Australian Energy Market Commission (AEMC) today released its final determination on a Victorian Government request for longer-term emergency reserve contracts 

In response to challenging reliability issues facing Victoria in the short to medium term the AEMC has targeted a new state-specific rule allowing the market operator, AEMO, to enter into multi-year electricity contracts under the Reliability and Emergency Reserve Trader (RERT) mechanism for a limited period of time.

The special arrangement was requested by Victoria’s Minister for Energy, Environment and Climate Change, the Hon Lily D’Ambrosio.

The new bridging arrangement will be in place until 30 June 2023, enabling it to be used to cover reliability gaps from the new rule’s start date on 16 April 2020. Contracts of up to three years will now be possible – up from the current one year maximum contract duration.

AEMC Chairman, John Pierce, said today the determination for Victoria responded to the current challenging circumstances the State is facing caused by its specific generation profile, while addressing consumer group concerns that these longer contracts are only used where they would mean lower costs for households and businesses.

AEMO’s assessment is that new renewable generation coming online makes only a small improvement to the State’s reliability outlook which is vulnerable to forced outage rates for brown coal power stations well above the national average.

“The Energy Security Board will provide advice to the COAG Energy Council on immediate measures to ensure reliability and security of the power system across the national electricity market as a whole and all the market bodies are currently involved in both this work and investigating a two-sided market where less generation would be needed in a market with higher levels of consumer participation and responsiveness,” Mr Pierce said.

“And to reinforce protections for consumers - we have introduced checks and balances to make sure multi-year contracts are only used where they minimise costs,” he said.

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 (VCR) and minimise market distortions, will apply to decisions about whether to enter into multi-year contracts.

The Commission has made a more preferable final rule in order to address the risk that the introduction of multi-year contracting could see unnecessary volumes of emergency reserves procured which would be passed onto consumers in Victoria. It contains the following checks and balances:

  • 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. 
  • The length of the contract is to be based on the duration of time AEMO reasonably expects that the emergency reserves would be required - where emergency reserves are expected to be required for a period less than three years, then the contract term should be for that lesser period, thereby avoiding the cost risk of unnecessarily procured RERT.
  • The volume of emergency reserves procured in years two and three needs to be based on what AEMO considers to be reasonably necessary for maintaining reliability of supply in Victoria. 
  • In addition to the reporting that is now required for all RERT contracts, such as the payments made in respect of each contract, there will also be specific reporting requirements for multi-year contracting that require AEMO to provide the reasons it considered it necessary to enter into a multi-year contract.  

Following stakeholder feedback on the draft rule, the final rule also requires AEMO to:

  • Have regard to the Retailer Reliability Obligation (RRO) as part of considering what is a reasonably necessary contract duration and volume of emergency reserves  
  • Report on how it had regard to the RRO.
  • Explain how each multi-year contract has lower total costs than RERT contracts with shorter durations would have had (in aggregate) covering the same period.  

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. This means multi-year contracts entered into in June 2023 under the derogation would not extend beyond June 2026.

Media: Kellie Bisset, Media and Content Manager, 0438 490 041 or (02) 8296 7813