The Wholesale Electricity Market in Australia a Report to the Australian Energy Market Commission
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June 2007 The Wholesale Electricity Market in Australia A report to the Australian Energy Market Commission Project Team Greg Houston Adrian Kemp Daniel Young Shane Anderson Tara D’Souza Adam Rakich Katherine Lowe NERA Economic Consulting Darling Park Tower 3 201 Sussex Street Sydney NSW 2000 Tel: +61 2 8864 6500 Fax: +61 2 8864 6549 www.nera.com Contents Contents 1. Introduction 1 1.1. Structure of this report 1 2. Overview of the National Electricity Market 3 2.1. Structure of the NEM 5 2.2. Electricity consumption in the NEM 10 2.3. Prices in the NEM 12 3. Generation, transmission and distribution in the NEM 16 3.1. NEM structure in aggregate 16 3.2. New South Wales 21 3.3. Queensland 25 3.4. South Australia 31 3.5. Snowy 36 3.6. Tasmania 37 3.7. Victoria 40 3.8. Proposed generation investments 45 4. Electricity retail in the NEM 47 4.1. Costs faced by retailers 48 4.2. Structure of electricity retailers in the NEM 49 5. Vertical integration in the NEM 62 5.1. AGL 62 5.2. Origin Energy 63 5.3. TRUenergy 64 5.4. International Power 64 6. Operation of the NEM 66 6.1. Pre-dispatch 66 6.2. Dispatch process and the spot price 67 6.3. Settlement of transactions 69 6.4. Maintaining the demand and supply balance in the wholesale market 70 6.5. Planning and development of the wholesale electricity market 70 6.6. Energy Losses 70 6.7. Constraints 73 Contents 7. Risk management 74 7.1. Overview 74 7.2. Tools to manage market risk 75 7.3. Effectiveness of Market Risk Tools 81 7.4. Managing Settlement Risk and Credit Risk 88 8. Recent reviews of the wholesale electricity market 91 9. Issues for retail competition 94 9.1. Observations on the extent of wholesale competition 95 9.2. Sources of wholesale market price variations 96 9.3. Implications for retail electricity competition 98 Appendix A: Analysis of regional NEM prices, 2005 and 2006 101 List of Tables Table 2.1 Average yearly regional spot price, 2002 to 2007 ($/MWh) 12 Table 2.2 Average yearly standard deviation of spot prices, 2002 to 2007 ($/MWh) 13 Table 3.1 Generation capacity by fuel type, NEM aggregate 16 Table 3.2 Interconnector capacity and throughput (GWh) 18 Table 3.3 Hours of system normal binding constraints 19 Table 3.4 Generation capacity by owner, New South Wales 23 Table 3.5 Electricity supplied by owner, New South Wales 23 Table 3.6 Generation capacity by owner, Queensland 29 Table 3.7 Electricity supplied by owner, Queensland 30 Table 3.8 Generation capacity by owner, South Australia 34 Table 3.9 Electricity supplied by owner, South Australia 35 Table 3.10 Generation capacity by owner, Victoria 43 Table 3.11 Electricity supplied by owner, Victoria 44 Table 4.1 Summary of retail competition introductions 47 Table 4.2 Summary of electricity customers by jurisdiction and retailer 50 Table 4.3: Licensed electricity retailers in eastern Australia 52 Table 7.1 Implied direct bilateral trade volumes (TWh) 84 Table 7.2 NEM Demand vs trading volume 85 Table 9.1 NEM and regional capacity and electricity supply shares, by generator 96 Contents List of Figures Figure 2.1 Interconnector capacity in the NEM 4 Figure 2.2 Structure of the National Electricity Market 6 Figure 2.3 Australian consumption of electricity by State, 1997-98 to 2004-05 10 Figure 2.4 Share of electricity consumption, 1997-98 and 2004-05 11 Figure 2.5 Forecast terminal demand, 2007 to 2020 12 Figure 2.6 Average daily NEM electricity spot price, 2006 and 2007 14 Figure 2.7 National Electricity Market interval prices, Victoria 15 Figure 3.1 Supplied electricity by fuel type, NEM aggregate, 2005/06 17 Figure 3.2 Snapshot of the National Electricity Market, 2005-06 20 Figure 3.3 Location of major generation in New South Wales 22 Figure 3.4 Major generation in Queensland 26 Figure 3.5 Generation capacity and electricity supplied by fuel type, Queensland 27 Figure 3.6 Major generation in South Australia 32 Figure 3.7 Generation capacity and electricity supplied by fuel type, South Australia 33 Figure 3.8 Major generation in the Snowy region 36 Figure 3.9 Major generation in Tasmania 38 Figure 3.10 Major generation in Victoria 41 Figure 3.11 Generation capacity and electricity supplied by fuel type, Victoria 42 Figure 4.1 Electricity customers by jurisdiction and retailer 51 Figure 6.1 Bid Structure 67 Figure 6.2 Scheduling and dispatch prices 68 Figure 6.3 Generator dispatch cycle 69 Figure 7.1 Swap arrangements 76 Figure 7.2 OTC instruments 78 Figure 7.3 Settlement residue auction process 79 Figure 7.4 Volume of derivatives traded through brokers 82 Figure 7.5 Volume of derivatives traded through SFE 83 Figure 7.6 Estimated derivative trading volumes 84 Figure 7.7 NEM demand and contracted volumes, 2003-04 to 2005-06 85 Figure 7.8 Volume of futures contract open at 25 Sep 2006 86 Figure 7.9 SRA Payout versus Inter-regional Swap Payout: Victoria to New South Wales 87 Figure A.9.1 - Avg NSW Electricity