The AEMC today called for submissions on a rule change request from Westpac Banking Corporation to enable the Australian Energy Market Operator (AEMO) to provide a platform for secondary trading of settlements residue distribution units.
Regions of the national electricity market (NEM) have different levels of demand and differently priced generation, which leads to different wholesale prices. Price separation between regions occurs when there is not enough interconnector capacity to equalise the spot price flowing from a lower to higher priced region. In these cases, AEMO collects more money in the higher priced region (from consumers) than it needs to pay to the generators in the lower priced region. That money is called the settlements residue.
AEMO auctions the rights to a share of this settlements residue on a quarterly basis, which provides auction participants with an additional hedging tool to help manage inter-regional price risk. While secondary trading of previously purchased settlements residue distribution units is allowed in the rules, the rule change request proposes a new platform for secondary trading based on an AEMO-facilitated auction.
In its request, Westpac proposes that auction-based secondary trading would increase the liquidity of settlements residue distribution units. Improved liquidity may also increase interstate trade of electricity and increase competition.
The consultation paper released today sets out the issues that will be considered by the AEMC, including the efficiency of inter-regional hedging through the use of settlements residue distribution units and default risk management.
Submissions are due by 9 May 2017.
Prudence Anderson, Communications Director, 0404 821 935 or DL (02) 8296 7817.