On 8 November 2013, the AEMC published an options paper in relation to stage 2 of its review of financial market resilience in the national electricity market (NEM). Public submissions on the report are invited by 19 December 2013. View more
Stage 2 options paper
On 8 November 2013, the AEMC published an options paper in relation to stage 2 of its review of financial market resilience in the national electricity market (NEM). Public submissions on the report are invited by 19 December 2013.
The options paper commences stage 2 of our advice to the Standing Council on Energy and Resources (SCER) on whether the financial relationships and markets underpinning the NEM are sufficiently robust to manage the financial consequences of unexpected events.
The first stage of our review focused on the risk of financial contagion arising from the failure of a large retailer and associated retailer of last resort event. Financial contagion refers to the potential for the financial problems of one business to be transmitted to other businesses, to the detriment of the long term interests of customers. We published draft recommendations in relation to the first stage of the review on 4 June 2013 in a first interim report.
The second stage of the review is considering other possible risks of financial contagion in the NEM. It highlights the important role played by financial contracts (known as derivatives) that are used by generators and retailers to hedge their exposure to the wholesale spot price.
The stage 2 options paper sets out a number of options for measures that could mitigate the risk of financial contagion in the NEM. These measures include reforms to the regulation of over-the-counter derivatives agreed by the ‘group of 20’ countries following the global financial crisis.
The stage 2 options paper does not contain recommendations as to which, if any, of the options should be implemented. The Commission will consider the options in light of a range of factors including the National Electricity Objective and the views expressed by stakeholders.
Draft recommendations will be published in a second interim report in the first quarter of 2014
We will develop our final recommendations and advice to SCER after consideration of stakeholder views in relation to both interim reports. We expect to publish our final report in mid-2014.
Advice requested by SCER
SCER has requested that the AEMC, with input from market participants, provide advice under the Australian Energy Market Commission Establishment Act 2004 (SA) on:
- the nature of any risks to financial stability in the NEM arising from financial interdependencies between market participants;
- whether the existing mechanisms to mitigate these risks are adequate; and
- if necessary, options to strengthen those existing mechanisms and minimise the identified risks and their consequences.
Stage 1 of the Review
The AEMC published three papers in relation to the first stage of the review, and invited submissions to each:
- an issues paper on 8 June 2012;
- an options paper on 9 November 2012; and
- a first interim report on 4 June 2013, with draft recommendations in relation to stage 1 of the review.