Energy Market Policy & Challenges API Summer School - 22 February 2016 Dr Brian Spalding, Commissioner AUSTRALIAN ENERGY MARKET COMMISSION AEMC PAGE 1
Energy Market Policy & Challenges • Governance and AEMC’s role • Energy Markets Overview • Strategic Priorities and Key Challenges • AEMC Key Projects AEMC PAGE 2
Governance and the AEMC’s role NEM Regulation and Governance COAG Energy Council Policy Making National Electricity, Retail and Gas Laws AEMC Rule Maker & Reviews National Electricity, Retail and Gas Market Rules AEMO AER Power System and Market Operator Economic reg. and Rule compliance Participants Generators and gas suppliers Retailers End Use Customers Network Businesses 3
Governance and the AEMC’s role National Electricity Rules and Gas Rules • The National Electricity Rules govern: – Operation of the national electricity market (NEM) – Regulation of network operation and network investment – Security and reliability • The National Gas Rules govern: – Gas spot markets in Victoria, Adelaide, Sydney, Brisbane and Wallumbilla – Access to and pricing of natural gas pipeline services
Governance and the AEMC’s role National Energy Customer Framework • The National Energy Customer Framework (NECF) commenced in July 2012 – Includes the National Energy Retail Law and Rules (NERR) – Aims to deliver a single national framework for governing non- economic aspects of electricity and gas retail regulation – State governments decide what aspects of the NERR they wish to adopt, and when they will do so – TAS, ACT, SA, QLD and NSW have implemented the NECF AEMC PAGE 5
Governance and the AEMC’s role Role and Functions of the AEMC • Determines changes to the national electricity, gas and energy retail market rules • Reviews and provides advice to the COAG Energy Council on energy market issues and how best to develop energy markets • Guided by national objectives for electricity, gas and energy retail (NEO, NGO and NERO): “…t o promote efficient investment in, and efficient operation and use of, electricity, natural gas and energy services for the long term interests of consumers with respect to price, quality, safety, reliability and security of supply…” AEMC AEMC PAGE 6 PAGE 6
Governance and the AEMC’s role Reliability Panel • Reliability Panel is oversighted by the AEMC – The Reliability Panel monitors, reviews and reports on the safety, security and reliability of the national electricity system.
Governance and the AEMC’s role The role of the State Governments • State governments and State regulators continue to play an important role that particularly affect consumers – State governments remain responsible for decisions about whether to impose retail price regulation and how regulators should determine prices – Consumer protection measures, including Retailer of Last Resort arrangements where they remain state specific, or adopt the National Energy Consumer Framework which has a common approach
Governance and the AEMC’s role Industry Components - Electricity Natural Monopoly Sectors Independently regulated, low risk Transmission Distribution Retailing Generation 132-500kVolts 415V-66kV Competitive Market Based High risk Approximate contribution to retail bill in the NEM (Price Trends 2015-16): Green Wholesale and Retail Networks (mostly distribution) 7% 50% 43%
Governance and the AEMC’s role Role of the Retailer • The NEM spot market and gas markets are wholesale • Retailers enter into contracts with customers to supply energy (set own Ts & Cs) or supply under jurisdictional regulatory arrangements (regulator sets Ts & Cs) • To supply their customers’ needs, retailers need to bundle together the costs of: – Generation or gas supply; – Transmission and distribution; and – Retail costs including metering and billing • Retailers source and manage the cost of generation or gas supply around the volatile spot market – Retailers have to manage demand forecasting and price risk
Governance and the AEMC’s role Retail Price Regulation • Retail price regulation is a state government prerogative – Victoria, NSW and South Australia have deregulated – Queensland deregulation expected 1 July 2016 • The AEMC conducts reviews of retail competition: – Recently completed NEM-wide review which recommended price deregulation in Queensland – Raise awareness of comparator tools, tailored communications, review concession schemes, harmonise regulatory arrangements – 2016 competition review underway with report required by 30 June • The AEMC will also continue to provide advice on retail prices annually to COAG Energy Council AEMC PAGE 11
