Energy Generation and Distribution

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Energy Generation and Distribution INDUSTRY COMMISSION Energy Generation and Distribution Volume 11: Report Report No. 11 17 May 1991 Australian Government Publishing Service Canberra © Commonwealth of Australia 1991 ISBN 0 644 14459 9 (volume 2) ISBN 0 644 14491 2 (the set) This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without written permission from the Australian Government Publishing Service. Requests and inquiries concerning reproduction rights should be directed to the Manager, AGPS Press, Australian Government Publishing Service, GPO Box 84, Canberra ACT 2601. Printed in Australia by P. J. GRILLS, Commonwealth Government Printer, Canberra INDUSTRY COMMISSION 17 May 1991 The Honourable P J Keating MP Treasurer Parliament House CANBERRA ACT 2600 Dear Treasurer In accordance with Section 7 of the Industry Commission Act 1989, we submit to you the report on Energy Generation and Distribution. Yours sincerely Acknowledgement The Commission wishes to thank those staff members who contributed to this report. CONTENTS ABBREVIATIONS xi GLOSSARY xiii PART 1 – BACKGROUND INFORMATION 1 INTRODUCTION 1 1.1 The reference 1 1.2 The Commission’s approach 2 1.3 Inquiry procedures 4 1.4 Structure of the report 4 KEY FEATURES OF THE ELECTRICITY AND GAS 2 5 SUPPLY INDUSTRIES 2.1 Industry size 5 2.2 Ownership and structure 6 2.3 Linkages with other sectors of the economy 9 2.4 Regulatory framework 12 PART 11 – EXISTING AND POTENTIAL PERFORMANCE THE ECONOMIC PERFORMANCE OF THE 3 ELECTRICITY AND NATURAL GAS SUPPLY 17 INDUSTRIES 3.1 Basis for assessing performance 17 3.2 Recent performance 19 3.3 Initiatives to improve performance 25 3.4 The scope for improvement 30 THE ECONOMIC BENEFITS OF IMPROVING 4 33 PERFORMANCE 4.1 Reforms considered 34 4.2 Specification of the ORANI Model 41 4.3 Results 42 4.4 Summary 49 V PART 111 – FUTURE DIRECTIONS FOR REFORM 5 A CORPORATE MODEL FOR PUBLIC UTILITIES 53 5.1 Rationale underpinning corporatisation 54 5.2 Relationship with government 55 5.3 Competitive neutrality 66 5.4 Complementary initiatives 74 5.5 Summary of proposals 81 6 REGULATION OF PRIVATE UTILITIES 83 6.1 Regulation to control the use of market power 83 6.2 Regulation of gas transmission and distribution tariffs 87 6.3 Franchise terms and conditions 90 6.4 Trade in natural gas 97 6.5 Summary of proposals 101 7 STRUCTURAL CHANGES TO PROMOTE COMPETITION 103 7.1 The benefits of promoting competition 103 7.2 Practical concerns 106 7.3 Promoting competition in the electricity industry 109 7.4 Promoting competition in the natural gas industry 137 7.5 Summary of proposals 145 8 THE QUESTION OF OWNERSHIP 147 8.1 The case for public ownership 147 8.2 Does it matter if governments retain ownership? 152 8.3 Realising the potential gains from the transfer of ownership 155 8.4 Alternative ownership structures 159 8.5 Summary of proposals 165 9 PRICING 167 9.1 Introduction 167 9.2 Current pricing practice 167 9.3 Short term pricing strategies 170 9.4 Longer term pricing strategies 178 9.5 Summary of proposals 184 VI 10 LOAD MANAGEMENT AND ENERGY CONSERVATION 185 10.1 Least cost planning 185 10.2 Role of users, utilities and governments in load management and energy conservation 187 10.3 Institutional impediments and/or market failures 191 10.4 Summary of proposals 203 REFERENCES 205 VII Text figures 2.1 Value added of selected major industries, 1986-87 6 2.2 Final Australian domestic energy availability, 1989-90 9 2.3 Major electricity markets, 1989-90 11 2.4 Major natural gas markets, 1989-90 11 2.5 Major primary fuel sources for the ESI, 1988-89 12 3.1 Comparison of electricity prices in selected countries, April 1990 20 4.1 State electricity multilateral TFP indices – 8 per cent real rate of return 35 4.2 International output sold per employee 39 Text tables 3.1 Reserve plant margin (RPM) by state, 1986-87 to 1989-90 21 3.2 Performance indicators for gas utilities, 1989-90 23 4.1 Estimated excess capital stock associated with 1989-90 reserve plant margins 38 4.2 Price changes to eliminate claimed cross-subsidies 40 4.3 Estimated long run effects of electricity supply productivity and pricing 43 reforms 4.4 Estimated long run effects of electricity improved productivity in gas 48 distribution 4.5 Estimated long run effects of improved productivity in gas distribution 49 5.1 Major CSOs fulfilled by public utilities 57 5.2 Public utilities’ liability for major taxes and charges 68 9.1 Cost recovery by state electricity authorities, 1989-90 171 9.2 Estimated levels of cross-subsidies in electricity supply – Victoria: 1987-88 173 VIII CONTENTS OF OTHER VOLUMES VOLUME 1 Summary and Recommendations VOLUME 2 Supporting Appendixes 1 TERMS OF REFERENCE AND CONDUCT OF THE INQUIRY 2 INDUSTRY STRUCTURE AND MARKETS 3 CURRENT LEGISLATIVE AND REGULATORY FRAMEWORK 4 RECENT INITIATIVES BY GOVERNMENTS/AUTHORITIES TO IMPROVE THE EFFICIENCY OF THE ELECTRICITY AND GAS SUPPLY INDUSTRIES 5 COMMUNITY