CREDIT LIMITS METHODOLOGY

Transcription

1 CREDIT LIMITS METHODOLOGY PREPARED BY: Electricity Metering & Settlements DOCUMENT NO: N/A VERSION NO: 10 PREPARED FOR: National Electricity Market FINAL

2 Disclaimer (a) Purpose This document has been prepared by the Australian Energy Market Operator Limited (AEMO) for the purpose of complying with clause of the National Electricity Rules (NER). (b) Supplementary Information This document might also contain information the publication of which is not required by the NER. Such information is included for information purposes only, does not constitute legal or business advice, and should not be relied on as a substitute for obtaining detailed advice about the National Electricity Law, the Rules, or any other relevant laws, codes, rules, procedures or policies or any aspect of the national electricity market, or the electricity industry. While AEMO has used due care and skill in the production of this document, neither AEMO, nor any of its employees, agents and consultants make any representation or warranty as to the accuracy, reliability, completeness, currency or suitability for particular purposes of the information in this document. (c) Limitation of Liability To the extent permitted by law, AEMO and its advisers, consultants and other contributors to this document (or their respective associated companies, businesses, partners, directors, officers or employees) shall not be liable for any errors, omissions, defects or misrepresentations in the information contained in this document or for any loss or damage suffered by persons who use or rely on this information (including by reason of negligence, negligent misstatement or otherwise). If any law prohibits the exclusion of such liability, AEMO s liability is limited, at AEMO s option, to the re-supply of the information, provided that this limitation is permitted by law and is fair and reasonable All Rights reserved May 2012 Credit Limits Methodology Version 10 I

3 Version Control VERSION DATE DETAILS 6.0 May 2009 Version 6 is effective from 27 May 2009 onwards, and includes changes to support Swap and Cap Reallocations, and an adjustment to the MCL to reflect situations where a participant has credit and debit amounts distributed in different regions. 6A Nov 2009 Update to AEMO Format 7 May 2011 Version 7 is effective from 5 May 2011 and includes changes to ensure that Reduced MCL is not applied to swap and cap reallocations and that reallocation profiles are consistent with load profiles with respects to off and on peak timeframes. 8 October 2011 Version 8 is effective from 6 th October 2011 and includes a change to maximum credit limit value rounding and additional information for new entrants. These changes were recommended in AEMO s Final Report on Prudential Readiness Review, April November 2011 Version 9 is effective from 7 November 2011 and includes a change to the calculation to correct an error in the calculation of inter regional debits which gave rise to inappropriate inter-regional adjustments under certain scenarios. 10 May 2012 Version 10 is effective from 11 May 2012 and includes a transitional approach for managing the step change in prices from 1 July 2012 anticipated with the introduction of a carbon price under the clean energy bill Reference to the transitional arrangements associated with abolishing of the Snowy region has been deleted. May 2012 Credit Limits Methodology Version 10 II

4 Table of Contents 1. PURPOSE OF DOCUMENT 1 2. INTRODUCTION 1 3. RATIONALE FOR SETTING A MAXIMUM CREDIT LIMIT (MCL) 1 4. RATIONALE FOR SETTING A PRUDENTIAL MARGIN (PM) 2 5. NER REQUIREMENTS FOR DETERMINING MCL AND PM 2 6. BASIS OF CALCULATION 2 7. FREQUENCY OF REVIEW 3 8. THE MAXIMUM CREDIT LIMIT CALCULATION 5 9. THE PRUDENTIAL MARGIN CALCULATION THE TYPICAL ACCRUAL CALCULATION DETAILS OF THE MCL AND PM COMPONENTS Average future RRP (PR) Adjustment for the Introduction of a Carbon Price Estimated Load & Generation (ELR/EGR) Average loss factor (LFR) Credit & Reaction Time Period (TCP/TRP) Volatility factor (VFR) & Capped Volatility factor (VFR,C) Goods and Services Tax Rate (GST) Reallocation Load Credit & Debit (RC R /RD R ) 12 Reallocation Swap Energy Credit & Debit (RCS R /RDS R ) Reallocation Swap Price Credit & Debit (PCS R /PCS R ) Reallocation Cap Energy Credit & Debit (RCC R,C /RDC R,C ) Reallocation Dollar Credit & Debit (RC$ R /RD$ R ) Reallocation profile adjustments Ancillary Service Costs ROUNDING MCL DETERMINATION MCL FOR NEW ENTRANTS MCL AND PM METHODOLOGY REVIEW TRADING LIMIT CALCULATION OF VOLATILITY FACTOR AND CAPPED VOLATILITY FACTOR Deriving the Volatility Factor Deriving the Capped Volatility Factor Method 1: Regions with sufficient historical data Method 2: Regions with insufficient historical data 17 May 2012 Credit Limits Methodology - Version 10 Page III

