The AEMC has asked us to examine the economic concepts of risk aversion and loss aversion, and to consider whether these concepts might be relevant for how the reliability framework in the National Electricity Market (NEM) addresses risks associated with high-impact, low probability (HILP) events.1 These concepts were raised by AEMO in connection with a recent rule change request, where it stated that the expected unserved energy (USE) reliability standard in the NEM assumes risk neutrality, which is inconsistent with the concept of risk aversion.

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