Who claims and who pays: the administered price cap (APC) compensation process

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The APC compensation scheme allows certain entities to claim compensation via AEMO and the AEMC where their total costs exceed their total revenue from the spot market over an eligible period. Entities that may be entitled to claim include scheduled and non-scheduled generators, scheduled network service providers, market participants in respect of a scheduled load, demand response service providers and ancillary service providers.

What is recoverable?

There are two broad categories of compensation that go into the total compensation amount (TCA). These are direct costs and opportunity costs.

Opportunity costs are defined in the AEMC’s guideline as follows:

Opportunity cost is the value of the best alternative opportunity for eligible participants during the application of a price limit event or at a later point in time. The opportunity cost is the foreclosure of this alternative opportunity to use scarce capacity or resources more profitably at the same point in time or at a later point in time.

The TCA is calculated on the basis of the following formula:

Where:

TCA = Total Claimable Amount.

DCt = Direct costs incurred in the eligibility period(s).

OCt = Opportunity costs incurred over the relevant period of time.

REVt = Actual or potential revenue.

OTHt = Any other adjustments to the amount of compensation payable to be taken into consideration by the Commission.

t = relevant period of time for which a claim is being made. The claimant is to define the time period(s) for which it is making a claim for compensation which should be limited to periods where the price limit event applies. The relevant time period may vary depending on the type of claim. The AEMC would assess whether the claimant has demonstrated the requirements for a claim in the relevant time period(s).

Claims for opportunity costs will be published. Claims for direct costs will not be published. Public scrutiny of claims for opportunity costs in the current environment are likely to limit the number of such claims made.

Who pays?

Ultimately, and unsurprisingly, consumers will ultimately pay for all of this.

Following the assessment process, if the AEMC determines that compensation is payable, it will advise AEMO of the total amount payable for each relevant period. AEMO will then recover the cost of compensation from market customers who consumed energy in the relevant eligibility period (s) in the relevant region.

AEMO’s determination is made pursuant to clause 3.15.10 (b) of the NER which provides:

AEMO shall determine the amounts payable for each eligibility period by each of the Market Customers referred to in clause 3.15.10(a) as follows:

where

APC is the total amount of any compensation payments awarded by the AEMC to Scheduled GeneratorsNon-Scheduled GeneratorsMarket ParticipantsScheduled Network Service Providers or Ancillary Service Providers in respect of that eligibility period in accordance with clause 3.14.6.

Ei is the sum of all of the Market Customer’s adjusted gross energy amounts, determined in accordance with clauses 3.15.4 and 3.15.5, in respect of each trading interval in the eligibility period and each connection point for which the Market Customer is financially responsible in the cost recovery region.

∑Ei is the sum of all amounts determined as “Ei” in accordance with this clause 3.15.10 for all Market Customers in the cost recovery region.

eligibility period means the period starting at the beginning of the first trading interval in which the price limit event occurs in a trading day and ending at the end of the last trading interval of that trading day.

In other words, retailers and other market participants will need to pay for compensation determined to be payable by AEMC. This presents a number of interesting consequences:

Firstly, new entrant retailers who enter the market after the current crises fades away won’t be liable to pay compensation to AEMO as they were not active in the relevant region at the relevant time. Presumably, all retailers will seek to recover the increased AEMO market fees from their customers and those fees will be factored into the next DMO and VDO. This may give smaller retailers an advantage over incumbents. In the context of smaller retailers leaving the market, this may be a net positive outcome as we will need new entrants to re-enter and re-invigorate retail competition.

Secondly, retailers with forward contracts in place won’t be too pleased by having to pay compensation via market fees for amounts that would otherwise be covered by those relevant contracts. Indeed, it appears that there may be scenarios where generators with direct OTC contacts with retailers are compensated despite relevant losses being attributable to contractual positions that they voluntarily entered into. Sure, the market conditions are unprecedented.

Finally, the calculation looks at gross energy amounts- so solar exports from customers during the relevant periods continued to be important.

The clock is now ticking on generators and others to make claims. Once those claims are made it will take some time for us to understand the full extent of amounts payable under this scheme.

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