5 1. PURPOSE OF DOCUMENT This document has been prepared to describe AEMO's methodology for determining the Maximum Credit Limit (MCL) and Prudential Margin (PM) for each Market Participant pursuant to Clause of the National Electricity Rules (NER) as amended. In this document, a word or phrase in this style has the same meaning as given to that term in the NER. 2. Introduction AEMO acts as the principal in the settlement of financial transactions with Market Participants related to the electricity spot market. Settlement occurs up to 5 weeks after the liability accrues, which gives rise to the need for credit and credit limits. AEMO's obligation to settle payments due to Market Participants in relation to a billing period is limited to the extent of funds received from Market Participants in respect of that billing period or provided under credit support arrangements. The relationship between AEMO and the Market Participants is illustrated in the following diagram: SETTLEMENT OF FINANCIAL TRANSACTIONS: Net receivers Net payers Market Participant Market Participant Credit Support Provider Market Participant AEMO as principal in NEM settlement Market Participant Credit Support Provider Market Participant Market Participant Credit Support Provider cash flows credit support flows If a Market Participant cannot satisfy the acceptable credit criteria, that Market Participant must provide AEMO with an unconditional guarantee in the form specified by AEMO from an acceptable credit support provider for an amount that is greater than or equal to the Market Participant's MCL. AEMO may draw on the guarantee if payment is not cleared in time to meet a settlement deadline. Any shortfall in AEMO's recovery from any Market Participant in relation to a billing period is shared proportionally by Market Participants due payments in that billing cycle in accordance with clauses and of the NER. 3. Rationale for Setting a Maximum Credit Limit (MCL) Confidence of the Market Participants in the financial settlement of spot electricity transactions is critical to the operation of the NEM and setting the spot market price (regional reference price or RRP). May 2012 Credit Limits Methodology - Version 10 Page 1 of 17

6 The NER govern the prudential supervision of Market Participants, and are designed to ensure credit risk is not factored into the determination of the RRP. A key element of the NER is a requirement for Market Participants to provide credit support in the form of an unconditional guarantee from an approved financial institution to pay AEMO an amount up to a pre-determined value, which is the MCL, defined as a reasonable worst case estimate of the NEM's potential exposure to the Market Participant. 4. Rationale for Setting a Prudential Margin (PM) The PM represents a buffer below the MCL, which sets the limit under which a Market Participant is permitted to trade. Its purpose is to ensure that AEMO is not exposed to a prudential risk during the period of suspending a defaulting Market Participant from the NEM (reaction period). 5. NER Requirements for Determining MCL and PM AEMO is required to develop a methodology to determine the MCL and PM of each Market Participant, that is, Market Generators, Market Customers and Market Network Service Providers (MNSPs) in accordance with clause of the NER. The NER do not prescribe the formula to determine the MCL and PM, but specify the principles of the calculation. Clause 3.3.8(b) of the NER requires that the MCL be determined "...on the basis of a reasonable worst case estimate of the aggregate payments for trading amounts (after reallocation) to be made by the Market Participant to AEMO over a period of up to the credit period applicable to that Market Participant." Clause 3.3.8(c) of the NER requires that the PM be determined on the basis of a reasonable worst case estimate of the aggregate of the expected trading amount and the reallocation amount owing by the Market Participant to AEMO in respect of the reaction period. Reasonable worst case is defined as a position that, while not being impossible, is to a probability level that the estimate would not be exceeded more than once in 48 months. 6. Basis of Calculation The methodology to determine a MCL for each Market Participant is based on a number of components that are consistent with clause and Schedule 3.3 of the NER. The key components are: The MCL calculation takes into account a Market Participant s average daily trading behaviour in the NEM, including energy purchases, generation sales and reallocation. Market ancillary services costs are not included (refer to Section 11.8). The MCL is assessed over a period that differs depending on whether the value is a credit or debit against AEMO. For debit amounts (energy purchases and reallocation debit) the full credit period is used (ie. 42 days, or 28 days where a reduced MCL has been approved following a request from a Market Participant under clause S3.3.1(b)(6)(iii) of the NER (Reduced MCL)). For credit amounts (generation sales and reallocation credit), the period does not include the reaction period (i.e. 35 days, or 21 days where a Reduced MCL has been approved). This approach is based on a reasonable worst case position of debits continuing to accrue during the reaction period, whilst credits cease at the start of the reaction period. An average RRP for each region is used to derive trading amounts from energy values. May 2012 Credit Limits Methodology - Version 10 Page 2 of 17

