To fulfil AEMO’s vision of being a world-leading energy system planner and operator, we need efficient, well-designed markets that deliver value to our industry stakeholders. This is why essential milestones like the completion of AEMO’s Reduction of Prudential Exposure (RoPE) Project in Western Australia’s (WA) Wholesale Electricity Market (WEM) is something to be celebrated.
The prudential frameworks in Australia’s electricity markets are important risk mitigation mechanisms for all market participants designed to protect them from payment shortfalls. Under the WEM Rules, AEMO sets credit limits, maintains credit support (cash or bank guarantee that are held in reserve) and monitors trading daily to ensure estimated liabilities are within defined limits.
The RoPE project was launched in early 2017 to address two shortcomings in the WEM prudential framework:
- · Impact of the Reserve Capacity Mechanism (RCM) – the WEM rules underestimated the required credit support due to the timeframes associated with the settlement of the RCM. What this meant was if a participant was to default on their invoice, credit support held by AEMO may have been insufficient to cover the default, leading to payment shortfalls for all other participants.
- · Accuracy of liability estimates –AEMO relies on an accurate estimate of liabilities to make sure participants are trading within the defined limits. If estimates are not accurate, there is increased risk of payment shortfalls to all participants if a participant defaults. In the WEM, before RoPE, estimates were based on invoices which could be up to 70 days old. Such a long period would not account for changes in participant trading behaviour and market outcomes.
Both of these shortcomings meant the prudential framework in the WEM wasn’t operating as efficiently as it could, as there was an increased level of prudential risk to participants. To solve this, we worked with WEM stakeholders via numerous working group meetings, procedure change proposals, one-on-one interactions and market trials.
In the end, with industry consultation and testing, the project delivered a rule change (RC_2017_06) with key coordination by the Rule Change Panel, four market procedure changes, extensive software changes to our current WEM systems, and a brand new WEM sub-system, the prudential service. In addition to solving the identified shortcomings, here’s how these changes will benefit stakeholders:
- · Improved clarity for participants – the new system publishes reports to participants that allow them to reconcile calculations to a more detailed level than ever before.
- · Lower support costs– the new system lays the foundations for AEMO to move from a third party owned and supported settlement system, which is in its end of life phase, to an inhouse settlement system.
- · Foundation reform work – the new system is an important preparatory step for the implementation of settlements under the Energy Transformation Strategy program.
- · Increased speed of calculations – calculation time has been reduced from 13.3 minutes/day to 4.7 minutes/day.
- · More efficient system operability – the new system has automated and scheduled jobs in a single system that replace a series of manual tasks across multiple systems and delivered a single certified calculation engine that will replace two separate calculation systems.
“This has been a huge journey, from the very beginning to get the obtain for the original rule change, and then significant efforts from across the business and with our stakeholders to deliver improved outcomes for participants and consumers.” said Executive General Manager, Western Australia, Cameron Parrotte.