On the 12 March 2020 the Commission made a final rule to enable multi-year contracting of emergency reserves under certain circumstances in Victoria for a limited period.  

This is under the reliability and emergency reserve trader (RERT), which is a last resort mechanism that allows AEMO to pay for additional capacity to be on stand-by in case of emergencies when the demand and supply balance is tight. 

Final determination

The Commission has made a final rule that is a more preferable rule. It provides AEMO with the flexibility to enter into multi-year contracts of up to three years under the long notice RERT mechanism in Victoria. This is to help address the short to medium-term reliability challenges facing that state. The time-limited derogation is to end in June 2023 and apply only in Victoria.

Under the final rule multi-year contracting is subject to robust checks and balances so that they are only entered into in circumstances where they would be a more cost-effective option. 

Under the final rule, multi-year contracting will be subject to key changes made under the Enhancement to the RERT rule change. This means that the RERT principles that seek to minimise impacts on customer bills, keep RERT procurement costs under the Value of Customer Reliability and minimise market distortions will apply to decisions about whether to enter into multi-year contracts.

Under the final rule, the trigger for procuring emergency reserves under the Enhancement to the RERT rule would apply to the first year before AEMO can enter into a multi-year contract; this is an expected breach of the reliability standard. However, the trigger would not be required to be met in years two and three. Instead, under the final rule, prior to entering into a multi-year contract, AEMO would need to consider what the appropriate term and structure of a Victorian reserve contract would be, including the appropriate volume of emergency reserves procured.

The Enhancement to the RERT rule out-of-market provisions, that aim to reduce the risk of distortions to the wholesale market, will also apply to multi-year contracting.

The final rule also requires AEMO to have regard to the Retailer Reliability Obligation (RRO) when deciding on an appropriate duration of a long notice RERT contract, and what would be reasonably necessary in relation to the volume of emergency reserves. This was included in response to stakeholder concerns that if the RRO were triggered in Victoria then this could lead to competition between market customers and AEMO for resources covering the same period, which could drive up costs.

To foster transparency and accountability, the final rule includes specific reporting requirements on AEMO with regards to multi-year contracts. These will require AEMO to make the following information public in its quarterly RERT reports:

• any contracts that have a term greater than 12 months
• an explanation of why such contracts were entered into for a term greater than 12 months, including the basis on which AEMO considered the term and volume to be reasonably necessary to ensure the reliability of supply in the Victorian region 
• the basis on which AEMO had regard to the RERT principles when entering into the multi-year contracts.
• an explanation of how AEMO had regard to the RRO in relation to the length of a multi-year contract and the volume of RERT procured 
• an explanation for how each multi-year contract has lower total costs than other types of RERT contracts covering the same period of time (in aggregate). 

The final rule specifies that the derogation will be in place for approximately three years, rather than five as proposed by the Victorian Government, and end on 30 June 2023.

Background

The rule change request
 
On 8 October 2019 the AEMC received a rule change request from the Hon Lily D’Ambrosio MP, Minister for Energy, Environment and Climate Change, Minister for Solar Homes (Victoria), to amend the National Electricity Rules (NER). 

The Minister sought a jurisdictional derogation for Victoria to allow the Australian Energy Market Operator (AEMO) to contract for emergency reserves under the reliability and emergency reserve trader (RERT) mechanism on a multi-year basis in that state. Specifically, the proposal was to enable AEMO to procure long-notice RERT contracts of up to three years’ duration. The Minister proposed that the derogation expire on 30 June 2025, on the basis that it is a response to a short-term reliability problem in Victoria. 

Commencement of the rule change process

On 24 October 2019 the Commission published a consultation paper to facilitate consultation on the derogation proposal and to seek stakeholder submissions.

The consultation paper set out that the Commission considered that the derogation proposal should be subject to the expedited rule process on the grounds that it considers the rule change request to be an urgent rule as defined in the National Electricity Law (NEL). 

Objections to using the expedited rule change process

Under section 96(3) of the NEL, the AEMC must not make a Rule in accordance with the expedited process if the AEMC receives a written request not to do so, and the reasons set out in the request are not, in its opinion, misconceived or lacking in substance. 

Four objections were received in relation to the proposed derogation proceeding through the expedited process as an urgent rule.

The Commission considered the reasons outlined in the four objections submitted and came to a view that some of the reasons provided in the requests were not misconceived or lacking in substance. Consequently, the proposed rule change request proceeded under the standard rule making process, rather than through an expedited process. 

The objections to the expedited process and the submissions to the consultation paper can be found below.

Draft determination

On 19 December 2019, the Commission published the draft determination. The draft rule proposed that multi-year contracting be subject to a trigger and AEMO would only be able to enter in multi-year contracting in certain circumstances. The draft rule also proposed a shorter duration of the derogation than was requested by the Victorian government.  

All public submissions to the draft determination can be found below.