The AEMC has made a rule, which is a more preferable 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 National Electricity Market (NEM) by potentially reducing barriers to entry and expansion.

The final 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 final 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 final Rule has the following key features:

  • removal of the prohibition in clause 3.3.8(e) of the National Electricity Rules on offsetting of trading and reallocation amounts in the prudential margin calculation with effect from 20 October 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 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, reallocation procedures and the reallocation timetable (as required) to take into account the final Rule (by 1 July 2017).

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