APEC

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Australias energy markets change and challenge
JOHN TAMBLYN CHAIRMAN AUSTRALIAN ENERGY MARKET
COMMISSION
ASSOCIATION OF POWER EXCHANGES 12-15 OCTOBER 2008
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CHANGE AND CHALLENGE

• Significant changes in energy market reform and
  development
• Successful stationary energy reform since 1990s
• Market structure, incentive regulation,
  competition
• Delivering real benefits to Australian economy
• Estimated contribution of A 2.0 b per annum to
  growth
• Policy and market frameworks must continue to be
  responsive to
• Changing market circumstances
• Community expectations for efficient, reliable
  and affordable energy services
• Emerging energy market challenges
• Climate change policy responses

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ENERGY REFORM OBJECTIVES

• Efficient investment, production and use of
  energy resources
• Maintain long-term energy security and
  reliability
• Promote energy efficiency and environmental
  sustainability
• Improve productivity and competitiveness of the
  economy
• Promote economic growth and community welfare

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TWO PHASES OF ENERGY REFORM

• 1990s Competition Policy Reform
• Agreed national energy reform strategy,
  objectives processes
• Market restructuring, corporatisation
  privatisation (some states)
• Establish competitive energy markets
• National access codes / independent regulation
  (federal / state)
• Energy Reform since 2003
• National energy market governance, laws and
  institutions
• Promote network interconnection, competition,
  capital investment
• Create integrated national energy market

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KEY DRIVERS OF REFORM
INDEPENDENT TRANSPARENT GOVERNANCE
BALANCE OF REGULATORY OBJECTIVES AND COMMERCIAL
OUTCOMES
FACILITATION OF COMPETITIVE MARKET



ECONOMIC EFFICIENCYGAINS
REFORMS ADD 2 BILLION PA TO AUSTRALIAN ECONOMY
(IEA)
COMMON NATIONAL MARKET OBJECTIVE, RULES
INSTITUTIONS
REGULATORY FAILURE
MARKET FAILURE
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NEM GOVERNANCE SINCE 2005
MINISTERIAL COUNCIL ON ENERGY
POLICY DIRECTION
NATIONAL ELECTRICITY/GAS LAW
AUSTRALIAN ENERGY MARKET COMMISSION (AEMC)
NATIONAL ELECTRICITY/GAS RULES
GAS AND ELECTRICITY SYSTEM AND MARKET OPERATOR
ASIC
AUSTRALIAN ENERGY MARKET OPERATOR NEMMCO (AEMO)
AUSTRALIAN ENERGY REGULATOR (AER)
ECONOMIC REGULATION RULE COMPLIANCE

• PARTICIPANTS
• WHOLESALE ENERGY SUPPLIERS
• MARKET CUSTOMERS (RETAILERS)
• PARTICIPANT END USE CUSTOMERS
• NETWORK OPERATORS
• TRADERS

NATIONAL COMPETITION LAW (ACCC)
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ELECTRICITY MARKET EVOLUTION
TODAY
PRE- 1990s
INDEPENDENT SYSTEM OPERATOR NEMMCO
RETAIL
NETWORK
GENERATION
GENERATION
NETWORK
RETAIL
CUSTOMERS
CUSTOMERS
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ELECTRICITY MARKET DESIGN

• Premise effective generator/ retailer
  competition efficient monopoly network
  regulation decentralised decision-making
• Power system security / reliability standards,
  obligations, and incentives specified in market
  Rules
• Wholesale market regionally-priced,
  energy-only, gross pool (no capacity payments/
  nodal pricing)
• Network regulation networks subject to CPI-X
  open access regulation (generator shallow
  connection/ no network access rights)
• Retail market fully competitive but with price
  regulation for small customers

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ELECTRICITY MARKET FEATURES

• Abundant fuel sources
• Generation remote from load
• Long connections network required
• Transition to interconnected national market