7 A volatility factor (VF) per region is used as a scaling factor to derive the reasonable worstcase value from an historical average value. Swap reallocations are valued at the difference between the strike price and the VF adjusted average RRP. Swap reallocations are always applied on the basis of a 42-day credit time period regardless of Reduced MCL approval. Cap reallocations are valued using a capped VF. Floor reallocations are not included in the calculation. Cap reallocations are always applied on the basis of a 42-day credit time period regardless of Reduced MCL approval. Additional scaling factors are used to derive a more accurate estimate of trading amounts, specifically loss factor and GST. The MCL is adjusted based on the distribution of credit and debit amounts across regions. In cases where there is more credit amount than debit amount in a given region, the MCL reduction attributable to the credit in excess of the debit amount (up to the amount of the total of debit amount in excess of credit amount in each of the other regions) is calculated without the VF. This approach is based on a reasonable worst case position that high prices are not correlated across regions. The reallocation amount is adjusted when the off-peak proportion of the Market Participant s credit reallocations profile is in excess of the off-peak proportion of the Market Participant s load profile in a region. The MCL is zero if the value calculated is negative and rounding is applied to the MCL to eliminate insignificant changes and to simplify the management of credit support. MCLs and PMs for new Market Participants are based on information provided by them, including projected load growth and estimates of load during construction and commissioning. Where information is unavailable the parameters set out in Section 14 may be used. The methodology to determine a PM for each Market Participant is based on similar components to the MCL, with the following key differences: The calculation of the PM takes into account only a Market Participant s net debit amounts against AEMO for energy and reallocations. Where a Market Participant has a net credit for either energy or reallocations, the respective energy or reallocation amounts are not included in the PM calculation, as a reasonable worst case position is that they would cease at the start of the reaction period. The PM is always assessed over a period equal to the reaction period (defined as 7 days). 7. Frequency of Review Clause 3.3.8(e) of the NER requires that the MCL and PM for each Market Participant be reviewed annually. AEMO s policy is to review the MCLs, including the values of the regional parameters used in the determinations, approximately every 3 months. Clause 3.3.8(f) states that AEMO may change any Market Participant's MCL or PM at any time. Reasons for AEMO to review an MCL or PM include, without limitation: - Market Participant request; The issue of a call notice; The consumption pattern or reallocation arrangements have suddenly changed; May 2012 Credit Limits Methodology - Version 10 Page 3 of 17

8 Significant change in the projected customer load due to unusual contestable customer transfer volumes, especially those associated with retailer mergers, takeovers or withdrawals; Significant differences between actual load of a new Market Participant compared with load forecasts provided; Significant change in the pattern of prospective (ex ante) reallocation requests and registrations (including the off- and on-peak profile of the reallocations) applied as an offset to customer load in the MCL calculation; and Significant change in the availability of generation capacity applied as an offset to customer load in the MCL calculation. May 2012 Credit Limits Methodology - Version 10 Page 4 of 17

9 8. The Maximum Credit Limit Calculation The MCL Calculation is represented by: MCL = Max[ R MCL R, 0] MCL R = (VEL R + VRD R + RD$ R ) x T CP (MCL increased by debit) (VEG R + VRC R + RC$ R ) x (T CP T RP ) (MCL decreased by credit) + RCS R x PCS R x (42 T CP ) (credit swaps adjustment if T CP 42) + RDS R x (P R x VF R PDS R ) x (42 T CP ) (debit swaps adjustment if T CP 42) + C [RCC R,C x (P R x VF R,C )] x (42 T CP ) (credit cap adjustment if T CP 42) + C [RDC R,C x (P R x VF R P R x VF R,C )] x (42 T CP ) (debit cap adjustment if T CP 42) + Min[VXC R, VID R ] x (1 1/ VF R ) x (T CP T RP ) (inter-regional adjustment) VXC R = Max[(VEG R + VRC R ) (VEL R + VRD R ), 0] VID R = All Except R Max[(VEL R + VRD R ) (VEG R + VRC R ), 0] VEL R = EL R x P R x VF R x LF R x (GST + 1) VEG R = EG R x P R x VF R x LF R x (GST + 1) VRD R = RD R x P R x VF R (value of excess credit in region) (value of inter-regional debit) (value of energy load) (value of energy generation) (value of debit energy reallocations) + RDS R x (P R x VF R PDS R ) (value of debit swap reallocations) + C [RDC R,C x (P R x VF R P R x VF R,C )] (value of debit cap reallocations) VRC R = RC R x P R x VF R (value of credit energy reallocations) + RCS R x (P R x VF R PCS R ) (value of credit swap reallocations) + C [RCC R,C x (P R x VF R P R x VF R,C )] (value of credit cap reallocations) where: P R represents AEMO s estimate of the average future RRP for each Market Region R; VF R is a volatility factor, which is a scaling factor used to derive a reasonable worst case value for each region R; VF R,C is a capped volatility factor for a cap value of C in region R; EL R represents AEMO s estimate of the participant s average daily load in each region R; EG R represents AEMO s estimate of the participant s average daily generation in each region R; RC R RD R RCS R represents the average daily energy of prospective (ex ante) energy reallocation transactions, adjusted in accordance with Section where appropriate, for which the Market Participant is the credit party, calculated at the RRP of region R; represents the average daily energy of prospective (ex ante) energy reallocation transactions for which the Market Participant is the debit party, calculated at the RRP of region R; represents the average daily energy of prospective (ex ante) swap reallocation transactions, adjusted in accordance with Section where appropriate, for which the Market Participant is the credit party, calculated at the RRP of region R; May 2012 Credit Limits Methodology - Version 10 Page 5 of 17

