Essential Energy’s 2019-24 Regulatory Proposal

3 July 2018

Sydney Water Leadership Team - 11 May 20182

1,381,758Power poles – which

equates to 1.6 power

poles for every customer

1,442powerlines with 10 that are

longer than 1,000km the

longest spanning 1,905km

95%of NSW and parts of

southern Queensland

377Zone substations and

140,000 distribution

substations

36 yearsaverage age of

network assets

737,000square kilometres

of network

183,612 kmof overhead powerlines –

equivalent to driving

around Australia 13 times

4.6 customersto fund every 1km of

overhead powerlines

>840,000customers

One of Australia’s Largest Distribution Networks

3

Our customer engagement journey

4

Our Proposal – shaped by customers and AER engagement

• Deliver a safe and reliable electricity network for customers

• Maintain current reliability and service standards

• Deliver an average 25% improvement in poor performance areas improving supply for

15,000 to 20,000 customers

• Continue and enhance public safety, bushfire and biosecurity management programs

• Investing for the future

• Trialling new technologies to serve future needs of customers in a rapidly changing

energy ecosystem

• Lower network charges, predicated on significant data, business process and change

management program of work, supported by new enabling systems

• Reduce cost base - deliver long-term price stability

• 6% real operating expenditure reduction* (lowest in 20 years)

• 19% real capital expenditure reduction* (lowest in 19 years)

• Average annual network charge increases limited to 1.43 per cent above CPI (impact

of ongoing RAB growth minimised)

• Longer term objective remains to achieve real reductions in distribution charges

through the 2024-29 period

• Capital expenditure is greater than current depreciation* compared to the 2014-19 regulatory period allowances.5

Transforming to improve efficiency

6

Phase 1:

Largely FTE reduction and

investment freeze

Phase 2:

Business process and

systems change

Phase 2 represents a

significant stretch for

the business to

improve capability,

processes and

technology

$1,422m

$745m $683m

Total expenditure

48%8%

The focus is on reducing network charges

7

Further analysis

underway to

better understand

and quantify

drivers

2014-19 and 2019-24

proposals adopt the

AER’s rate of return

guideline placing

downward pressure on

network charges

Reduce cost base sustainably by investing

in core systems and innovative and

enabling technologies

Linking risk-based asset management

strategies to asset management decisions

to deliver benefits to customers

Cost reductions minimising revenue increases

$4.1B $6.9B $5.3B $5.1B

*All values presented in real $2018-19

2004/05

RAB

$3.6B*

2023/24

RAB

$8.7B*

RAB growth

driving

revenue

increases up

to 2023-2024

8

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Sta

ndard

Contr

ol R

evenue (

$M

real 2018

-19)

Actual revenue 59A undertaking Draft Proposal Allowance

2004-2009

(regulated by IPART)

2009-20014

(AER regulation)

2014-2019

(Set-aside determination)

2019-24

(Forecast)

36% lower

27% lower

Cost reductions minimising impact of RAB growth

9

• Cost reductions including a 6% reduction in opex and a 21% reduction in capex (compared to 2014-19

allowances) will minimise the impact of RAB growth and limit network charge increases to 1.43% above

CPI over 2019-24

• Necessary ongoing capital expenditure is higher than depreciation, resulting in ongoing growth in the

Regulated Asset Base (RAB)

• Proposed investment over the next five years to deliver efficiencies and stabilise RAB growth

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

200

4-0

5

200

5-0

6

200

6-0

7

200

7-0

8

200

8-0

9

200

9-1

0

201

0-1

1

201

1-1

2

201

2-1

3

201

3-1

4

201

4-1

5

201

5-1

6

201

6-1

7

201

7-1

8

201

8-1

9

201

9-2

0

202

0-2

1

202

1-2

2

202

2-2

3

202

3-2

4

202

4-2

5

202

5-2

6

202

6-2

7

202

7-2

8

202

8-2

9

202

9-3

0

203

0-3

1

203

1-3

2

203

2-3

3

203

3-3

4

203

4-3

5

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5-3

6

203

6-3

7

203

7-3

8

203

8-3

9

203

9-4

0

204

0-4

1

204

1-4

2

204

2-4

3

204

3-4

4

204

4-4

5

204

5-4

6

204

6-4

7

204

7-4

8

204

8-4

9

204

9-5

0

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0-5

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1-5

2

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5

Clo

sin

g R

AB

$M

Re

al 2

01

8-1

9

Future RAB growth limited Historic RAB growth 2042 Peak

~$9.2B

Capital

Projects

Maintenance

and

Replacement

Vegetation

Management

Outage

Response

Field force

Productivity

External

Spend

Support

functions

$4M $14M $14M $1M $27M $7M $17M

Creating long term value for our customers

10

Cu

sto

me

r

Pri

ori

ties

• Deploy modern core systems

• Enable transformation, technology

and advanced data analytics

• Best practice processes

• Customer connected

E-tech and

dataPhase 1 and Phase 2 of the transformation

require investment of $250M to deliver

sustainable expenditure reductions of

~$84M* p.a. by 2023/24

Exp

en

dit

ure

red

uc

tio

ns

En

ab

lers

*Numbers may not add due to rounding

$84M per annum by 2023/24

Our energy and demand forecasts

Very slow and

steady growth in

maximum demand

No material change in

forecasted energy

consumption

Customer connections

forecast to grow by

0.8% per annum

2016-17

12,389 GWh

2016-17

842,381 customers17 January 2017

2,326 MW

(Extreme weather)

11

Creating pricing stability

Distribution network charges in 2023-24 are proposed to be 25% lower compared to 2011-12

12

Transforming the core business to support evolution of network

Heartland Grid

Scale delivery through poles and wires

Lower costs and greater value from DER

orchestration

Mid Grid

Microgrids

Improved reliability and

network resilience

Edge of Grid

Stand-alone systems

More reliable and lower

cost over time

13

Investigations & trials

currently underway:

• Partnering with Reposit in

Northern NSW to use solar and

batteries to manage voltage

fluctuations

• Working with NRMA on EV

charging

• Trialling a stand alone power

system near Bulahdelah

• Grid scale storage trials at Byron

Bay

• Microgrid trials Lockhart (mid

2018) and Byron Bay (Q3 2018)

• OEH vulnerable customer

program

Tariff reform is vital

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EssentialEnergy

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