On 16 June 2011 the Australian Energy Market Commission (Commission) gave notice under sections 102 and 103 of the NEL relating to the making of the National Electricity Amendment (Reliability Settings from 1 July 2012) Rule 2011 No. 5 and related final determination.

The Commission’s decision was to make a more preferable Rule, which differs from the proposed Rule. The reasons for the Commission’s decision are set out in detail in its final Rule determination.

The Rule as Made incorporates many of the features proposed in the Rule change request, in particular the introduction of a mechanism to index the market price cap (MPC) and cumulative price threshold (CPT). However, it adopts the Consumer Price Index (CPI) rather than the proposed Intermediate (stage 2) Producer Price Index (Stage 2 PPI), and includes a requirement for a four-yearly comprehensive review of the Reliability Standard and Settings, including indexation, to be undertaken by the Reliability Panel. This will replace the previous requirement of a two-yearly review of the Reliability Standard and Settings.

The Rule as Made will commence on 1 July 2011. Indexation will commence on 1 July 2012, with the first four-yearly comprehensive review to be completed by 30 April 2014.

Background 

On 27 August 2010, the Reliability Panel (Panel) submitted a Rule change request to the Commission in relation to the indexation of specified Reliability Settings and the process of review of the Reliability Standard and Reliability Settings, to be applied from 1 July 2012.

The Rule change request sought to put into effect the recommendations of the Review of the Reliability Standard and Reliability Settings undertaken earlier by the Reliability Panel and published on 30 April 2010. In that review, the Panel considered the level of Reliability Standard, and the Settings to be applied in the National Electricity Market (NEM) in order to be able to meet the Reliability Standard, from 1 July 2012.

In the context of the NEM, reliability is a measure of the adequacy of the electricity system in generating and transporting sufficient electricity supply to meet consumer demand. Balancing supply and demand to meet reliability (and other) requirements in the longer term is significantly affected by a variety of regulatory, market and pricing mechanisms, such as the MPC and CPT.

The MPC sets the upper limit to which generators can price their supply into the market and is currently set at $12 500/MWh. The CPT is a pricing mechanism that is triggered once a particular threshold of protracted high prices is reached and acts to dampen them via the imposition of an administered price cap, thereby limiting the financial exposure of market participants. It is currently set at $187 500. Prior to this Rule change the Panel was required under the National Electricity Rules to review these (and other) mechanisms on a regular, two-yearly basis.

The Rule change request sought firstly, to maintain the real values of the MPC and CPT over time through indexation, and secondly, to implement significant changes to the regular review process. These changes were proposed to commence in 2012.

On 1 February 2011, the Commission gave notice under section 107 of the NEL to extend the publication date of the draft Rule determination to 24 March 2011.  The Commission considered the Rule raised issues of sufficient complexity or difficulty that an extension of time was necessary.

In particular, the Commission wished to undertake further work to evaluate potential indexes for incorporation into the draft Rule. This included engaging a consultant (Sinclair Knight Mertz) to provide independent time series data relating to the capital costs of new entrant peak generation. The purpose was to be able to compare the movements of these costs over time with the movements of the proposed, and other, indexes. This report was completed and published on the AEMC’s website together with the Commission’s draft Rule determination on 24 March 2011.

On 24 March 2011 the Commission gave notice under section 99 of the NEL of the publication of the draft Rule determination, including a draft Rule for the Reliability Settings from 1 July 2012 Rule change. The Commission had determined to make a more preferable draft Rule, for reasons that are set out in detail in its draft Rule determination. The more preferable draft Rule was substantially the same as the final Rule as Made.