 May 2018. This was followed by a draft determination and draft rule, published on 23 August 2018. All submissions have been taken into account in preparing the final rule. 

This rule change request follows the 13 day market suspension that occurred in South Australia in late 2016 – the second market suspension to have occurred since the National Electricity Market commenced in 1998. 

AEMO noted in its rule change request that, during the South Australian market suspension, the absence of a compensation framework meant some participants were incentivised to minimise financial losses due to the application of the MSPS by withdrawing or reducing their availability for dispatch. As a result, AEMO was reliant on participant goodwill to manage system restoration and operation, or issuing directions so that participants who operated at a loss could recover their costs through the directions compensation process.

AEMO considers that directions should be a last resort. They involve a resource intensive process and are not consistent with the principle in the National Electricity Rules that AEMO decision-making should be minimised to allow market participants the greatest amount of commercial freedom to decide how they will operate in the market.

In proposing a new compensation framework for market suspension events, AEMO’s aim was to remove the incentive for participants to await a direction in order to be sure that they can recover their costs. 

This rule change request was lodged together with another request relating to pricing during market suspension. The latter was considered urgent and was progressed using expedited processes. On 10 October 2017 the AEMC made a final rule that simplified the process for setting prices if the spot market is suspended.

Note: Schedule 2 of the National Electricity Amendment (Participant compensation following market suspension) Rule 2018 No. 13 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.