10 RDS R PCS R PDS R represents the average daily energy of prospective (ex ante) swap reallocation transactions for which the Market Participant is the debit party, calculated at the RRP of region R; represents the swap energy-weighted average strike price for prospective (ex ante) swap reallocation transactions for which the Market Participant is the credit party, calculated at the RRP of region R; represents the swap energy-weighted average strike price for prospective (ex ante) swap reallocation transactions for which the Market Participant is the debit party, calculated at the RRP of region R; RCC R,C represents the average daily energy of prospective (ex ante) cap reallocation transactions, adjusted in accordance with Section where appropriate, for which the Market Participant is the credit party, for a cap value C, calculated at the RRP of region R; RDC R,C represents the average daily energy of prospective (ex ante) cap reallocation transactions for which the Market Participant is the debit party, for a cap value C, calculated at the RRP of region R; RC$ R RD$ R T CP T RP LF R GST represents the average daily dollar amount of prospective (ex ante) dollar reallocation transactions for which the Market Participant is the credit party, in each region R; represents the average daily dollar amount of prospective (ex ante) dollar reallocation transactions for which the Market Participant is the debit party, in each region R; is the credit time period, which is 42 days, unless the Market Participant has requested a Reduced MCL, in which case T CP is 28 days; is the reaction period, which is 7 days; represents AEMO s estimate of the loss factor applicable across all participants for each region R; represents the applicable rate for the Goods and Services Tax; The calculated value is rounded in accordance with Section 12. Detailed definitions of each term is provided in Section 11. The approach adopted for calculating the MCL necessitates modelling assumptions. The reasonableness of AEMO's modelling assumptions will be monitored and periodically tested to ensure the adopted methodology continues to estimate an MCL that meets the requirements of the NER. May 2012 Credit Limits Methodology - Version 10 Page 6 of 17

11 9. The Prudential Margin Calculation The PM calculation is represented by: PM = Max[ R (VEL R VEG R ) x T RP, 0] + Max[ R (VRD R VRC R + RD$ R RC$ R ) x T RP, 0] VEL R = EL R x P R x VF R x LF R x (GST + 1) VEG R = EG R x P R x VF R x LF R x (GST + 1) VRD R = RD R x P R x VF R (value of energy load) (value of energy generation) (value of debit energy reallocations) + RDS R x (P R x VF R PDS R ) (value of debit swap reallocations) + C [RDC R,C x (P R x VF R P R x VF R,C )] (value of debit cap reallocations) VRC R = RC R x P R x VF R where: (value of credit energy reallocations) + RCS R x (P R x VF R PCS R ) (value of credit swap reallocations) + C [RCC R,C x (P R x VF R P R x VF R,C )] (value of credit cap reallocations) P R represents AEMO s estimate of the average future RRP for each region R; VF R is a VF, which is a scaling factor used to derive a reasonable worst case value for each region R; VF R,C is a capped VF for a cap value of C in region R; EL R represents AEMO s estimate of the Market Participant s average daily load in each region R; EG R RC R RD R RCS R RDS R PCS R PDS R represents AEMO s estimate of the Market Participant s average daily generation in each region R; represents the average daily energy of prospective (ex ante) energy reallocation transactions, adjusted in accordance with Section where appropriate, for which the Market Participant is the credit party, calculated at the RRP of region R; represents the average daily energy of prospective (ex ante) energy reallocation transactions for which the Market Participant is the debit party, calculated at the RRP of region R; represents the average daily energy of prospective (ex ante) swap reallocation transactions, adjusted in accordance with Section where appropriate, for which the Market Participant is the credit party, calculated at the RRP of region R; represents the average daily energy of prospective (ex ante) swap reallocation transactions for which the Market Participant is the debit party, calculated at the RRP of region R; represents the swap energy-weighted average strike price for prospective (ex ante) swap reallocation transactions for which the Market Participant is the credit party, calculated at the RRP of region R; represents the swap energy-weighted average strike price for prospective (ex ante) swap reallocation transactions for which the Market Participant is the debit party, calculated at the RRP of region R; RCC R,C represents the average daily energy of prospective (ex ante) cap reallocation transactions, adjusted in accordance with Section where appropriate, for which the Market Participant is the credit party, for a cap value C, calculated at the RRP of region R; RDC R,C represents the average daily energy of prospective (ex ante) cap reallocation transactions for which the Market Participant is the debit party, for a cap value C, calculated at the RRP of region R; May 2012 Credit Limits Methodology - Version 10 Page 7 of 17

12 RC$ R RD$ R T RP LF R GST represents the average daily dollar amount of prospective (ex ante) dollar reallocation transactions for which the Market Participant is the credit party, in each region R; represents the average daily dollar amount of prospective (ex ante) dollar reallocation transactions for which the Market Participant is the debit party, in each region R; is the reaction period, which is 7 days; represents AEMO s estimate of the loss factor applicable across all Market Participants for each region R; represents the applicable rate for the Goods and Services Tax; The calculated value is rounded in accordance with Section 12. Detailed definitions of each term is provided in Section 11. May 2012 Credit Limits Methodology - Version 10 Page 8 of 17

