The Australian Energy Market Commission (AEMC) has implemented a new rule which commenced (after delay) on 1 May 2022. The new rule relates to a change in the current market settlement framework. The rule changes the framework from the previous framework of ‘settlement by difference’ to a ‘global settlement’ framework.
What is the difference/ what’s changed?
The ‘settlement by difference’ framework was designed at a time when local retailers supplied electricity to all small customers. Under this approach, electricity within a distribution area was billed to the local retailer, except for the loss-adjusted metered electricity consumed by the customers of independent retailers, within their local area. This means that the local retailer for an area bore the risk of all residual electricity losses in that area (UFE). UFE includes unaccounted for technical losses, commercial losses and meter profiling errors.
Under a ‘global settlement framework’ every retailer is billed for the loss-adjusted metered electricity that is consumed by their customers within the area. The UFE is then allocated to market customers (mainly retailers) in the local area, pro-rated based on their ‘accounted-for’ energy.
What is the procedural background to the change?
On 16 March 2018, the AEMC received the rule change request. On 10 May 2018, the AEMC published a draft consultation paper and published a draft determination and draft rule on 30 August 2018.
The Rule was scheduled to commence on 6 February 2022. However, the commencement was delayed under the National Electricity Amendment (Delayed Implementation of five minute and global settlement) Rule 2020 No. 10 and commenced on 1 May 2022.
Why has the framework changed?
The AEMC cited three key reasons for the change:
1. Improved transparency, leading to fewer settlement disputes and lower levels of UFE over time. Under global settlements AEMO will be able to fully reconcile energy within each distribution network because it will receive data from all retailers in the area. Full reconciliation will allow for better and timelier identification, mitigation and prevention of settlement errors. This will reduce costs of resolving settlement disputes, which are currently substantial. Increased transparency of UFE will also allow for AEMO to report on UFE levels and actions to reduce UFE.
2. Competition on equal terms. No matter how well-designed, there will always be some UFE in the NEM. To facilitate effective retail competition in the long term, it is important that where there are shared market inefficiencies, they are shared in a manner which does not distort competition. The final rule does this by allocating UFE to all retailers based on their accounted-for energy within each local area.
3. Improved risk allocation driving enhanced incentives. Under the Commission’s preferred global settlements design, UFE is allocated to all retailers in the local area, pro-rated based on their ‘accounted-for’ energy. By allocating UFE to retailers, they will face the risk of UFE, and therefore, will be provided with improved incentives to reduce UFE (for example, by installing smart meters and reconfiguring meters to record five minute data). Through this process, it is expected that UFE levels will be lower under global settlement.
What are the design features of global settlement within the rule?
The key design features of global settlements within the final rule are:
- The level at which UFE is allocated: UFE will be calculated and allocated at the local area (i.e. distribution network) level.
- Who and how to allocate UFE: UFE will be allocated across all market customers (i.e. retailers) in each local area, pro-rated based on their accounted-for energy.
- Transparency framework: A reporting obligation will be introduced for AEMO to publish annual reports which provide information and analysis of UFE in each local area. These reports will include recommendations to improve visibility of, and actions to reduce, UFE.
- Accounting for energy associated with unmetered loads: AEMO to include guidance in the • metrology procedures and unmetered load guidelines on how to incorporate non-type 7 unmetered loads in settlement.
- Networks responsible for inter-network metering: Instead of the local retailer being the • metering coordinator at the relevant network connection point, the relevant network is, or can appoint, the metering coordinator for that connection point.
What are the implications of the rule change for retailers?
Under the new rule, every retailer will be billed for the loss-adjusted metered electricity that is consumed by their customers within a given region. AEMO will then allocate the UFE to market customers in that local area, pro-rated based on their “accounted-for” energy.
