Retailer Reliability Obligation in force soon

In brief 9 min read

The 1 July 2019 deadline for the introduction of the Retailer Reliability Obligation is getting close, with consultation on the draft National Electricity Rule changes designed to implement it now open. Partner John Greig, Managing Associate Karla Drinkwater, Associate Mark Leersnyder and Lawyer Mark Young discuss the key new design details and areas for consideration, ahead of the submission deadline of 5 April 2019.

Background

Our Overview of the Retailer Reliability Obligation summarises the Retailer Reliability Obligation (RRO) and how it will work in practice.

While the RRO is intended to commence on 1 July 2019, extensive transitional arrangements will apply during the initial years of its operation, during which the Australian Energy Market Operator (the AEMO) and the AER are to develop a series of guidelines and procedures, which will detail key matters such as:

• how reliability forecasting will (and should) be conducted;
• the process for large customers to 'opt in', should they wish to manage the reliability obligation associated with their load;
• how to assess qualifying contracts and determine the firmness factor to be applied to those contracts;
• the processes required for the operation of the market liquidity obligation; and
• the procedures applying to AEMO's voluntary book build.

Liable entities

While the Consultation Paper talks of the RRO being 'designed to incentivise retailers, on behalf of their customers, to support the reliability of the power system'¹, it is clear from the draft rules that the legal obligations, in the absence of an end customer opting in, fall not on the end customer but on the Market Customer (which will, in most cases, be a retailer).

Akin to some end customers agreeing to supply RECs to their retailers, rather than the retailers charging a fee on account of RECs obligations, a large customer may decide to 'opt in', in the belief that it will be better placed to manage the RRO costs associated with its load.

A large customer may apply to the AER to opt in, so as to become liable for its own load. There are size, creditworthiness, notification and other, yet to be specified, requirements to be satisfied. Notice to the large customer's retailer is required but its consent to a large customer opting in is not.² Consent of the retailer is required in order to opt out.³

Triggering the RRO

Following consultation on the materiality test to be applied in determining whether a forecast reliability gap is material, the Energy Security Board has indicated that if the expected unserved energy for a region exceeds the reliability standard (currently set at 0.002 per cent of total annual energy demand in that region), the gap will be considered material, and the AEMO may apply to the AER to trigger the RRO.⁴ There is no minimum threshold by which the reliability standard must be exceeded for a gap to be considered material.

Transitional arrangements for qualifying contracts

The draft Rules contain transitional provisions that enable a non-retailer Market Customer or 'opt in' large customer who was party to a qualifying contract⁵ as at 10 August 2018 to allocate the highest possible firmness factor (of 1) to that qualified contract until the expiry date (being the later of the expiry of the initial contract term and 1 July 2023 ⁶). It is possible that the reference to 2023 is designed to address contracts that do not have an explicit end date, but the drafting needs clarification because it is not clear why a contract that has a contract term expiring pre 2023 needs to have specified a firmness post its expiry.

Market liquidity obligation

Market Generators whose generating capacity is controlled by a trading right holder (ie a person with dispatch control over generating capacity) within an 'MLO group'⁷ will be subject to the market liquidity obligation (MLO), which is an obligation to simultaneously offer to buy and sell a calculated quantity of 'MLO products'. That is designed to create a liquid market of qualifying contracts that RRO liable entities may acquire in order to satisfy their RRO liability.

The draft Rules require that Market Generators carry out detailed tracing to establish who holds the trading rights associated with its market generating units and provide this information to the AER by 1 September 2019 for inclusion in the public MLO register. Market Generators will also be required to notify the AER within 10 business days of any MLO register information previously provided to the AER becoming inaccurate.

Trading groups,⁸ and hence MLO groups, are defined by reference to, among others, whether another entity is 'in a position to directly or indirectly influence or control' (widely defined) a trading right holder. It is possible that the definitions are too wide, as a literal reading would suggest that:

• a bank that informs separate unrelated generators it is not willing to roll over separate loans at their respective contractual maturities is an entity that ' is in a position to influence or determine decisions relating to … major loans involving ' the generator, and hence is taken to be in a position to influence or control each generator;⁹ and
• a director who sits on the separate boards of otherwise unrelated trading right holders, being an entity (defined to include individuals) who is in a position to exercise voting rights in relation to the unelated holders, hence is taken to be in a position to influence or control each holder, ¹⁰

with the consequence that, in each case, the otherwise unrelated generators are taken to be in a 'common corporate group' and hence are members of a trading group.

