Australia’s energy markets: change and challenge

JOHN TAMBLYN

CHAIRMAN AUSTRALIAN ENERGY MARKET COMMISSION ASSOCIATION OF POWER EXCHANGES 12-15 OCTOBER 2008

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

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

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

KEY DRIVERS OF REFORM

INDEPENDENT TRANSPARENT GOVERNANCE + FACILITATION OF COMPETITIVE MARKET + BALANCE OF REGULATORY OBJECTIVES AND COMMERCIAL OUTCOMES =

ECONOMIC EFFICIENCY GAINS REFORMS ADD $2 BILLION PA TO AUSTRALIAN ECONOMY (IEA)

COMMON NATIONAL MARKET OBJECTIVE, RULES & INSTITUTIONS

MARKET FAILURE REGULATORY FAILURE

NEM GOVERNANCE SINCE 2005

POLICY DIRECTION MINISTERIAL COUNCIL ON ENERGY NATIONAL ELECTRICITY/GAS LAW AUSTRALIAN ENERGY MARKET COMMISSION (AEMC) NATIONAL ELECTRICITY/GAS RULES GAS AND ELECTRICITY SYSTEM AND MARKET OPERATOR AUSTRALIAN ENERGY MARKET OPERATOR NEMMCO (AEMO)

PARTICIPANTS

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

ASIC

ECONOMIC REGULATION & RULE COMPLIANCE NATIONAL COMPETITION LAW (ACCC)

ELECTRICITY MARKET EVOLUTION

TODAY PRE- 1990s GENERATION NETWORK RETAIL GENERATION INDEPENDENT SYSTEM OPERATOR NEMMCO NETWORK RETAIL CUSTOMERS CUSTOMERS

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

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

ELECTRICITY SUPPLY BY FUEL TYPE 2008

SOURCE:

NEMMCO 2008 Natural Gas 8.5% Oil and Other 0.3% Brown Coal 25% Hydro 7.2% Black Coal 59% COAL SUPPLIES > 40% OF AUSTRALIA’S TOTAL PRIMARY ENERGY SUPPLY INCREASING EMISSIONS INTENSITY OF OUR PRIMARY ENERGY SUPPLY IS DUE TO INCREASING RELIANCE ON COAL FOR GENERATION

REFORMS HAVE MET AUSTRALIA’S NEEDS

• Reforms designed for Australian context • Australia among lowest priced/most reliable energy markets • Reforms add A$2 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 Australia’s competitiveness & economy

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

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?

CLIMATE CHANGE AND THE ENERGY MARKET

1 DISPATCH IMPACTS AND SYSTEM OPERATION 4 RETAIL MARKET RISK AND COMPETITION CLIMATE CHANGE POLICIES WILL ‘STRESS TEST’ ENERGY MARKET DESIGN’S ABILITY TO DELIVER EFFICIENT OUTCOMES FOR CONSUMERS GENERATION ADEQUACY AND INVESTMENT 2 NETWORK INVESTMENT & CO ORDINATION 3

1

SYSTEM AND MARKET OPERATION

NOW

$ GAS

FUTURE

BLACK COAL

BLACK COAL

BROWN COAL WIND

COST DRIVES MERIT ORDER

WIND

ISSUES

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?

2

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?

3

NETWORK INVESTMENT

UNCERTAIN IN TIME + LOCATION

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NETWORK SPENDING DETERMINED BY CHOICE BETWEEN GAS, WIND, OR COAL GENERATION ISSUES LARGE IMPACTS ON THE TRANSMISSION

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NETWORK?

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’?

4

RETAIL COMPETITION AND EFFICIENCY

PRICE PRICE CAPS ISSUES

1.

Price regulation?

2.

Financial distress and market exit?

3.

Investment / entry incentives?

4.

Vertical integration?

5.

Competitive opportunities?

ENERGY ENVIRONMENT COMPLIANCE NETWORK CHARGES PRUDENTIALS RETAILER COSTS

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