13 10. The Typical Accrual Calculation The Typical Accrual (TA) calculation is represented by: TA = DTA x T DTA = R DTA R (daily typical accrual) DTA R = (EL R EG R ) x P R x LF R x (GST + 1) (daily typical accrual) where: + (RD R RC R ) x P R (net energy reallocations) + RDS R x (P R PDS R ) RCS R x (P R PCS R ) (net swap reallocations) + (RD$ R RC$ R ) (net dollar reallocations) P R represents AEMO s estimate of the average future RRP for each region R; EL R represents AEMO s estimate of the Market Participant s average daily load in each region R; EG R RC R RD R RCS R RDS R PCS R PDS R RC$ R RD$ R T LF R GST represents AEMO s estimate of the Market Participant s average daily generation in each region R; represents the average daily energy of prospective (ex ante) energy reallocation transactions, adjusted in accordance with Section where appropriate, for which the Market Participant is the credit party, calculated at the RRP of region R; represents the average daily energy of prospective (ex ante) energy reallocation transactions for which the Market Participant is the debit party, calculated at the RRP of region R; represents the average daily energy of prospective (ex ante) swap reallocation transactions, adjusted in accordance with Section where appropriate, for which the Market Participant is the credit party, calculated at the RRP of region R; represents the average daily energy of prospective (ex ante) swap reallocation transactions, adjusted in accordance with Section where appropriate, for which the Market Participant is the debit party, calculated at the RRP of region R; represents the swap energy-weighted average strike price for prospective (ex ante) swap reallocation transactions for which the Market Participant is the credit party, calculated at the RRP of region R; represents the swap energy-weighted average strike price for prospective (ex ante) swap reallocation transactions for which the Market Participant is the debit party, calculated at the RRP of region R; represents the average daily dollar amount of prospective (ex ante) dollar reallocation transactions for which the Market Participant is the credit party, in each region R; represents the average daily dollar amount of prospective (ex ante) dollar reallocation transactions for which the Market Participant is the debit party, in each region R; is the number of days over which the corresponding outstandings are calculated represents AEMO s estimate of the loss factor applicable across all Market Participants for each region R; represents the applicable rate for the Goods and Services Tax; Detailed definitions of each term is provided in Section 11. The daily typical accrual (DTA) is determined at each MCL review using the same inputs as for MCL and PM. May 2012 Credit Limits Methodology - Version 10 Page 9 of 17

14 The current TA is calculated each business day as part of the prudential monitoring, and is available to Market Participants through the Prudential Dashboard. The Prudential Dashboard is a browser based application provided by AEMO that allows Market Participants to view their current prudential position and attributes. 11. Details of the MCL and PM Components 11.1 Average future RRP (P R ) The average future RRP (P R ) is AEMO s estimate of the RRP expected to prevail for a region R for the purposes of the MCL and PM calculation only. The expected RRP will be the same for all Market Participant loads in that region. The methodology to estimate the expected RRP for each region is determined as the average RRP over the previous 12 months period in that region, taking into consideration any adjustment under Section Where a new region is created, the historical RRPs will be taken from a proxy region as outlined in Section Adjustment for the Introduction of a Carbon Price On 1 July 2012, as a result of the introduction of the Clean Energy Act 2011, it is anticipated that the RRP in each region will increase by approximately $20 per MWh from this date. The calculation of P R will be adjusted where: the effective date of the MCL or PM is on or after 1 July 2012; and the historical RRPs in a region include data prior to 1 July The adjustment is performed by increasing the historical RRPs by $20 per MWh for each trading interval prior to 1 July Estimated Load & Generation (EL R /EG R ) The estimated load (EL R ) for each Market Participant is a positive energy amount that represents the estimated value of the Market Participant s average daily load within region R. The average daily load is estimated by reference to historical loads and evident trends in the Market Participant s usage patterns. For new Market Participants, the estimate will be agreed between AEMO and the Market Participant using any relevant information available. The estimated generation (EG R ) for each Market Participant is a positive energy amount that represents the estimated value of average daily sent-out generation within region R. The average daily sent-out generation is estimated based on historical generation patterns. MNSPs operate so that energy is dispatched in direction and at times leading to a settlement surplus accruing and a credit in the MNSP s settlement account. The dispatched flow varies according to current market conditions, bears a low correlation with historical values and, therefore, cannot be reliably forecast into the future. Accordingly, the estimated load and estimated generation for a MNSP is zero Average loss factor (LFR) The average loss factor (LF R ) is a conservative estimate of the multiplier used to account for transmission losses within each region. To be conservative, the value of LF R chosen should reflect the reasonable high limit of the transmission loss factors for each region. May 2012 Credit Limits Methodology - Version 10 Page 10 of 17