GAS FIELDS
ELECTRICITY NETWORKS
COAL DEPOSITS
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ELECTRICITY SUPPLY BY FUEL TYPE 2008
COAL SUPPLIES gt 40 OF AUSTRALIASTOTAL PRIMARY
ENERGY SUPPLY INCREASING EMISSIONS INTENSITY OF
OUR PRIMARY ENERGY SUPPLY IS DUE TO INCREASING
RELIANCE ON COAL FOR GENERATION
SOURCE NEMMCO 2008
Hydro 7.2
Natural Gas 8.5
Oil and Other 0.3
Black Coal 59
Brown Coal 25
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REFORMS HAVE MET AUSTRALIAS NEEDS

• Reforms designed for Australian context
• Australia among lowest priced/most reliable
  energy markets
• Reforms add A2 billion pa to Australian economy
• Improved productivity/availability of generation
  and networks
• Interconnection of previously separate state
  markets
• Required capital investment (mainly private) is
  occurring
• Strong wholesale competition/improving retail
  competition
• Security/reliability being maintained or improved
• Outcomes contributing to Australias
  competitiveness economy

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EMERGING ENERGY MARKET CHALLENGES

• Tightening domestic energy supply/demand balance
• Forecasts of potential supply shortfalls
• Rising energy input costs
• Uncertain world energy market
• Rising world oil and gas prices
• Growing energy demand and emissions
• Energy market impacts of climate change policies
• A common issue for most countries

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CLIMATE CHANGE POLICY

• Australia is now a signatory to Kyoto Protocol
• Developing policy responses to climate change
• An Emissions Trading Scheme (ETS) by 2010
• Renewable Energy Targets (RET) to be met by 2020
• An emission reduction target to be met by 2050
• Impacts on energy market structure, economics
  performance?
• Will the current energy market design deliver
  efficient outcomes?

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CLIMATE CHANGE AND THE ENERGY MARKET
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DISPATCH IMPACTS AND SYSTEM OPERATION
CLIMATE CHANGE POLICIES WILL STRESS TEST
ENERGY MARKET DESIGNS ABILITY TO DELIVER
EFFICIENT OUTCOMES FOR CONSUMERS
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4
GENERATION ADEQUACY AND INVESTMENT
RETAIL MARKET RISK AND COMPETITION
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NETWORK INVESTMENT CO-ORDINATION
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1
SYSTEM AND MARKET OPERATION
NOW
ISSUES
FUTURE
Likely changes in variable costs (inputs,
emissions)? What merit order changes likely and
technically feasible? Impact on system security
and reliability? Level and volatility of spot
prices? Network congestion from changed
flows? Required level of reserves how procured?

BLACK COAL
COST DRIVES MERIT ORDER
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GENERATION INVESTMENT
EMERGING TIGHT SUPPLY/DEMAND POSITION FROM 2011
ARE MARKET SIGNALS FOR INVESTMENT SHARP ENOUGH?
WILL INVESTORS BE DETERRED BY CLIMATE POLICY
RISKS UNTIL ETS AND RET DESIGN RESOLVED?
RESERVE TRADER INTERVENTION FOR SHORT TERM GAPS
ONLY
IS A CAPACITY MARKET NEEDED?
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3
NETWORK INVESTMENT
UNCERTAIN IN TIME LOCATION
ISSUES


Investment planning in this noisy
environment? Not crowding out market
responses How to incentivise / remunerate
transmission companies? How are network users
charged? Definition and allocation of
transmission rights? Who bears the risk of
asset stranding?
LARGE IMPACTS ON THE TRANSMISSIONNETWORK?
NETWORK SPENDING DETERMINED BY CHOICE BETWEEN
GAS, WIND, OR COAL GENERATION
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RETAIL COMPETITION AND EFFICIENCY
ISSUES
PRICE

• Price regulation?
• Financial distress and market exit?
• Investment / entry incentives?
• Vertical integration?
• Competitive opportunities?

PRICECAPS
ENERGY
PRUDENTIALS
ENVIRONMENTCOMPLIANCE
NETWORKCHARGES
RETAILER COSTS
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REVIEW OF ENERGY MARKET IMPACTS

• AEMC requested to review and report on
• Likely energy market impacts
• Capacity for energy market to accommodate
• Options for design change where necessary
• Presumption in favour of competitive markets,
  efficient regulation and decentralised
  decision-making
• Interaction of review with climate change policy
  process

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