In practice, those examples may not be of practical consequence (eg by giving rise to the market liquidity obligation), as those trading groups will not attract the MLO obligation (or become a MLO group) unless they hold at least 15 per cent of the aggregate trading group capacity in the relevant region.

Power purchase agreements between intermediaries and exempt persons not uncommonly reserve some rights to the exempt person that could result in both parties possessing trading rights to the same generating capacity.

Quite apart from whether exempt persons and their respective intermediaries both hold trading rights to the same generation capacity, the existing Rules provide that acts and omissions of an intermediary in its capacity as a Registered Participant are deemed to be the acts and omissions of the exempt person.¹¹

But is a failure of a Market Generator:

• in its capacity as a 'MLO generator' (eg to comply with its market liquidity obligation ¹² ), a failure by that entity? Perhaps not, because the relevant draft Rule references a 'MLO generator', not a 'Market Generator'; or
• in its capacity as a 'Market Generator' (to provide information to the AER ¹³), a failure by it, given the existing Rules already provide that a reference to a '… Market Generator … only applies to a person only in so far as it is applicable to matters connected with the person's … market generating units…'¹⁴? The question becomes: is the requirement to provide information a matter '… connected with [its] … market generating units …? '

These and similar examples warrant clarification in the final Rules.

Where trading rights are ultimately controlled by entities within the same corporate group, it could be expected that the Market Generator will hold or be able to obtain (and be aware of any changes in) this information. Where trading rights are controlled by entities outside a Market Generator's corporate group (eg because of intermediary /exempt person arrangements or otherwise), Market Generators will need to take steps to ensure they are able to obtain this information, and be notified of future changes, sufficiently in advance of the compliance due date.

Voluntary book build

The design and process to apply to AEMO's book build mechanism is under development, with details to be provided later through the (to be developed) Book Build Procedures.

In the interim, one matter warrants consideration. Presumably, the contracts that result from the book build will result in contracts with a certain firmness (if not a firmness of 1). If not, the existence of these contracts will not provide the desired assurance of extra capacity.

But with the book build '... matching buyers and sellers…, with detailed terms and conditions to be finalised directly between the ..matched …participants '¹⁵, it seems that further involvement of the AER or AEMO is inevitable, if only to verify the firmness of the resultant contract, and not merely its existence, given that both firmness and existence of the contract may be influenced by the negotiations for those contracts. 

Valuing the RRO obligation

A difficulty inherent in the RRO is likely to be the one (actual and potential) liable entities (including large customers considering whether to opt in or, indeed, to opt out) face in valuing the RRO portion of their electricity supply, separate from the other components of their electricity supply. This difficulty arises, in part, due to the uncertainty surrounding (among others):

• whether, and if so when and in which region(s), a reliability gap will form;
• whether any identified reliability gaps will persist and result in a T-1 reliability instrument being issued; and
• the ability of a liable entity to enter into sufficient qualifying contracts between a T-3 reliability instrument and a T-1 reliability instrument.

Without an understanding of the value they should be placing on the RRO, it is difficult to see how retailers will determine how much more to pay for 'firm' qualifying contracts, or how much less large customers should be charged for their electricity if a large customer elects to opt in. Equally, without a feel for the value of RRO, large customers will find it difficult to decide whether it is worthwhile opting-into or whether their retailers are imposing higher than necessary costs.

While akin to an end customer undertaking similar analysis and decisions about whether to manage the RECs liability for its own load, the RRO will be more complicated, as it will give rise to different outcomes in each region.

Next steps

Stakeholders wishing to provide a submission on the draft Rule changes should do so by 5 April 2019.

Allens will continue to monitor, and provide updates on, the development of the RRO – see our Energy Reform Hub for more details.

Also, please contact any of the people below if you would like further information.