15 The loss factor for all Market Participants shall be set at 1.05 for the purposes of the MCL and PM calculation Credit & Reaction Time Period (TCP/TRP) The credit time period (T CP ) is the typical number of trading days used to calculate a Market Participant s credit exposure. It is the same as the credit period defined in Schedule 3.3 of the NER. It has three components, namely: The billing period, which is defined as 7 days; The payment period, which AEMO has estimated to be 28 days, unless the Market Participant has a Reduced MCL, in which case the payment period will be 14 days for the purposes of calculating the MCL; and The reaction period, which is defined as 7 days. Accordingly, the credit time period (T CP ) is 42 days, or 28 days if the Market Participant has a Reduced MCL. The setting of a Reduced MCL does not affect the settlement timetable in any way. An application for Reduced MCL may be made in writing to AEMO at any time except when an unanswered call notice or default notice has been issued to the Market Participant. The application is usually acknowledged within 2 business days with the issue of an MCL review letter to the Market Participant. The Reduced MCL takes effect on the date nominated in the review letter, which is not less than 5 business days after the date of that review letter. If the Market Participant cancels an application, or a call notice is issued to the Market Participant, then the current application for Reduced MCL is cancelled and AEMO issues an MCL review letter based on a 42-day credit period. The effective date for the increased MCL is not less than 5 business days after the date of the review letter. The reaction period (T RP ) is 7 days Volatility factor (VFR) & Capped Volatility factor (VFR,C) The volatility factor (VF R ) is a number derived from the distribution of RRP and acts as a scaling factor to derive the reasonable worst case value from the historical average liability. The capped volatility factor (VF R,C ) is a number derived from the distribution of capped RRP and acts as a scaling factor to derive the reasonable worst case value for cap reallocations. The volatility factor and capped volatility factor are calculated on a regional basis. The methodology for setting the volatility factor and capped volatility factor are described in the Section 17. As described in Section , the historical RRP values used in the calculation of volatility factor and capped volatility factor will include an adjustment for the introduction of carbon pricing as required Goods and Services Tax Rate (GST) The Goods and Services Tax Rate is the value of the Goods and Services Tax (GST) which is applicable for the 3 month period following the date of the MCL and PM calculation. GST applies to energy purchases and sales in the NEM. Accordingly, the MCL and PM calculation allows for the additional liability due to GST on the value of reasonable worst case energy trading. As reallocation transaction amounts do not attract GST, it is not applied to the reallocation elements of the calculation. May 2012 Credit Limits Methodology - Version 10 Page 11 of 17

16 11.7 Reallocation Load Credit & Debit (RC R /RD R ) Reallocation Swap Energy Credit & Debit (RCS R /RDS R ) Reallocation Swap Price Credit & Debit (PCS R /PCS R ) Reallocation Cap Energy Credit & Debit (RCC R,C /RDC R,C ) Reallocation Dollar Credit & Debit (RC$ R /RD$ R ) Clause of the NER requires that MCLs and PMs are determined after taking into account the effect of reallocations. Substantial reallocation, customer load or both by a Market Generator (at a level approaching the estimated value of energy sales) can lead to its MCL being assessed at a value greater than zero. The reallocation load credit/debit (RC R /RD R ) for each Market Participant is a positive energy amount that represents the estimated average daily energy of prospective (ex ante) energy reallocation requests (i.e. do not specify a strike price) in the immediate future for which the Market Participant is the credit/debit party respectively, for region R. The reallocation swap energy credit/debit (RCS R /RDS R ) for each Market Participant is a positive energy amount that represents the estimated average daily energy of prospective (ex ante) swap reallocation requests in the immediate future for which the Market Participant is the credit/debit party respectively, for region R. The reallocation swap price credit/debit (PCS R /PDS R ) for each Market Participant is a positive dollar amount that represents the estimated swap energy-weighted average strike price of prospective (ex ante) swap reallocation requests in the immediate future for which the Market Participant is the credit/debit party respectively, for region R. The reallocation cap energy credit/debit (RCC R,C /RDC R,C ) for each Market Participant is a positive energy amount that represents the estimated average daily energy of prospective (ex ante) cap reallocation requests in the immediate future for which the Market Participant is the credit/debit party respectively, for region R and a cap value C. For the purposes of simplifying the calculation, a number of predefined cap values will be chosen, aligned with the cap values of cap reallocations that have been registered (e.g. $300). If a cap reallocation request has a strike price that does not align with a predefined cap value, it will be included in the next largest cap value. For example, if cap values of $150 and $300 were chosen, a cap reallocation with a strike price of $290 would be included in the $300 cap value. The reallocation dollar credit/debit (RC$ R /RD$ R ) for each Market Participant is a positive dollar amount that represents the estimated average daily dollar value of all prospective (ex ante) dollar reallocation requests in the immediate future for which the Market Participant is the credit/debit party respectively, for region R. AEMO estimates these average values according to one or more of following: The quantity and type of reallocations accepted over the previous 3 months. The quantity and type of reallocations proposed for up to 3 months in the future. Any sudden changes in reallocation patterns for periods in the immediate future. AEMO may consider written advice from Market Participants intending to commence regular prospective (ex ante) reallocations in determining the values. Where the lodgement and authorisation of such reallocation transactions do not occur according to the reallocation timetable, AEMO may immediately review the Market Participants MCL and PM. May 2012 Credit Limits Methodology - Version 10 Page 12 of 17