Governance of the Energy Market Effective reform has been dependent on: • gaining commitment by jurisdictional governments to the overall benefits to consumers of a national approach • having the structure and governance necessary to deliver it Where this has been achieved reforms have been effective and long-lasting AEMC PAGE 12
Energy Markets Overview The National Electricity Market (NEM) NEM Statistics • Longest alternating current system in the world Queensland Summer • Interconnected system spanning peak: 5,000 km and including 40,000 km 8,500 MW SA Summer of transmission lines peak: • Supports 19 million residents NSW 3,300 MW • 200 terawatt hours pa Summer peak: Victoria 12,000 MW Market Design Summer peak: • Gross pool, energy only, 10,300 MW Tasmania mandatory Winter • 5 regional half hourly spot prices peak: 1,800 MW • Financial contracts manage risk AEMC PAGE 13
Energy Markets Overview Main Electricity Generation Centres Hydro 1GW Hydro 1GW Hydro 1GW Black Coal 8GW Black Coal 8GW Black Coal 8GW Lignite Coal 1GW Lignite Coal 1GW Lignite Coal 1GW Gas 2GW Gas 2GW Gas 2GW Gas 3GW Gas 2GW Gas 2GW Gas 2GW Black Coal 12GW Black Coal 12GW Black Coal 12GW Gas 1GW Gas 1GW Gas 1GW Hydro 4GW Hydro 4GW Hydro 4GW Wind Wind Brown Coal 6GW Brown Coal 6GW Brown Coal 6GW 2GW 2GW Gas 3GW Gas 2GW Gas 2GW Gas 2GW Hydro 2GW Hydro 2GW Hydro 2GW PAGE 14
Energy Markets Overview Dispatch and spot price setting in the NEM Central Dispatch Process: 4:15 demand = 350MW • Generator 1,2 and 3 fully dispatched • Generator 4 partly dispatched • Dispatch price = $37 4:20 demand = 450MW • Generators 1, 2, 3 and 4 fully dispatched • Spot price is the average of the 5 minute dispatch prices for the half hour period • Generator 5 must be partly dispatched • All generators dispatched in that half hour period receive the wholesale price • Dispatch price = $38 AEMC PAGE 15
Energy Markets Overview Spot Market Pricing – Daily Generator Merit Order Demand (Marginal plant sets common clearing price) Gas Fuel cost $40-$85/MWh, ( (Emissions Intensity 0.4-0.6 t CO 2 /MWh) Black Coal Fuel Cost $25/MWh, (Emissions Intensity 0.8-1.0 t CO 2 /MWh) Brown Coal Fuel cost $10/MWh, (Emissions Intensity 1.2-1.5t CO 2 /MWh) Wind Usage cost $3/MWh (Emissions Intensity 0t CO 2 /MWh)
Energy Markets Overview Financial Interdependencies • The spot market price is volatile reflecting supply and demand variations. The turnover in the market can range from around $80M to $1B per week. • Retailers have to manage cost of supply and generators need to be able to manage their revenue requirements to operate their businesses – Both have an incentive to contract around the spot market • Generators and retailers can be expected to hold a portfolio of contracts with a range of other participants in the market – alternately generators and retailers can vertically integrate to manage risk • The resulting contracts incentivise parties to ensure their plant is available when needed and act to underpin investment in new generation
Energy Markets Overview Financial and Physical Functions in the NEM Physical Electricity Flows Physical settlement Physical settlement Generators Purchasers AEMO Broker Futures Exchange Broker Financial OTC Contract Payments PAGE 18
Reliability and Security in the NEM Reliability • A Reliable Power System is one that has a high likelihood of supplying all consumer needs • A consumer focus Security • A Secure Power System is one that is being operated or managed such that all vital technical parameters such as voltage, equipment loading, and power system frequency are all within design limits and are stable and all persons are safe – even following a credible event (an event AEMO considers reasonably possible given the circumstances) • A power system integrity focus AEMC PAGE 19
What does a Reliable Power System Require? A Reliable Power System requires all of the following Adequate A secure + + + Reliable supply of Reliable power transmission dispatchable distribution system generation (inc DM) = High likelihood of consumer demand being met AEMC PAGE 20
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