The well-functioning of the National Electricity Market (NEM) depends upon the ability to instantaneously match supply and demand of electricity.
One of the mechanisms embedded in the National Electricity Rules (NER) that enables this matching of supply and demand to occur is the requirement that each generator submit bids to the Australian Energy Market Operator (AEMO) regarding the volume and the price bands for electricity supplied by the generator. These bids must be submitted in advance of the trading interval during which the electricity is actually supplied. AEMO collates all the bids made for the supply of electricity for a particular trading interval to determine which generators should be dispatched and at what price, to ensure demand is met in the most cost-efficient way.
Nevertheless, the NER allows generators to adjust their bids to reflect changing circumstances, including changes in demand, plant availability or network constraints. Generators may submit 'rebids' up until five minutes prior to dispatch. More specifically, generators may shift the volume of electricity they are willing to supply between price bands. This dynamic aspect of the NEM allows the wholesale electricity price to reflect the actual balance between supply and demand at the time of dispatch.
The current rebidding rule – acting in good faith
Clause 3.8.22A of the NER provides that all market participants must make rebids in 'good faith'. A rebid is taken to have been made in good faith if, at the time the rebid was made, the generator had a genuine intention to honour the rebid if the material conditions and circumstances upon which the rebid was based remain unchanged until the relevant dispatch interval. A breach of clause 3.8.22A attracts a maximum civil penalty of $1 million.
Clause 3.8.22A is supplemented by clause 3.8.22 of the NER, which requires participants to submit a brief, verifiable and specific reason to AEMO at the time of the rebid and provide any other substantiating information as required by AEMO.
The good faith requirement was tested before the Federal Court in the case of Australian Energy Regulator v Stanwell Corporation Limited. In that case, the Australian Energy Regulator (AER) argued that a Queensland generator – Stanwell – contravened clause 3.8.22A of the NER. In particular, according to the AER, Stanwell did not act in good faith in relation to rebids made in February 2008 because the rebids were not made with the intention that they would be honoured in the absence of a change in material conditions and circumstances. More specifically, the AER argued that Stanwell used the rebidding process to drive up prices. According to the AER, Stanwell submitted its rebids with the intention that, if the dispatch price did not rise sufficiently with the rebid, a further rebid would be made.
The AER argued that the requirement in clause 3.8.22A, 'material conditions and circumstances remain unchanged' is to be construed as limited to objective conditions and circumstances and objective changes. In response, Stanwell argued that its traders' subjective forecasts or expectations were conditions or circumstances within the meaning of clause 3.8.22A.
The Federal Court accepted Stanwell's argument regarding the good faith requirement. More specifically, it accepted that a rebid could be considered to be in good faith if it reflected the trader's subjective intentions and expectations at the time of making the rebid. In reaching this conclusion, the Court noted that an absence of good faith could not necessarily be inferred merely because the trader might have been contemplating making a further rebid if expectations were not met. The Court noted that, in order to establish a breach of clause 3.8.22A, it would be necessary that, at the time of making the rebid, the generator had a positive intention to resile from that bid.
Rule change request – rebidding in good faith
The South Australian Minister for Mineral Resources and Energy is the proponent for a current rule change proposal regarding the rebidding requirements in the NER.
In the proponent's view, the Federal Court's interpretation of the good faith rebidding provision is inconsistent with the original policy intent underlying that provision. In this regard, the proponent notes that the ACCC's determination to incorporate the good faith requirement was based on the need to provide participants in the NEM that rely upon pre-dispatch forecasts with some assurance that generators intend to honour their bids. The proponent considers that the reliability and efficiency of the NEM could be compromised if initial bids and rebids are made without an intention to honour them.
Accordingly, the following changes to the NER have been proposed:
- Reversal of onus of proof: reverse the onus of proof onto generators to demonstrate that rebids have been made in good faith.
- Basis for variation to a bid or rebid: a variation to a bid or rebid must not be made unless it is in response to a significant and quantifiable change in price, demand or other data published by AEMO and must be made as soon as practicable after the change comes to its attention.
- Trader's subjective expectations not enough: non-fulfilment of a trader's subjective expectation as the result of a rebid does not justify another rebid.
- Information requirements: participants must provide the AER with accurate and complete data and information on request to substantiate compliance.
- Overall assessment of intention: the AER may assess the intention of a participant by having regard to all of the bids and rebids over which the participant has substantial control.
What will the rule change mean in practice?
The rule change proposal and associated submissions are currently being considered by the energy rule maker, the Australian Energy Market Commission.
If accepted, the rule change proposal is likely to have dramatic implications for generators, who will be held to a high standard in justifying their rebids. Practical and procedural changes will need to be made by generators, ensuring that the additional requirements to justify rebids can be met and demonstrated to have been met.
The rule change proposal may also have implications for electricity consumers. The restrictions on the circumstances in which rebids can be made may limit a generators ability to increase the price for which electricity is supplied, particularly during periods of high demand.