Settlement and Prudential Review 2011-12
Purpose and scope of review
In February 2011, the Authority commenced a review of wholesale market settlement and prudential obligations.
The purpose of the review is to ensure that settlement and prudential arrangements are consistent with the Authority's statutory objective, which is to promote competition in, reliable supply by, and the efficient operation of, the electricity industry for the long-term benefit of consumers. In particular, prudential obligations should achieve an appropriate balance between the financial security of the market (the confidence that there will be sufficient money available to pay generators) and the promotion of competition by encouraging new entry into the retail market.
The review consists of two phases:
- Quick wins - The aim of the quick wins phase is to implement any reasonably uncontroversial, easily implemented changes that can be identified. The changes that have been identified are shown below along with progress as at 19 December 2011.
- A first principles review - This phase of the project would review fundamental issues relating to settlement and prudential arrangements. The Authority expects to make decisions on the future shape of these arrangements by mid 2012.
The Wholesale Advisory Group (WAG) has accepted the Authority's invitation to lead the first principles review phase of the project. This means that the WAG has reviewed the project plan, has taken responsibility for deciding what analysis is needed, intends to approve discussion papers for publication, and make a recommendation to the Authority's Board.
Quick wins process
The following table shows the quick wins that the Authority has identified, along with progress on implementing those quick wins as at 19 December 2011.
|
Quick wins |
Progress as at 19 December 2011 |
|---|---|
| Improvements to the calculation of required prudential levels. In particular, this would involve moving away from using bids as an estimate of historic purchases in the credit period. Instead, the calculation would use GXP metered quantities from the pricing schedule (adjusted for any embedded generation), which would be allocated to purchasers by market share. | The Clearing Manager has undertaken a consultation process to gather opinion on the changes it has proposed. The Clearing Manager is finalising its quick wins recommendations to the Authority, taking into consideration views expressed in submissions. Work is expected to begin soon on implementation. |
| “Business as usual” improvements to settlement processes | Completed |
| Amendment to the Electricity Industry Participation Code 2010 (Code) to recognise a long term A- rating from Fitch Ratings as an acceptable credit rating | Completed |
| Enabling utilisation of cash deposits on settlement day in case of default | Completed |
| Preparing information sheets: | |
|
Completed |
|
Completed |
The Authority also intends to review its existing guidelines for managing payer default. This is a closely related project because the speed with which a defaulting payer can be stopped from accruing further wholesale payment obligations influences the magnitude of the default risk faced by the market.
First Principles Review
As noted above, the WAG is leading this phase of the project. For details on the WAG's meeting dates please refer to the WAG's webpage.
The Authority has already:
- meet individually with a number of stakeholders, and will continue to meet with others, to discuss the shape of future settlement and prudential arrangements;
- examined settlement and prudential arrangements in Australia's national electricity market (NEM) as a useful point of comparison for New Zealand's arrangements;
- developed a detailed model of settlement and prudential information from 2005 onwards;
- produced initial results from the model on various statistics relating to prudential security, such as 'loss given default; and
- begun testing various options for improving the settlement and prudential system.
The kind of issues that are being considered as part of the first principles review are:
- whether settlement should be gross or net;
- settlement frequency, including the possibility of a “pay as you go” approach involving payments based on estimates;
- the degree of prescription compared to discretion given to the clearing manager;
- the amount / level / period that prudential security should cover;
- the forms of security, such as the use of cash and hedge arrangements; and
- which parties should ultimately bear the prudential risk.
The first principles review may also provide an opportunity to redraft part 14 of the Code to make it more easily understood.
Subject to decisions by the WAG, the Authority envisages that a discussion paper will be published during April 2012 that sets out the problem definition and evaluates proposed solutions. The WAG will consider submissions and make a recommendation to the Authority on its preferred solution by June 2012. A consultation paper may then be published by the Authority on proposed Code amendments. Any implementation date would depend on the nature of the changes and on discussions with service providers such as the clearing manager (NZX).
This page is related to: Retail and Wholesale Market.