Experiences of the Australian Electricity Market under power disturbances and

financial stress

Dr Brian SpaldingChief Operating officer

2

Overview

Overview of Australia’s National Electricity Market (NEM)

Recent major events in the NEM Power System Financial

Recent Trends in Reform

3

Australia’s National Electricity Marketcovers the Eastern and Southern interconnected electricity system

Scale

0 1,000km

4

NEMMCO – Market and System Operator

NEMMCO is the Market and System Operator for the Eastern and Southern Australia (92% by energy)

NEMMCO• Operate the Market, determines prices and

settles the physical spot market • Operate the Power System, responsible for

power system integrity• Co-ordinates inter-regional transmission

planning• Facilitates the operation of the retail market

5

NEM – The Electricity Market

Gross pool (Compulsory)

Generator production levels and prices are set each 5 minutes by NEMMCO on the basis of offer prices from Generators within a constrained optimisation

30 minute trading interval (Spot) price in each of 6 regions

No physical delivery contracts as financial instruments (over the counter CFDs or hedging contracts, futures contracts) between participants manage the physical spot price risk

NEMMCO settles the cash spot market but does not settle the financial instruments

Annual spot market settlement transactions in 2006/2007 of about AU$11B (US$9.6B)

Settlement is weekly, 4 weeks in arrears (about 33 days accumulation)

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Settlement for 100% of energy Consumed

Retailers

(hedging contracts)

Financial Market

Settlement for 100% of energy Generated

Generators

Spot Settlement(NEMMCO)

Physical (Spot) Market

NEM - Cash Overview

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NEM - Market Pricing

The NEM is a constrained real time (5 minutes ex-ante) priced spot market During disturbances prices will be volatile Real time pricing generally aligns with dispatch of generation

Some aspects of NEM design have been developed to drive long term investment but in an emergency can break the linkage of pricing and dispatch When load is shed and cannot be all restored the Market Rules

have the price being set to the Value of Lost Load ($10,000/MWh) There are few reasons to direct generators that are not responding

to Power System needs but when generation is directed – the market is priced as if the direction had not been given

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NEM Regions

Tas

Vic

NSW

SA

6 Price Regions

Generators Paid Regional Price

Customers Pay Regional PriceQLD

S

9

Recent NEM Events

NEM performance has been sound over last 9 years. Investment forthcoming Competitive wholesale prices Fierce retail competition

The IEA reported that the NEM is a competitive competitive and effective electricity market

Survived two significant events this year – but not without opportunities for improvement

16 January 2007 – 2,200 MW of customer load interrupted following bushfire transmission line faults

June 2007 – major increase in prices leading to the suspension of a retailer and the invocation of the Retailer of Last Resort process

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16 January 2007 – Bushfire Event

Bushfires in Victoria for the previous 40 days

Maximum demand for year in Victoria – about 9,200 MW

All interconnectors were at maximum flow into Victoria

Generation reserves adequate

Power System operated to cover for any single contingency

Two single circuit 330kV lines (same easement) from NSW/Snowy to Victoria tripped and locked out of service

Six other transmission lines tripped out of service

System separated into three island systems

Victorian “island” had a major generation deficit

Automatic under-frequency relays interrupted 2,200MW of customer load in Victoria and averted a major disturbance

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Before the event

Tas

Vic

S/NSW

SA

300MW

1690MW

484MW

$190/MWh

$70/MWh

$8,500/MWh

$9,500/MWh

QLD

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After the event

Tas

Vic

S/NSW

SA 400MW

200MW

$90/MWh

$60/MWh

$8,500/MWh

$12/MWh2200MW shed

QLD

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16 January 2007 – Outcomes – System

All transmission line protections operated as designed

The automatic under-frequency load shedding effectively controlled the Victorian low frequency and averted major Victorian collapse

Most power stations maintained capability and contributed to system management

There were no issues with the control of transmission voltages in Victoria during the stabilisation period

South Australia reconnected to Victoria in 40 minutes and all island systems were reconnected in 3 hours (delays as the fire authorities would not give clearance for lines to be restored for fire fighting and safety reasons)

All load restored in 4.5 hours

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16 January 2007 – Outcomes - Frequency

Frequency

47.5

48

48.5

49

49.5

50

50.5

51

51.5

3:0

0:0

0 P

M

3:0

0:2

8 P

M

3:0

0:5

6 P

M

3:0

1:2

4 P

M

3:0

1:5

2 P

M

3:0

2:2

0 P

M

3:0

2:4

8 P

M

3:0

3:1

6 P

M

3:0

3:4

4 P

M

3:0

4:1

2 P

M

3:0

4:4

0 P

M

3:0

5:0

8 P

M

3:0

5:3

6 P

M

3:0

6:0

4 P

M

3:0

6:3

2 P

M

3:0

7:0

0 P

M

3:0

7:2

8 P

M

3:0

7:5

6 P

M

3:0

8:2

4 P

M

3:0

8:5

2 P

M

3:0

9:2

0 P

M

3:0

9:4

8 P

M

3:1

0:1

6 P

M

3:1

0:4

4 P

M

3:1

1:1

2 P

M

3:1

1:4

0 P

M

3:1

2:0

8 P

M

3:1

2:3

6 P

M

3:1

3:0

4 P

M

3:1

3:3

2 P

M

3:1

4:0

0 P

M

3:1

4:2

8 P

M

3:1

4:5

6 P

M

Hz NSW/Qld

Victoria

South Australia

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16 January 2007 – Outcomes - Operation

