Transcript APEC

Australia’s energy markets:
change and challenge
JOHN TAMBLYN
CHAIRMAN
AUSTRALIAN ENERGY MARKET COMMISSION
ASSOCIATION OF POWER EXCHANGES
12-15 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
ENERGY REFORM OBJECTIVES
• 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
TWO PHASES OF ENERGY REFORM
• 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
KEY DRIVERS OF REFORM
INDEPENDENT
TRANSPARENT
GOVERNANCE
+
FACILITATION OF
COMPETITIVE
MARKET
+
BALANCE OF
REGULATORY
OBJECTIVES
AND
COMMERCIAL
OUTCOMES
=
ECONOMIC
EFFICIENCY
GAINS
REFORMS ADD
$2 BILLION PA
TO AUSTRALIAN
ECONOMY (IEA)
COMMON
NATIONAL
MARKET
OBJECTIVE,
RULES &
INSTITUTIONS
MARKET
FAILURE
REGULATORY
FAILURE
NEM GOVERNANCE SINCE 2005
MINISTERIAL COUNCIL ON ENERGY
POLICY
DIRECTION
NATIONAL ELECTRICITY/GAS LAW
AUSTRALIAN ENERGY MARKET COMMISSION (AEMC)
NATIONAL ELECTRICITY/GAS RULES
GAS AND
ELECTRICITY
SYSTEM
AND MARKET
OPERATOR
AUSTRALIAN ENERGY
MARKET OPERATOR NEMMCO
(AEMO)
AUSTRALIAN ENERGY
REGULATOR (AER)
ASIC
ECONOMIC REGULATION &
RULE COMPLIANCE
PARTICIPANTS
• WHOLESALE ENERGY SUPPLIERS
• MARKET CUSTOMERS (RETAILERS)
• PARTICIPANT END USE CUSTOMERS
• NETWORK OPERATORS
• TRADERS
NATIONAL
COMPETITION LAW
(ACCC)
ELECTRICITY MARKET EVOLUTION
TODAY
PRE- 1990s
RETAIL
GENERATION
GENERATION
INDEPENDENT
SYSTEM
OPERATOR
NEMMCO
NETWORK
RETAIL
CUSTOMERS
CUSTOMERS
NETWORK
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
ELECTRICITY MARKET FEATURES
• Abundant fuel
sources
• Generation remote
from load
• Long connections
network required
• Transition to
interconnected
national market
GAS FIELDS
ELECTRICITY NETWORKS
COAL DEPOSITS
ELECTRICITY SUPPLY BY FUEL TYPE 2008
COAL SUPPLIES
> 40% OF
AUSTRALIA’S
TOTAL PRIMARY
ENERGY
SUPPLY
SOURCE: NEMMCO 2008
Hydro 7.2%
Natural Gas 8.5%
Oil and Other 0.3%
Black Coal
59%
Brown Coal
25%
INCREASING
EMISSIONS
INTENSITY OF
OUR PRIMARY
ENERGY
SUPPLY IS DUE
TO INCREASING
RELIANCE ON
COAL FOR
GENERATION
REFORMS HAVE MET AUSTRALIA’S NEEDS
• 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
EMERGING ENERGY MARKET CHALLENGES
• 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
CLIMATE CHANGE POLICY
• 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 AND THE ENERGY MARKET
1
4
RETAIL MARKET
RISK AND
COMPETITION
DISPATCH IMPACTS
AND SYSTEM
OPERATION
CLIMATE CHANGE POLICIES
WILL ‘STRESS TEST’ ENERGY MARKET
DESIGN’S ABILITY TO DELIVER
EFFICIENT OUTCOMES FOR CONSUMERS
NETWORK
INVESTMENT & COORDINATION
3
GENERATION
ADEQUACY AND
INVESTMENT
2
1
SYSTEM AND MARKET OPERATION
NOW
FUTURE
Likely changes in variable
costs (inputs, emissions)?
GAS
$
ISSUES
What merit order changes
likely and technically
feasible?
BLACK
COAL
Impact on system security
and reliability?
BLACK
COAL
Level and volatility of spot
prices?
BROWN
COAL
WIND
Network congestion from
changed flows?
WIND
Required level of reserves
– how procured?
COST DRIVES MERIT ORDER
2
GENERATION INVESTMENT
EMERGING TIGHT
SUPPLY/DEMAND POSITION
FROM 2011
ARE MARKET SIGNALS FOR
INVESTMENT SHARP
ENOUGH?
WILL INVESTORS BE
DETERRED BY CLIMATE
POLICY RISKS UNTIL ETS
AND RET DESIGN
RESOLVED?
RESERVE TRADER
INTERVENTION FOR SHORT
TERM GAPS ONLY
IS A CAPACITY MARKET
NEEDED?
3
NETWORK INVESTMENT
UNCERTAIN IN TIME + LOCATION
}
NETWORK
SPENDING
DETERMINED
BY CHOICE
BETWEEN GAS,
WIND, OR
COAL
GENERATION
ISSUES
}
LARGE
IMPACTS
ON THE
TRANSMISSION
NETWORK?
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’?
4
RETAIL COMPETITION AND EFFICIENCY
ISSUES
PRICE
1.
Price regulation?
2.
Financial distress
and market exit?
3.
Investment / entry
incentives?
4.
Vertical integration?
5.
Competitive
opportunities?
PRICE
CAPS
ENERGY
ENVIRONMENT NETWORK PRUDENTIALS
COMPLIANCE CHARGES
RETAILER COSTS
REVIEW OF ENERGY MARKET IMPACTS
• 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