The AEMC today called for public submissions on a draft Rule that removes the restriction on market participants using off-market trading relationships (such as hedging contracts) to reduce the amount of credit support they are required to provide to the Australian Energy Market Operator (AEMO).

This will allow market participants to use their collateral more efficiently and may result in cost savings. It also supports competition in the NEM by potentially reducing barriers to entry and expansion.

The draft Rule enables AEMO to offset between trading and reallocation amounts when determining a market participant's prudential margin, which is a part of the overall credit support provided by market participants to minimise the risk of a payment shortfall when purchasing electricity in the NEM’s spot market.

This change is intended to enhance the efficient operation of the prudential framework, while maintaining the NEM prudential standard. The draft Rule is aligned with the AEMC’s strategic priority related to markets and networks, a priority which is partly based on encouraging efficient investment in the NEM.

The draft Rule has the following key features:

  • removal of the prohibition on offsetting of trading and reallocation amounts in the prudential margin calculation with effect from 1 December 2017;
  • introduction of a new clause that stipulates that the prudential margin cannot be a negative amount in order to eliminate any prudential risks associated with a prudential margin being less than zero;
  • retains AEMO‘s discretion in relation to developing the methodology to determine the prudential settings to apply to market participants, including the extent to which it takes account of prospective reallocation amounts in the calculation of the prudential margin; and
  • imposes (through transitional rules) a requirement for AEMO to amend and publish the Credit Limit Procedures and reallocation procedures to take into account the draft Rule (by 1 July 2017).

The AEMC invites submissions on its draft rule determination, including the draft Rule, by 11 August 2016.

Media contact: Prudence Anderson 0404 821 935 or (02) 8296 7817