Regulator finds AEMO made ‘intentional and avoidable’ breach of market rules

An investigation by the state regulator has found the Australian Energy Market Operator knowingly breached the rules of the Western Australian electricity market when it awarded special status to two power stations, allowing them to receive millions of dollars in capacity payments.

The findings were made by the WA Economic Regulation Authority, which issued AEMO with a formal warning, after AEMO self-reported the rule breaches, which occurred in 2016, and undertook to implement revised assessment processes.

The investigation by the WA ERA found that AEMO had intentionally used its discretion to award special status in breach of the market rules.

An AEMO spokesperson told RenewEconomy that the market body acknowledged the rule breaches, and said that AEMO had implemented new controls to prevent a reoccurrence in the future.

“AEMO confirms that the non-compliance breaches outlined by the ERA occurred in 2016 (for the deferred 2015 Reserve Capacity Cycle). They were identified and addressed as part of the annual independent market audit undertaken that year,” the spokesperson said.

“Since the 2016 market audit that identified this breach, AEMO has implemented revised procedures and tightened its internal due-diligence controls for assigning CRC to prevent future non-compliance events in this area. AEMO has clearly communicated the acceptable criteria for certification of [reserve capacity] since the breach via several communication channels, including annual stakeholder workshops to explain the requirements of the certification process, as well as via regular interactions with Market Participants.”

“There have been zero non-compliance findings relating to the CRC assessment process that have been reported since AEMO self-reported this breach to the ERA.”

The Western Australian energy market operates independently to the National Energy Market that connects east Australian states and contains some notable differences to that of the eastern market, including its own version of the so-called “capacity market”.

Under this capacity market, generators are issued ‘capacity credits’ for the generation capacity they can provide to the market at certain times.

These credits provide revenues to generators, as they can be traded with electricity retailers and large energy users, that must acquire a sufficient number of credits to match their forecast loads. Some power stations have funded their entire investment with capacity credits, without ever having been switched on.

Auditors found that AEMO awarded two un-named power stations “Certified Reserve Capacity” status, which is a gateway to being able to trade in capacity credits, the value of which can run into the millions of dollars.

AEMO was found to have breached the market rules in two instances in 2016 when it awarded the Certified Reserve Capacity status to two facilities that AEMO knew should not have been eligible to receive the status.

In one instance, AEMO had used its discretion to grant the Certified Reserve Capacity status to a facility that had yet to secure a network access arrangement. The project was eventually abandoned, and was never able to trade in the capacity credits, and did not receive any additional revenues.

However, in a second rule breach, two additional facilities were awarded an increase in their assessed Certified Reserve Capacity, despite not being able to deliver on the increased output.

AEMO had awarded the status on the assumption that the facilities would be successful in achieving the higher level of output, again using its discretion in a manner the market rules did not allow.

“The non-compliance breaches relate to the process of assigning Certified Reserve Capacity, which is a pre-cursor to the assignment of Capacity Credits, that determines the price paid to capacity providers. The CRC assessment and assignment process ensures that there is sufficient generation and Demand Side Management capacity to meet the peak demand periods in the Wholesale Electricity Market,” the AEMO spokesperson said.

“At the time of CRC assignment for the 2015 Reserve Capacity Cycle, and on the basis of information available at the time, AEMO believed that the level of CRC assigned to two facilities would be available to the WEM by 1 October 2017, the start of the relevant Capacity Year.”

In this second incident, the facilities were awarded additional tradable Capacity Credits that they were otherwise ineligible to receive and providing the facilities with an estimated financial advantage of around $1.2 million in additional capacity payments, as calculated by AEMO’s auditors.

Under WA’s Wholesale Electricity Market rules, AEMO is unable to use its discretion grant Certified Reserve Capacity status to facilities can provide firm evidence of their ability to deliver on the claimed reserve capacity.

AEMO identified the breaches as part of an internal audit, and self-reported them to the Economic Regulation Authority.

“The ERA’s investigation confirmed that AEMO knowingly breached the Market Rules when it allocated the capacity to the two participants. At the time, AEMO believed its actions would better serve the market objectives,” the ERA said in a statement.

In assessing AEMO’s reported breaches, the authority found the breaches were “intentional and avoidable” and has issued AEMO with a formal warning.

The WA energy market was originally operated by the Independent Market Operator, but AEMO took over responsibilities for operating the WA market in 2015.

The ERA has responsibility for assessing and enforcing compliance with the electricity market rules, and may issue formal warnings, as well as undertaking proceedings for civil penalties and other orders from WA’s Electricity Review Board.

The facilities that the breaches relate to, including those who received excess credits, have not been disclosed.

The ERA told RenewEconomy that the market rules specified that the details of the investigation were to remain confidential, beyond the information it has included in an issued breach notice.

“Investigations of non-compliance carried out under clause 2.13.10 of the Market Rules are classified as “Rule Participant Market Restricted”. Information assigned this classification cannot be made public without the consent of the relevant party,” a spokesperson for ERA said.

AEMO published some additional information related to the findings of its internal audit.