Price 101 Figure A.9.2 - Avg Vic Electricity Price 101 Figure A.9.3 - Avg SA Electricity Price 102 Figure A.9.4 - Avg Snowy Electricity Price 102 Figure A.9.5 - Avg Tas Electricity Price 103 Figure A.9.6 - Avg Qld Electricity Price 103 Glossary Glossary ACCC Australian Competition and Consumer Commission AEMC Australian Energy Markets Commission AER Australian Energy Regulator APRA Australian Prudential Regulation Authority ASX Australian Stock Exchange CCGT Combined Cycle Gas Turbine CRA Charles River Associates COAG Council of Australian Governments DC Direct Current DLF Distribution Loss Factor DNSP Distribution Network Service Provider ERIG Energy Reform Implementation Group ERAA Energy Retailers Association of Australia ESAA Energy Supply Association of Australia ESC Essential Services Commission (Victoria) ESCOSA Essential Services Commission of South Australia ETEF Electricity Tariff Equalisation Fund (New South Wales) FRC Full Retail Contestability/Competition GW Gigawatt IPART Independent Pricing and Regulatory Tribunal (New South Wales) LEP Long-Term Energy Procurement MCE Ministerial Council of Energy MNSP Market Network Service Provider MRET Mandatory Renewable Energy Target Glossary NCC National Competition Council NCP National Competition Policy NEL National Electricity Law NEM National Electricity Market NEMMCO National Electricity Market Management Company NER National Electricity Rules (‘the Rules’) NGF National Generators Forum MW Megawatt OCGT Open Cycle Gas Turbine OTC Over-the-Counter PC Productivity Commission QCA Queensland Competition Authority QNI Queensland to New South Wales Interconnector RLMS Resource and Land Management Services SFE Sydney Futures Exchange TLF Transmission Loss Factor TNSP Transmission Network Service Provider TWh Terawatt-hours VENCorp Victorian Energy Networks Corporation The Wholesale Electricity Market Introduction 1. Introduction NERA Economic Consulting has been asked by the Australian Energy Market Commission (AEMC) to provide a high-level overview of the wholesale electricity and gas market structures and operation within the National Electricity Market (NEM) jurisdictions. This report focuses on the wholesale electricity market and its sister report undertakes a similar analysis for the wholesale gas market in Australia. These reports will provide a basis of information for the review of the effectiveness of retail electricity and gas markets, which is currently being undertaken by the Commission. Our approach in this report has been to provide a snap shot of the electricity market structure as it operates currently in each of the NEM regions. This involves a discussion of: § electricity generators in each region, including generator capacity, fuel type, energy supply and ownership structure; § the transmission and distribution system as it operates in each region; and § the electricity retail segment, including market share information. In so doing we also examine electricity supply and demand, the interconnection of the network between NEM regions and identify the extent of vertical aggregation that is arising between generators and retailers in some regions. In addition to a discussion of the market structure, we also describe the operation of the wholesale market including the roles of market institutions, the approach to bidding, settlement and dispatch, and the important role that financial risk management possesses in the efficient operation of the NEM. Finally, we provide a brief outline of the policy issues arising from the current reforms, particularly those raised in the recent report by the Energy Reform Implementation Group (ERIG). We also provide some observations arising from the descriptions of market structure as it relates to a consideration of the effectiveness of retail electricity competition. 1.1. Structure of this report The remainder of this report is structured as follows: § Section 2 provides an overview of the NEM, its participants and electricity consumption; § Section 3 discusses the structure of the NEM, focusing on generation capacity, location, ownership, and electricity supply; transmission and distribution; and interconnection between each NEM region; § Section 4 outlines the retail segment of the market, including the structure of electricity retailers in each of the NEM regions; § Section 5 discusses the extent of vertical integration between retailers and generators which has occurred in recent years; NERA Economic Consulting 1 The Wholesale Electricity Market Introduction § Section 6 discusses the operation of the market including price formulation, dispatch procedures, settlement and treatment of electricity losses; § Section 7 discusses the approaches to risk management, including the types of risks that arise, and the tools for managing those risks; § Section 8 provides a brief summary of recent reviews of the wholesale electricity market; and § Section 9 considers issues arising from the structure and operation of the wholesale electricity market for retail competition.