Review the process to determine when to operate the Power System to withstand a multiple contingency event ie when to cover for the loss of two separate 330kV lines

Man machine interface – Challenge to provide Operators with rapid view 8 lines tripped across a wide geographic area 3 islands Took some minutes to be clear on system state

Need to control multiple separate frequency control areas Looking to more flexible systems

Market System flexibility Need to continue to function and dispatch appropriate generation in an

islanded environment

Simulate these events for further training

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16 January 2007 – Outcomes - Market

Real Time Pricing in emergencies Simplify Rules in an emergency – do not require power

system operators to be considering market impacts during disturbances as they are focused on Power System security

Ensure incentives on generators align with Power System need. By artificially setting a price to the Value of Lost Load regardless of the generator offers can create complex incentives and market outcomes.

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16 January 2007 – Outcomes

The power system responded well and the event was contained

Some processes can be improved

Some Market design issues need to be reconsidered

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Financial Event – Drought

Drought conditions had been worsening over the last 12 months Some thermal generators put on standby to conserve cooling water Most hydro generators with limited water Greater gas fired generation Spot and contract prices up by 80% since January 2007 High volume in futures contract trading High wholesale prices made it difficult to source supply at

reasonable cost Retailer stress due to regulated retail tariffs

NEMMCO commences publishing projected energy assessments in addition to routine capacity (Supply/Demand) assessments

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Financial Event – June 2007

June 2007 (Winter) was cold in South and East Australia Some record electricity demands but within capability of supply

Large Generator (13% of NEM, 35% of NSW region) bidding behaviour Pricing a substantial portion of its capacity at near VoLL just for

the peak period of the day

June 2007 prices in New South Wales $230/MWh for month (Jun 2006 was $31.47/MWh) 42 half hours greater than $5,000/MWh

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NEM Market Outstandings

Market Outstanding / MCL since Jan 2007

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

03/0

1/07

10/0

1/07

17/0

1/07

24/0

1/07

31/0

1/07

07/0

2/07

14/0

2/07

21/0

2/07

28/0

2/07

07/0

3/07

14/0

3/07

21/0

3/07

28/0

3/07

04/0

4/07

11/0

4/07

18/0

4/07

25/0

4/07

02/0

5/07

09/0

5/07

16/0

5/07

23/0

5/07

30/0

5/07

06/0

6/07

13/0

6/07

20/0

6/07

27/0

6/07

04/0

7/07

11/0

7/07

18/0

7/07

25/0

7/07

01/0

8/07

Date

Ou

tsta

nd

ing

in $

m

$0

$200

$400

$600

$800

$1,000

$1,200

Wei

gh

ed R

RP

Aggregate of Outstandings Aggregate of Guarantee Market Trading Limit Weighed RRP

Current guarantee $3,055m

Current outstanding $1,161m

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Futures Contract Prices

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June 2007 Event

Consequences Small retailer suspended from trading as it could not honour its

customer contracts Two other retailers in obvious financial stress Retailer of Last Resort (RoLR) enacted transferring 6,000

customers to a new retailer following suspension Suspended retailer was co-operative Smooth processes experienced

Opportunities More efficient cash and settlement processes Review length of Settlement cycle Review effectiveness of netting spot and contract settlement Test RoLR for very large customers numbers

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Trends in Operation and Reform

Renewable Generation Increasing wind generation – greater need for increased

wind generation forecasting, more complex reliability assessment, and network management complexities

Increasing gas generation

Integration of Gas and Electricity Fuel balance implications under periods of heavy gas fired

electricity generation Emergency management of both gas and electricity

incidents Many Retailers involved with both fuels Trend to National market in both fuels Australian Energy Market Operator (AEMO) to be formed

from July 2009 to combine NEMMCO and Gas Markets

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Trends in Operation and Reform

National Approach to Transmission Planning State planners have clear state reliability obligations No clear obligations to benefit National trading AEMO as a National Transmission Planner

Very large increases in data movement between the industry Interval meter role out Retail customer churn – 25-30% in Victoria and South

Australia B2B transactions

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Overview

Overview of Australia’s National Electricity Market (NEM) Real time constrained gross market

Recent major events of the NEM Tested process and showed opportunities for improvement

Recent Trends in Reform Closer linkages between electricity and gas