According to the Regulations of the European Council the passengers can request the reimbursement of their ticket in case the delay is more than 5 hours if they decide not to accept the alternate flight offered by the company. For this reason, in this case no monetary compensation applies..
Just to be clear, their response is completely and utterly untrue. The regulations states that compensation is payable after 3 hours delay and whether or not you accept a rescheduled flight is absolutely irrelevant if you still arrive more than 3 hours late.
As proven again and again in EU courts, including a recent UK ruling, technical faults are covered by this legislation and thus if this was the primary reason for your delay then you are definitely owed compensation.
I dare say their reply to you is borderline illegal in that they have out rightly lied to you as to what the law is. To be honest, I am little bit shocked - even Ryanair would not do this.