Regulation Impact Statement Updates

Official website for publishing regulatory impact analysis information for regulatory decisions announced by the Australian Government, COAG and COAG Councils.

Short Term Forward Market for electricity derivatives

13th March 2020

COAG Decision Regulation Impact Statement – Australian Energy Market Commission

On 5 March 2020, the Australian Energy Market Commission (AEMC) released a final rule determination for the Short Term Forward Market rule change request (ERCO259). The AEMC has determined not to make a final rule in relation to introducing a voluntary short term forward market (STFM) in the national electricity market (NEM).

On 20 December 2018, the Australian Energy Market Operator (AEMO) submitted a rule change request to the AEMC proposing the introduction of a STFM for electricity derivatives, operating alongside the NEM, on the basis that it could:

  • contribute to the reliable and secure supply of electricity by addressing potential barriers to demand side participation, and creditworthiness and collateral requirements for smaller participants—providing more avenues for participation could lead to more efficient spot market outcomes and long term investments;
  • improve short term operational decisions of market participants in the face of volatile market conditions, e.g. holding a swap contract incentivises generators to be available when needed to earn revenue in the spot market to fund payouts on their contract positions; and
  • support long term contracting by providing signals of market expectations of future spot prices, lowering the cost of financing investment in generation capacity and underwrite retailers' fixed price offers to end-customers.

In its final rule determination, the AEMC has concluded that a STFM is unlikely to generate material benefit to consumers, based on (inter alia):

  • findings that there is limited demand for short term hedging products and, if demand were to develop, industry can facilitate the trade of such products;
  • if introduced, a STFM would not be actively traded on and would not provide investment signals, or materially improve short term operational decisions; and
  • enduring reforms that bring the NEM closer to a two-sided market would be of more value to participants and AEMO with respect to reliability and security than a STFM.

Having regard to the issues raised in the rule change request and during its consultation, the AEMC has not been satisfied the proposed rule will, or is likely to, contribute to the achievement of the national electricity objective (NEO).

The AEMC’s final rule determination has been assessed by the Office of Best Practice Regulation as compliant with requirements for a Council of Australian Government’s Decision RIS.


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