Australian Energy Market Commission looks at congestion management

By Michelle Schonstein.

Key Points:
The Commission is considering whether improvements in trading arrangements would assist in managing the issues of congestion and pricing in the National Energy Market.

The Directions Paper on Congestion Management Review, released by the Australian Energy Market Commission on 12 March 2007, seeks to bring industry participants up-to-date on the progress of the Congestion Management Review currently being undertaken by the Commission at the direction of the Ministerial Council on Energy. The Review itself focuses on the problems associated with congestion in the National Energy Market, and how best to address them.

In its Review, the Commission is considering whether improvements in trading arrangements would assist in managing the issues of congestion and pricing in the National Energy Market. The Commission was given two main Terms of Reference for the Review:

• to identify and develop improved arrangements for managing financial and physical trading risks associated with material network congestion; and
• to articulate the relationship between a constraint management regime and other matters impacting on congestion.

What is congestion?

Transmission congestion arises when transmission limits prevent NEMMCO from dispatching the power system based on the least cost-effective combination of bids and offers made by market participants. Transmission limits are generally based on the thermal capability of components of a transmission network or power system stability requirements.

Effects of congestion

Transmission congestion can create both physical and financial trading risks for participants in the market, which need to be managed effectively in order to create more balanced and realistic market outcomes.

The Commission is currently focusing on the issue of the materiality of congestion in the market, or in other words, how frequently the problem occurs, and the level of impact it has on the market. At this stage, the Commission has not yet established whether or not the issue of congestion is a material problem in the National Energy Market. As a result, the Commission has begun a major project to further analyse the materiality of congestion, before making any recommendations for improvements to the current system.

Current congestion management arrangements

At the moment, the main features of the National Energy Market that manage congestion include:

• the dispatch process
• spot and transmission pricing arrangements
• information requirements; and
• transmission economic regulatory provisions.

These design features are currently under review, and some changes have already been made, with more likely to follow.

Options for managing physical and financial trading risks

According to the Commission's findings to date, two main "paths" are being considered for the management of physical and financial trading risks:

• first, the creation of mechanisms (particularly a system that prices congestion more accurately) to assist participants to better manage trading risk; and
• secondly, reducing the congestion itself, thereby preventing trading risks from occurring as frequently. This reduction could be effected by investing in both transmission services and transmission alternatives.

Having considered the range of possibilities, and also the changes to the National Energy Market that have recently been made, the Commission intends to focus on:

• enhanced information provisions regarding network operation and congestion incidence and impact
• pricing for "constrained-on" generation
• modifications to the Inter-Regional Settlement Residues hedging instruments
• constraint support pricing and constraint support contracts; and
• constraint-based residues.

Next steps

The release of the draft report on the outcome of the Review was originally intended to be in June 2007. That date is now being extended, with the Commission expecting to announce the date for the release of the draft Review in the coming weeks.

The Commission invites submissions on the issues raised in the Directions Paper by 13 April 2007.

For further information, please contact Faith Taylor.