Bruce MountainDirector

Achieving an efficient, secure and clean electricity supply: an

economic and policy analysis.

Australia’s experience

Outline

• Arrangements pre-deregulation and pre-privatisation

• Deregulation in the 1990s– Why– What

• Outcomes in 2010– Generation– Transmission and distribution– Retail

• Current challenges– Network economic regulation– Retail and wholesale competition– Demand-side participation– Low emission development

2

Pre-deregulation and pre-privatisation

• Vertically integrated generation, transmission and distribution

• Some distribution by local authorities

• No meaningful demand-side participation

• Focus on large scale, capital intensive, “base load” fossil fuel generation

• Concerns about efficiency, “gold-plating” and “empire-building”

3

Deregulation from mid 1990s, and later

• Started in Victoria in mid-1990s, largely borrowing British experience

• Vertical disaggregation and the privatisation of generators, transmission and distribution and retailers

• Introduction of independent economic regulations and five year price cap regulation

• Major innovation was creation of wholesale spot market with offers from generators

• Pressure to reduce cross-subsidies

• Progressive introduction of retail competition

• Growing importance of environmental obligations (renewable energy schemes and, most recently emission reduction schemes)

4

Outcomes: electricity prices

5

Outcomes by 2010

6

Wholesale markets have worked reasonably well

7

Extreme prices (up to $12,500/MWh are possible)

Wholesale markets competitive for most of the year

Financial markets have offered effective spot market risk management (and some evidence of financial speculation)

Peaking generation capacity has been constructed – largely to manage spot market peak demand risks

But wholesale market has failed to provide effective retail price signals to end users

8

….…. and resulting extremely peaky load duration curve

9

The last 4000 MW of

production and distribution was used for just 50

hours (100 settlement

periods) in 2011

The failure to effectively involve the demand side has been significantly higher costs – mainly as a result of higher network expenditure

10

Present Value of costs avoided in the NEM through DR assuming 3,000 MW of DR available

Current challenges – network economic regulation

11

Transmission Distribution

Prices have risen strongly

Main problem is poor regulatory design: incentives schemes appropriate for privatised companies are being used with state-government owned companies, leading to significant over-investment.

Low emission subsidies – the burden has been borne by energy users

12

For renewable generators commissioned by the end of 2010

And substantial subsidy has been paid to high cost technologies

13

Subsidies for renewables commissioned by the end of 2010

Emission reduction policies

• Recent introduction of fixed price emission permit scheme ($24/tonne CO2e) becoming tradable from 2015.

• Linkage to EU Emission Trading Scheme.

• With declining average demand for electricity, gas prices rising more than coal prices it is not clear that emission prices will be sufficient to drive development of low emission technology.

14

Current challenges – demand side participation

• Despite very volatile wholesale prices, there has been little demand-side participation.

• Network regulation incentives have discouraged non-network solutions (demand side participation, energy efficiency, demand shifting).

• Feed-in tariffs for distributed generators do not consider avoided transport costs.

• Effective price signals through the production-transmission-distribution value chain are not reflected in retail tariffs and network use of system charges.

• Distribution connection arrangements have been a barrier.

15

Some summary comments

• De-regulation and reform can be misnomers – be careful what you wish for.

• Competition in wholesale, centrally dispatched production has been reasonably successful.

• Network regulation has been a disaster: problem of political economy and regulatory design and implementation.

• Demand-side participation has been problematic, despite very strong wholesale market price signals.

• Renewables subsidies have allocated funds to expensive technologies

• Feed-in tariffs have failed to consider all avoided costs.

• “Market reform” is better characterised as many little markets along the supply chain, poorly connected and operating in isolation of each other.

• Development of “clean energy” largely isolated from the energy market

16