SERVICE OBLIGATIONS 6 ELECTRICITY AND GAS INTERCONNECTIONS 7 COGENERATION 8 INTERGOVERNMENTAL RELATIONS 9 REFORM INITIATIVES IN SELECTED OVERSEAS COUNTRIES 10 ELECTRICITY POOLING AND COORDINATION ARRANGEMENTS 11 PROFILE OF CURRENT ENVIRONMENTAL POLICIES AND PROGRAMS 12 DEMAND SIDE MANAGEMENT IX X MAJOR ABBREVIATIONS USED IN THIS REPORT Energy Utilities ACTEW ACT Electricity and Water AGL AGL Gas Companies ECNSW Electricity Commission of New South Wales ETSA Electricity Trust of South Australia GFCV Gas and Fuel Corporation of Victoria HECT Hydro-Electric Commission of Tasmania PASA Pipeline Authority of South Australia PAWA Power and Water Authority, Northern Territory QEC Queensland Electricity Commission Sagasco South Australian Gas Company SECV State Electricity Commission of Victoria SECWA State Energy Commission of Western Australia SMHEA Snowy Mountains Hydro-Electric Authority TPA The Pipeline Authority Government Departments/Agencies ABARE Australian Bureau of Agricultural and Resource Economics ABS Australian Bureau of Statistics ALC Australian Loan Council CGC Commonwealth Grants Commission DITR Department of Industry, Technology and Resources, Victoria DPIE Department of Primary Industries and Energy IAC Industries Assistance Commission IC Industry Commission PSA Price Surveillance Authority TPC Trade Practices Commission Other AGA Australian Gas Association CSO Community Service Obligation DSM Demand Side Management ESAA Electricity Supply Association of Australia ESI Electricity Supply Industry IES Intelligent Energy Systems Pty Limited LNG Liquid Natural Gas LPG Liquid Petroleum Gas MW Megawatt NGI Natural Gas Industry RPM Reserve Plant Margin TPA Trade Practices Act XI XII GLOSSARY Availability Measure of the capability of generating plant for energy production during a period compared to the total energy production if the plant had operated continuously at full output during the period. Base Load That part of the power demand which is effectively constant throughout the year. A unit providing this load should run on a continuous basis at a near rated capacity when not out of service for routine or annual maintenance. Such plant would normally operate with an annual capacity factor in excess of 60 per cent. Capacity Factor Measure of the energy production of a generating plant during a period compared to the total energy production if the plant had operated continuously at full output during the period. City-gate The point where gas emerges from the major supply pipeline for distribution to users. Cogeneration The generation of electricity as part of some other process such as the supply of low pressure steam to a chemical plant or the recovery of waste heat and gases from a blast furnace. Combined Cycle A two stage electrical generation process. In the first stage, electricity is generated by a gas turbine. The waste heat from this process then passes through a heat recovery boiler which produces steam for additional power generation in a conventional steam turbine. This results in an increase in overall power generation efficiency. Common Carriage A requirement imposed on transmission or distribution system owners to carry third party electricity or gas. Conservation The efficient use of energy, by forsaking energy needs or by using more efficient systems or appliances. Demand Side Management Commonly defined as the systematic planning and implementation of energy utility services designed to influence customer use of energy in ways that will produce desired changes in the utility’s load. It is also known as demand management and encompasses both load management and energy conservation. Energy A measure of the amount of electricity or gas used over a period of time. Units commonly used for electricity are gigawatt-hours XIII (GWh), megawatt-hours (MWh) or kilowatt-hours (kWh), depending on the power and time scale involved. As with electricity, the unit used to measure gas consumption varies with conditions of use. Common units include megajoules (MJ) and gigajoules (GJ). 1 kWh = 3.6 MJ 1 GJ = 277.8 kWh Forced Outage The unscheduled outage of a generating unit due to the occurrence of a component failure or other condition which requires the unit to be taken out of service for repairs or inspection. Gas Turbine A generating unit in which an air/fuel mixture is burnt, with the resulting hot air/gas mixture used to drive a turbine. The turbine drives a generator to produce electrical energy. Hydro-electric A term for the generation of electrical energy by turbine alternators driven by a Generation flow of water. Intermediate Load That part of the power demand which falls between the highly fluctuating peak loads and the steady base load components. Plant supplying intermediate loads typically operate during weekdays and are shut down or off-loaded overnight and during weekends. This plant would generally operate at an annual capacity factor of between 30 and 60 per cent.
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