17 Reallocation requests based on floor offsets are not considered in the MCL and PM calculations. It is expected that floor offsets will be used with a strike price lower than the average price, however if the strike price is higher than the average price AEMO may elect to modify this methodology to include floor offsets. Floor offsets are included in the daily calculation of total outstandings. Ex post reallocations are not considered in the MCL and PM calculations. A demonstrated history of ex post reallocations does not give sufficient confidence that the practice will continue during periods of extreme RRPs. Ex post reallocations can assist in management of total outstandings, but not in reducing MCLs Reallocation profile adjustments A Market Participant registers reallocations (other than dollar) based on a daily profile with energy amounts submitted for each of the 48 trading intervals. It is important to ensure that the profile of a Market Participant s credit reallocations align with the Market Participant s load so that the reallocations are appropriately valued in the MCL calculation. In assessing the load and reallocation profiles, peak and off-peak timeframes are considered. The peak timeframe is taken to be 7 am to 10 pm EST (trading intervals 15 to 44) and off-peak timeframe to be 10 pm to 7 am EST (trading intervals 1 to 14 and 45 to 48). The following process is used to amend a Market Participant s reallocation energy for excess off peak reallocations on a regional basis. 1. Calculate a typical average daily load (EL) 2. Calculate a typical average daily off peak load taking into account the off peak trading intervals only (OEL) 3. Calculate the percentage off peak load (%OEL) as: OE OE E 4. Calculate the daily energy value of MCL credit reallocations (RC) 5. Calculate the net daily off peak energy value of MCL credit reallocation for the off peak trading intervals (ORC) 6. Calculate the percentage of off peak reallocation (%OR) as: O O 7. If the percentage of off peak reallocations (%ORC) is greater than the % of off peak load (%OEL) then the reallocation daily amount used for the purposes of the MCL calculation will be as follows: Ad usted [ O OE OE AEMO may also elect to not consider reallocations where the daily energy profile is significantly different to the profile of load and generation in that region. AEMO will advise a Market Participant where a reduction has occurred Ancillary Service Costs Schedule 3.3 of the NER requires that it be read and construed as taking into account market ancillary service transactions for the calculation of MCL and PM. ] May 2012 Credit Limits Methodology - Version 10 Page 13 of 17

18 For the period between January 2004 and January 2007, there have been no instances where the total value of market ancillary services exceeded 5% of the total transaction amounts. Accordingly, the contribution of market ancillary services to the reasonable worst case based on energy and reallocations alone is considered to be less than 2% and, therefore, negligible. Hence the MCL methodology does not recognise, and is not affected by, market ancillary services costs. 12. ROUNDING The value of the MCL is determined as per the calculation in Section 8. The value is then rounded up to the next multiple of $10,000 for values up to $250,000 and to the next multiple of $100,000 for values above $250,000 so that minor changes in a Market Participant's average purchased energy, typically through contestable customer transfers, is unlikely to affect the end result of the MCL determination. With a RRP around $30/MWh and a VF of 1.8, the step value of $10,000 is equivalent to 1,400MWh of market load per annum, the step value of $100,000 is equivalent to 14,000MWh of market load per annum. The value of PM is determined as per the calculation in Section 9. The value is then rounded up to the nearest $1,000. This is performed to simplify the representation of trading limit and the management of prudentials by Market Participants. 13. MCL Determination The MCL determination for a Market Participant is the rounded up value of the higher of the calculated MCL and zero. The MCL is the minimum value of credit support that must be lodged with AEMO by the Market Participant. 14. MCL for New Entrants Where a new Market Participant registers as a Market Customer or Market Generator, AEMO will assess the MCL and PM that are to apply from the effective date of registration. AEMO s preference is that this calculation is based on information provided by the applicant, including: Expected load during the relevant period based on expected customer acquisition and transfer activity. For Market Generators, the expected capacity and output of generating units being registered, and projected load to be consumed during construction and commissioning. Intention to utilise reallocations to cover part or all of traded energy. The following table has been provided as a guide to the nominal MCL and PM values that AEMO may determine as part of the review of a new Market Participant. PARTICIPANT TYPE SIZE REQUIREMENT MCL PM 1 Market Generator - not yet generating MW Auxiliary/ commissioning load coverage $0 $1,000 Market Generator - not yet generating 1 to 10 MW Auxiliary/ commissioning load $0 $10,000 1 For Market Generators, PM assumes 2% house load, 24 hours per day for 7 days with a VF x P R of $200/MWh based on a house load of 1MW for size less than 1 MW or rounded to the nearest 10MW for size greater than 1 MW. May 2012 Credit Limits Methodology - Version 10 Page 14 of 17

19 PARTICIPANT TYPE SIZE REQUIREMENT MCL PM 1 coverage Market Generator - not yet generating > 10 MW Auxiliary/ commissioning load coverage $0 $10,000 per 10 MW Market Customer - inactive - Cover for unintentional NMI transfer $0 $1,000 Market Customer planning to acquire customers - 3 month growth estimates available As per Section 8 $10,000 minimum As per Section 9 $1,000 minimum Where a new active Market Customer is not able to provide any data on their expected load a default MCL of $100,000 may be applied. Any new Market Participant wishing to have reallocations taken into account in their MCL calculation must consult with AEMO on their expected generation and load. Where a new Market Participant s actual load profile appears to be significantly greater than that assumed upon registration, an MCL review will be undertaken at the earliest opportunity and a revised MCL issued. 15. MCL and PM Methodology Review The MCL and PM methodology described in this document will be reviewed at least every 3 years. 16. Trading Limit A Market Participant may provide credit support in excess of that required following application of the MCL methodology. Clause of the NER states that the trading limit for the Market Participant will be determined from the difference between the total value of credit support and the PM. Note that where the PM exceeds the total credit support, the trading limit will be negative. The following examples illustrate the trading limit in different scenarios (rounding has been ignored): For a Market Customer with credit support = $100 and PM = $16, then the trading limit = $84. The Market Customer must always ensure that the total outstandings is less than $84 (i.e. their debit position must not exceed $84) For a Market Customer with credit support = $50 and PM = $80, then trading limit = $-30. The Market Customer must always ensure that the total outstandings is more negative than $-30 (i.e. they must maintain a credit of more than $30). For a Market Generator with credit support = $0 and PM = $10, then trading limit = $-10. The Market Generator must always ensure that the total outstandings is more negative than $-10 (i.e. they must maintain a credit of more than $10) Note that in the above examples, a negative outstandings is considered to be a net settlement amount owed by AEMO to the Market Participant. May 2012 Credit Limits Methodology - Version 10 Page 15 of 17

