Australia’s energy markets: change and challenge

JOHN TAMBLYNCHAIRMAN

AUSTRALIAN ENERGY MARKET COMMISSION

ASSOCIATION OF POWER EXCHANGES12-15 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

• 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

ENERGY REFORM OBJECTIVES

• 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

TWO PHASES OF ENERGY REFORM

COMMON NATIONAL MARKET

OBJECTIVE, RULES &

INSTITUTIONS

REGULATORY FAILURE

MARKET FAILURE

ECONOMIC EFFICIENCYGAINS

REFORMS ADD$2 BILLION PATO AUSTRALIAN ECONOMY (IEA)

KEY DRIVERS OF REFORM

INDEPENDENT TRANSPARENT GOVERNANCE +

BALANCE OF REGULATORY OBJECTIVES

AND COMMERCIAL OUTCOMES

FACILITATION OF COMPETITIVE

MARKET + =

PARTICIPANTS

• WHOLESALE ENERGY SUPPLIERS

• MARKET CUSTOMERS (RETAILERS)

• PARTICIPANT END USE CUSTOMERS

• NETWORK OPERATORS

• TRADERS

NATIONAL ELECTRICITY/GAS RULES

ASICAUSTRALIAN ENERGY MARKET OPERATOR NEMMCO (AEMO)

AUSTRALIAN ENERGY REGULATOR (AER)

ECONOMIC REGULATION &RULE COMPLIANCE

GAS AND ELECTRICITY SYSTEMAND MARKETOPERATOR

AUSTRALIAN ENERGY MARKET COMMISSION (AEMC)

MINISTERIAL COUNCIL ON ENERGY

POLICY DIRECTION

NATIONAL COMPETITION LAW

(ACCC)

NEM GOVERNANCE SINCE 2005

NATIONAL ELECTRICITY/GAS LAW

CUSTOMERS

ELECTRICITY MARKET EVOLUTION

RETAILGENERATION

NETWORK

GENERATION NETWORK

RETAIL

CUSTOMERS

PRE- 1990s TODAY

INDEPENDENTSYSTEM

OPERATOR

NEMMCO

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

• Abundant fuel sources

• Generation remote

from load

• Long connections network required

• Transition to interconnected national market

ELECTRICITY MARKET FEATURES

GAS FIELDS

ELECTRICITY NETWORKS

COAL DEPOSITS

COAL SUPPLIES > 40% OF AUSTRALIA’STOTAL PRIMARY ENERGY SUPPLY

INCREASING EMISSIONS INTENSITY OF OUR PRIMARY ENERGY SUPPLY IS DUE TO INCREASING RELIANCE ON COAL FOR GENERATION

ELECTRICITY SUPPLY BY FUEL TYPE 2008

SOURCE: NEMMCO 2008

Black Coal59%

Hydro 7.2%

Oil and Other 0.3%

Brown Coal25%

Natural Gas 8.5%

• 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

REFORMS HAVE MET AUSTRALIA’S NEEDS

• 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

EMERGING ENERGY MARKET CHALLENGES

• 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 POLICY

GENERATION ADEQUACY AND

INVESTMENT

DISPATCH IMPACTS AND SYSTEM OPERATION

NETWORK INVESTMENT & CO-

ORDINATION

RETAIL MARKET RISK AND

COMPETITION

1

2

3

4

CLIMATE CHANGE AND THE ENERGY MARKET

CLIMATE CHANGE POLICIES WILL ‘STRESS TEST’ ENERGY MARKET

DESIGN’S ABILITY TO DELIVER EFFICIENT OUTCOMES FOR CONSUMERS

SYSTEM AND MARKET OPERATION

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?

1ISSUES

$BLACKCOAL

NOW FUTURE

COST DRIVES MERIT ORDER

GAS

WIND

BROWNCOAL

BLACKCOAL

WIND

EMERGING TIGHT SUPPLY/DEMAND POSITION FROM 2011

ARE MARKET SIGNALS FOR INVESTMENT SHARP

ENOUGH?

RESERVE TRADER INTERVENTION FOR SHORT

TERM GAPS ONLY

GENERATION INVESTMENT

WILL INVESTORS BE DETERRED BY CLIMATE

POLICY RISKS UNTIL ETS AND RET DESIGN

RESOLVED?

2

IS A CAPACITY MARKET NEEDED?

NETWORK INVESTMENT3ISSUES

}LARGE IMPACTS ON THE TRANSMISSIONNETWORK? }

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’?

UNCERTAIN IN TIME + LOCATION

NETWORK SPENDING DETERMINED BY CHOICE BETWEEN GAS, WIND, OR COAL GENERATION

RETAIL COMPETITION AND EFFICIENCY4PRICE

PRICECAPS

ENERGY ENVIRONMENTCOMPLIANCE

NETWORKCHARGES

PRUDENTIALS

1. Price regulation?

2. Financial distress and market exit?

3. Investment / entry incentives?

4. Vertical integration?

5. Competitive opportunities?

ISSUES

RETAILER COSTS

• 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

REVIEW OF ENERGY MARKET IMPACTS