According to the relation-interpretation-competition-evaluation (RICE) hypothesis, compound word processing involves selecting a relational meaning (e.g., moonlight is ‘light from moon’) from a larger set of competing possible relational meanings. Prior lexical decision experiments with existing compound words have demonstrated that greater entropy of conceptual relations, i.e., greater competition between conceptual relations, impedes lexical processing speed. The present study addresses two unresolved issues: First, it is unclear whether the competition effect generalizes to the processing of novel compounds (e.g., grassladder), and second, it is not yet known whether competition between possible relational meanings extends to compounds when they are read in a sentence context. A series of self-paced reading tasks examined whether the competition effect operates regardless of (i) compound type (existing vs. novel), and (ii) whether sentence context (semantically supportive vs. semantically non-supportive) moderates the competition effect. The experiments confirmed that reading times of novel and existing compounds read in sentences were impacted by entropy of conceptual relations. Moreover, the effect was equally strong in both sentence context types. Additional analyses indicated that relational meanings are more ambiguous and flexible across different contexts for novel compounds compared to existing compounds.