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AEMO directions change - what does it mean to small and large energy users?

Written by Energy Action

The Australian Energy Market Operator (AEMO) has the ability to intervene in the operation of the energy and ancillary services markets in circumstances where AEMO believes the market response has been inadequate to maintain a reliable and secure power system, or in response to unexpected events.  

The National Electricity Rules allow AEMO to issue directions to registered market participants (typically generators) to take action to maintain or re-establish the power system to a secure, satisfactory or reliable operating state.  A registered market participant must use its reasonable endeavours to comply with AEMO’s directions unless to do so would be a hazard to public safety, materially risk damaging equipment or contravene another law.

Over the last three years there has been a significant increase in the use of directions by AEMO primarily in response to system security issues such as inadequate system strength in South Australia but also to manage system reliability.

How can a direction impact large energy users?

After AEMO issues a direction it must in accordance with a specific intervention settlement timetable follow any guidelines developed by AEMO that are also in accordance with the National Electricity Rules to calculate the required compensation and payments.  There is typically 7 to 8 months time lag between an intervention event and the final settlement with AEMO.

Post a direction, AEMO’s first step is to determine the type of service(s) provided: energy, ancillary service or other service such as system security.  Compensation can then be payable to one or more of the following parties:

  • The directed market participant for the services that were the subject of the direction
  • Other affected participants whose dispatched quantities of electricity were adversely affected by the direction
  • Other eligible persons as outlined in the National Electricity Rules who may have been adversely impacted by the direction.

The compensation calculated by AEMO must be at a fair payment price for the services provided, which is defined as the market price that would otherwise prevail in similar demand and supply conditions. 

In addition, to any compensation calculated by AEMO, directed market participants are also entitled to submit written claims for additional compensation to recover their specific direct net costs.  Examples of such direct net costs include fuel costs, incremental maintenance costs and incremental manning costs.

When calculating compensation amounts AEMO may also engage an independent expert to determine the fair market price and / or review the additional claims from market participants. 

The total of any final compensation amount, interest, and an independent expert fee if applicable, are recovered from market participants including retailers and large direct market customers.  Retailers are then allowed to recover these costs from their customers. There are different recovery methodologies that vary depending on the service provided.

AEMO is also required to publish market intervention reports for each intervention and publish all relevant information on the AEMO website[1].

What are some examples of recent AEMO interventions?

There have been several intervention events in South Australia in 2020, for example during the period January to March 2020 there were a number of times when the interconnector between Victoria and South Australia was not fully operational and therefore directions were issued to maintain system strength and ensure system security. 

For example, a large battery was instructed to remain between 45% and 55% of maximum charge and for the relevant participant to bid into the ancillary services market in a specific manner.

For intervention events in this period, AEMO engaged an independent expert to verify the additional compensation claims from the relevant participants.  Based on the market event reports on the AEMO website, the compensation claims for the period are estimated to be in excess of $3.5 million excluding interest and any independent expert fees.  Based on the intervention settlement timetable, some of these costs should either have recently been settled by market participants with AEMO or are due to be settled in the next month or two. 

If you have any questions or need advice on the Big Stick legislation please contact your Energy Action account manager or alternatively, call us on 1300-964-589.