Energy Market Policy & Challenges API Summer School - 22 - - PowerPoint PPT Presentation

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Energy Market Policy & Challenges

Dr Brian Spalding, Commissioner AUSTRALIAN ENERGY MARKET COMMISSION

API Summer School - 22 February 2016

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Energy Market Policy & Challenges

• Governance and AEMC’s role
• Energy Markets Overview
• Strategic Priorities and Key

Challenges

• AEMC Key Projects

Participants

Generators and gas suppliers Retailers End Use Customers Network Businesses

National Electricity, Retail and Gas Laws AEMC

Rule Maker & Reviews

National Electricity, Retail and Gas Market Rules AEMO

Power System and Market Operator

AER

Economic reg. and Rule compliance

COAG Energy Council

Policy Making

Governance and the AEMC’s role NEM Regulation and Governance

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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

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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

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• 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): “…to 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…”

Governance and the AEMC’s role Role and Functions of the AEMC

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 Competitive

Market Based High risk

Generation

Transmission 132-500kVolts Distribution 415V-66kV Retailing

Approximate contribution to retail bill in the NEM (Price Trends 2015-16): Independently regulated, low risk

Wholesale and Retail 50% Networks (mostly distribution) 43%

Green

7%

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
• wn 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

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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

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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

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Energy Markets Overview The National Electricity Market (NEM)

NEM Statistics

• Longest alternating current

system in the world

• Interconnected system spanning

5,000 km and including 40,000 km

• f transmission lines
• Supports 19 million residents
• 200 terawatt hours pa

Market Design

• Gross pool, energy only,

mandatory

• 5 regional half hourly spot prices
• Financial contracts manage risk

Queensland Summer peak: 8,500 MW NSW Summer peak: 12,000 MW Tasmania Winter peak: 1,800 MW Victoria Summer peak: 10,300 MW SA Summer peak: 3,300 MW

Black Coal 8GW Black Coal 12GW Brown Coal 6GW Hydro 4GW Gas 2GW Hydro 2GW Gas 2GW Lignite Coal 1GW Gas 2GW Gas 1GW Hydro 1GW Wind 2GW Black Coal 8GW Black Coal 12GW Brown Coal 6GW Hydro 4GW Gas 2GW Hydro 2GW Gas 2GW Lignite Coal 1GW Gas 2GW Gas 1GW Hydro 1GW Black Coal 8GW Black Coal 12GW Brown Coal 6GW Hydro 4GW Gas 2GW Hydro 2GW Gas 2GW Lignite Coal 1GW Gas 2GW Gas 1GW Hydro 1GW Wind 2GW

Energy Markets Overview Main Electricity Generation Centres

Gas 3GW Gas 3GW

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• Spot price is the average of the 5 minute dispatch

prices for the half hour period

• All generators dispatched in that half hour period

receive the wholesale price 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

• Generator 5 must be partly

dispatched

• Dispatch price = $38

Energy Markets Overview Dispatch and spot price setting in the NEM

Energy Markets Overview Spot Market Pricing – Daily Generator Merit Order

Brown Coal Fuel cost $10/MWh, (Emissions Intensity 1.2-1.5t CO2/MWh) Black Coal Fuel Cost $25/MWh, (Emissions Intensity 0.8-1.0 t CO2/MWh) Gas Fuel cost $40-$85/MWh, ( (Emissions Intensity 0.4-0.6 t CO2/MWh) Demand (Marginal plant sets common clearing price) Wind Usage cost $3/MWh (Emissions Intensity 0t CO2/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

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Generators Purchasers

Physical Electricity Flows Physical settlement Financial OTC Contract Payments

Futures Exchange

Physical settlement

Broker

AEMO

Broker

Energy Markets Overview Financial and Physical Functions in the NEM

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

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What does a Reliable Power System Require?

