Rule Change: Open

Overview

This rule change request from ENGIE seeks to establish a tender for voluntary market making services in the national electricity market.
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This rule change request from ENGIE seeks to establish a tender for voluntary market making services in the national electricity market. 

A market making arrangement would increase the opportunities for market participants to trade in electricity hedge contracts and to have greater visibility of wholesale contract prices. It can be voluntary or compulsory.

The service is typically made available in less liquid markets so that retailers and other market participants always have an opportunity to buy and sell electricity futures contracts. This helps to increase market liquidity and support competition and confidence in the market as a whole. 

ENGIE’s rule change request proposes a tender for voluntary market making services, to be run by the Australian Energy Regulator.  ENGIE maintains this is the most appropriate method for identifying parties with the sophistication and appetite to take on the risk associated with market making.

The request raises a number of issues with compulsory market making mechanisms. It also raises questions about the level of contract market liquidity in South Australia and calls on the Commission to examine this in more detail. 

ENGIE’s proposal calls for the voluntary market making arrangement to apply in all states, not just South Australia, on an ongoing basis, with the AER operating the tender and the AEMC reviewing its operation before each new tender period commences. 

The request suggests that a compulsory liquidity obligation, as currently envisaged under the Retailer Reliability obligation (RRO), would therefore be unwarranted. 

The request also asks that consideration be given to complementing the ASX market making incentive scheme currently under development.

Consultation paper

On 20 December 2018 the AEMC published a consultation paper on the rule change request. The paper seeks stakeholder comments on a number of key issues:

  • diagnosing whether there is a contract market liquidity problem in the NEM
  • defining solutions to the problem
  • the range of options in relation to a market making arrangement 
  • the potential operation of a tender
  • what contracting products should be considered
  • jurisdictional issues
  • commencement dates.

Stakeholder submissions on the consultation paper were due by 7 February 2019 and can be found below.

Workshop

The AEMC held a workshop on 28 February 2019 in Melbourne to gather industry views on the operation of the contract market. At the workshop the AEMC presented draft analysis of the issues gathered to date. 

Background

There has been significant work addressing market making in the Australian Electricity Futures market during 2018, both by policymakers and by the ASX:

  • A market liquidity obligation forms part of the Retailer Reliability Obligation currently being developed by the ESB.
  • The ACCC recommended that the AEMC introduce a market making obligation in South Australia to boost market liquidity as part of the Retail Electricity Pricing Inquiry published in July 2018. 
  • The ESB addressed a market liquidity obligation in September 2018 through a consultation paper on market making requirements in the NEM. 
  • In November 2018 the Commonwealth government proposed legislation following recommendations from the ACCC Retail Electricity pricing Inquiry that would allow the ACCC to recommend to the Treasurer, in the event that a person has engaged in prohibited conduct, that an order be made to require an electricity company to offer electricity financial products to third parties. 
  • The ASX commenced a process in July 2018 to introduce a voluntary market making scheme to the Electricity Futures market. The ASX aims to have the scheme in place by 1 July 2019. 

Internationally, market making arrangements for electricity markets have recently been introduced in New Zealand, Singapore and the United Kingdom. 

The Commission will be looking at all these developments as part of its consideration of the rule change proposal. 

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Documentation