20 17. Calculation of Volatility Factor and Capped Volatility Factor 17.1 Deriving the Volatility Factor The Volatility Factor (VF) is a number derived from the distribution of RRP and acts as a scaling factor to derive the reasonable worst case value of credit liability from the historical average value. The period over which the volatility is assessed is 12 months. The suitability of using this methodology in achieving a reasonable worst case position is monitored by AEMO to ensure that it continues to result in an MCL and PM that meet the requirements of the NER. In the case of a Market Participant that has applied for a Reduced MCL, the time period is reduced from 42 days to 28 days for the purposes of calculating MCL only. This means that the Market Participant has accepted the responsibility of managing its outstandings to stay under the reduced trading limit by providing security deposits or ex-post reallocations as needed. The primary consideration is that the amount of headroom between the trading limit and the amount of guarantee provided by the Market Participant (i.e. PM) is exactly the same, in terms of absolute dollars, as the headroom under the standard MCL/trading limit situation. The VF is calculated on the same rolling 42-day averages to set the Reduced MCL, and the headroom is still maintained, in absolute dollar terms, as being 7 days worth of trading value at the reasonable worst case conditions. There are two methods for calculating VF outlined below. Neither method makes any assumptions about the correlation between RRP and usage, or about the shape and symmetry of the frequency distribution. Selection of the appropriate method to use depends upon whether there is historical price and usage data available for the last 12 months Deriving the Capped Volatility Factor The Capped Volatility Factor (CVF) is used for cap reallocations, and operates in a similar way to the VF. The price used in the calculation is capped, such that the CVF represents a scaling factor to derive the reasonable worst case value of cap reallocations. For the purposes of simplifying the process, CVF is calculated for a number of predefined cap values. These values are intended to align with commonly used caps (e.g. $300). The values will be determined and amended based on the cap reallocations registered by the Market Participant. There are two methods for calculating CVF outlined below, depending on whether there is historical price and usage data available for the last 12 months. Because the price in a region can be negative, the calculation of CVF can result in a number greater than the VF. To prevent the unfavourable treatment of cap reallocations in the calculation of MCL, the value of CVF will be capped to the value of VF Method 1: Regions with sufficient historical data The process by which the VF and CVF are calculated for those regions with sufficient historical data (more than 12 months) is: 1. For the historical observation period, calculate half-hourly values of the product of RRP and total customer load in the region (P x L). In the case of CVF, the price (P) is capped at the cap value. Note that the RRP may include an adjustment as specified in Section Calculate the sum of these half-hourly values on a daily basis. May 2012 Credit Limits Methodology - Version 10 Page 16 of 17

21 3. Using the results of step 2, calculate a rolling 42-day average payment for each day within the historical observation period. This gives a distribution of the rolling 42-day average daily purchase (RADP). This is to ensure consistency with the 42-day factor (Time) within the MCL formula. 4. Calculate the mean (M) of the distribution RADP. 5. Determine the highest value (X) of the distribution RADP within the historical observation period. 6. Calculate the VF and CVF, to 1 decimal place, as: X VF M 7. If CVF is greater than VF, CVF is adjusted to equal VF. This approach of taking the ratio of the largest observation to the mean of the observations is suitable because it is simple to understand and perform, and it captures the ratio between the average 42-daily purchase and the largest (i.e. the extreme) 42-daily purchase. The period of 12 months for the calculation is chosen as a compromise. It is the shortest period over which seasonal variations can be captured. Two- or four-year periods are not expected to improve the accuracy of the results because of the likelihood of systematic changes such as new entrants or changes to inter-regional constraints, the long term balance of supply and demand, generator cost structures as well as bidding and contracting strategies. Significant changes in any of these areas would cause historical results to be less accurate in predicting future results. The use of 12 months data is monitored by AEMO to ensure the results continue to meet the requirements of the NER Method 2: Regions with insufficient historical data The approach for determining the VF and CVF for a region with insufficient historical data is to reference the VF and CVF for a region selected by AEMO that has sufficient historical data. The selected proxy region would be: 1. for existing regions that have been modified by the addition or removal of connection points, the existing region. 2. for new regions with no interconnection history, a region with similar electrical size; 3. for new regions with interconnection for more than 12 months, the interconnected region; and 4. for new regions created by the division of an existing region, the existing region. Once there is sufficient historical data for a new region, Method 1 is to be applied. Method 2 would apply to any boundary change that affected regions. May 2012 Credit Limits Methodology - Version 10 Page 17 of 17