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+ + +

A Reliable Power System requires all of the following

Adequate supply of dispatchable generation (inc DM) A secure power system Reliable transmission Reliable distribution

=

High likelihood of consumer demand being met

How to Deliver Reliability Adequate Supply of Dispatchable Generation

• Mainly driven by the market – entrepreneurial investment
• Market informed by AEMO forecasts – SOO, PASA, EAAP
• Market parameters recommended by the Reliability Panel so that the

maximum level of unserved energy from main generation and interconnection is not likely to be exceeded – MPC, MPF, CPT

• Short term interventions by AEMO:

– RERT – short-term reserve contracts where market fails to deliver sufficient generation – directions

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Prices set by supply and demand Price level and volatility drives need to contract

• r self invest

Contracts lead to generation or DM investment Investment leads to adequate supply

How to Deliver Reliability A Secure Power System

• Mainly the responsibility of AEMO - Acquires ancillary services, can direct or

instruct

• Transmission, Distribution and AEMO to agree to connection standards
• Generators to comply with performance standards, can supply FCAS
• Reliability Panel – determines frequency standards, guidelines for AEMO,

generator performance templates for compliance

• Jurisdictions set curtailment priorities (load shedding for emergency

frequency control and maintaining power system security)

• Large Market Customers must provide interruptibility (60%)
• AER responsible to monitor compliance

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How to Deliver Reliability Reliable Transmission and Distribution

• Jurisdictions set Transmission and Distribution reliability standards
• Networks plan, invest and operate to achieve reliability standards
• AER determines revenue sufficient to allow efficient business to

meet reliability requirements

• AER operates reliability incentive schemes to encourage improved

reliability

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Reliable Power System

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+ + +

A Reliable Power System requires all of the following

Adequate supply of dispatchable generation (inc DM) A secure power system Reliable transmission Reliable distribution

=

High likelihood of consumer demand being met

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Energy Markets Overview Changes in electricity prices 2009 to 2014

Increasing network charges have been responsible for around 50% of the increases 2009 to 2014

• Replacement of ageing

assets

• Meeting forecast peak

demand

• Increases in reliability

standards

• Higher cost of capital post

GFC

• Rules in favour of NSPs

Government policies such as the RET, and State FITs

Scale of increases varies between States

200 400 600 800 1000 1200 1400 1600 2009/10 2014/15 Environmental Regulated Networks Wholesale and Retail

Dollars per Annum

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Energy Markets Overview Changes in electricity prices 2014 to 2018

Scale of increases varies between States

200 400 600 800 1000 1200 1400 1600 1800 2014/15 2015/16 2016/17 2017/18 Environmental Regulated Networks Wholesale and Retail

Dollars per Annum

Energy Markets Overview Australian Gas Network

Energy Markets Overview Victorian Gas Market

• Wholesale spot market across

principal gas transmission network.

• Provides for short-term trade,

with the price varying between $0 - $800/GJ.

• Trades the ‘imbalance’ that

exists between the overall gas injected (delivered) and the gas withdrawn

• Market participants attempt to

align injections and withdrawals

• AEMO responsible for physical

security of pipelines

Energy Markets Overview Gas Short Term Trading Markets in Adelaide, Sydney, Brisbane and Supply Hub at Wallumbilla

• STTM trades gas at

“Demand Hubs”

• “Supply Hub” at Wallumbilla
• Daily pricing, settlements and
• ther services.
• AEMO is market operator:
• schedules gas
• sets daily prices
• settle markets
• Does not operate pipelines,

manage system security/or emergencies.

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National Markets Are Evolving

All around us we see the evidence of accelerating change in energy market dynamics

AEMC’s Strategic Priorities Addressing key challenges

• Consumer Priority

– Enabling consumers to make informed decisions in competitive retail markets

• Protection - Engagement - Participation
• Gas Priority

– Promoting the development of efficient gas markets

• Markets and Network Priority

– Market and Network arrangements that encourage efficient investment and flexibility

• Technology and new business models
• Network evolution
• Policy integration

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Consumer Priority Power of Choice

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Consumer priority Cost reflective network pricing

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Example 1: Solar PV

• Consumer saves $200 p.a. using north

facing solar PV

• Reduces Consumer network costs by

$80

• Other consumers pay remaining $120

Example 2: Air conditioner

• Consumer using 5kW air conditioner

causes $1,000 p.a. network costs

• Consumer A pays $300
• Other consumers pay remaining $700

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Energy Market Policy & Challenges

• Governance and AEMC’s role
• Energy Markets Overview
• Strategic Priorities and key challenges
• AEMC key projects

A national commitment and effective governance is critical to deliver benefits to consumers

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