15 0 2 STATE OF THE ENERGY MARKET ENERGY THE OF STATE STATE OF THE ENERGY MARKET 2015 STATE OF THE ENERGY MARKET 2015 Australian Energy Regulator Level 35, The Tower, 360 Elizabeth Street, Melbourne Central, Melbourne, Victoria 3000 Email: [email protected] Website: www.aer.gov.au ISBN 978 1 922145 67 3 First published by the Australian Competition and Consumer Commission 2015 © Commonwealth of Australia 2015 This work is copyright. Apart from any use permitted under the Copyright Act 1968, no part may be reproduced without prior written permission from the Australian Competition and Consumer Commission. Requests and inquiries concerning reproduction and rights should be addressed to the Director Publishing, ACCC, GPO Box 3131, Canberra ACT 2601, or [email protected]. ACKNOWLEDGEMENTS This report was prepared by the Australian Energy Regulator. The AER gratefully acknowledges the following corporations and government agencies that have contributed to this report: Australian Financial Markets Association, ASX Energy, Australian Bureau of Statistics, Australian Energy Market Operator, Australian Energy Market Commission,Clean Energy Regulator, Department of Industry (Australian Government), and EnergyQuest. The AER also acknowledges AGL Energy, APA Group, BG Group, Snowy Hydro and Allison Crowe for supplying photographic images. IMPORTANT NOTICE The information in this publication is for general guidance only. It does not constitute legal or other professional advice, and should not be relied on as a statement of the law in any jurisdiction. Because it is intended only as a general guide, it may contain generalisations. You should obtain professional advice if you have any specific concern. The ACCC has made every reasonable effort to provide current and accurate information, but it does not make any guarantees regarding the accuracy, currency or completeness of that information. Editor: Editor’s Mark, Melbourne Cover image courtesy of Allison Crowe CONTENTS 1 PREFACE 4 MARKET OVERVIEW 6 A.1 Introduction 6 A.2 National Electricity Market 11 A.3 Gas markets 15 A.4 Regulated energy networks 18 A.5 Retail energy markets 22 1 NATIONAL ELECTRICITY MARKET 24 1.1 Electricity demand 27 1.2 Generation technologies in the NEM 31 1.3 Carbon emissions and the NEM 36 1.4 Generation investment 38 1.5 Supply–demand balance 39 1.6 Market structure 43 1.7 National Electricity Market 45 1.8 Recent NEM activity 53 1.9 Electricity contract markets 56 1.10 Improving market efficiency 57 1.11 Reliability of supply 59 1.12 Barometers of competition in the NEM 64 2 ELECTRICITY NETWORKS 66 2.1 Electricity networks in the NEM 70 2.2 Economic regulation of electricity networks 73 2.3 Electricity network revenue 74 2.4 Electricity network investment 76 2.5 Operating and maintenance expenditure 77 2.6 Efficiency incentive schemes 78 2.7 Power of choice reforms 81 2.8 Transmission reliability and congestion 83 2.9 Distribution network performance 86 3 GAS MARKETS 88 3.1 Gas reserves and production 95 3.2 Eastern Australia gas markets 98 3.3 Upstream competition 98 3.4 State of the eastern gas market 108 4 GAS PIPELINES 110 4.1 Ownership 110 4.2 Regulation of gas pipelines 116 4.3 Pipeline investment 117 4.4 Pipeline revenues and retail impacts 120 5 ENERGY RETAIL MARKETS 122 5.1 Energy market regulation 123 5.2 Retail market structure 127 5.3 Retail competition 131 5.4 Retail prices 141 5.5 Customer complaints PREFACE I am pleased to introduce the Australian Energy Regulator’s The State of the energy market report focuses on energy State of the energy market 2015 report. This ninth edition market activity over the past 12–18 months in those explores structural shifts across the energy supply chain, jurisdictions in which the AER has regulatory responsibilities. both in electricity and gas, and how these shifts impact on In future, the report’s coverage will expand. In 2015, consumers and industry. the AER became the electricity network regulator in the Northern Territory. It will also acquire this role in Western In electricity, six years of flat or negative demand growth and Australia in 2017, pending legislative approval and other the continued rise of renewable generation are translating regulatory processes. into plant redundancies and, in some regions, market volatility. These trends impact on the network sector, The report consists of a market overview, supported by which is also being transformed by new regulatory rules five chapters on the electricity and gas sectors. As usual, and metering and pricing reforms that will better inform it employs accessible language to reach a wide audience. consumer choice. The retail market is responding to these I hope this 2015 edition is a valuable resource for policy changes with new approaches to selling energy. Alongside makers, consumers, industry and the media. these developments, Queensland’s new LNG industry is Paula Conboy transforming eastern Australia’s gas industry. Chair December 2015 1 SNAPSHOT National Electricity Market Eastern Australia gas market • Demand for electricity declined or stayed flat for six • Domestic gas demand was flat in 2014–15 (especially consecutive years to 30 June 2015. for gas powered generation), but export demand is • Demand for electricity at peak times was 20 per cent rising as Queensland LNG projects compete for locally below historical highs in NSW, Victoria and produced gas. South Australia in 2014–15, but set a new record • Two LNG projects commenced exports in 2015, and a in Queensland. third will commence by early 2016. • Rising electricity bills over the past five years drove • Gas markets were volatile in 2015, with weekly spot consumers to adopt energy efficiencies and 1.5 million prices ranging from near zero to $12 per gigajoule. households to install rooftop solar photovoltaic panels. • Transmission pipelines in eastern Australia were By 2024–25 solar PV is forecast to generate 7.5 per cent re‑engineered for bidirectional flows, allowing more of total energy requirements. flexible gas trading. • The first commercial solar farms opened in 2015, with • New transmission pipeline linking Queensland with the capacity of 175 megawatts. Northern Territory will open the eastern gas market to • Investment in wind generation has been ongoing, but new supply sources by 2018. coal and gas plant have closed in South Australia, • Major ACCC and AEMC reviews of eastern gas markets Queensland, NSW, Victoria and Tasmania. were underway in 2015. • Wholesale electricity prices fell in 2014–15, except in Queensland, where generator bidding contributed to high summer prices. The South Australia market also had volatile pricing. SNAPSHOT Regulated energy networks Retail energy markets • Lower electricity demand has meant less network • Retail electricity prices mostly fell in in 2015, reflecting investment to augment capacity but higher replacement declining network costs pressures. expenditure for ageing assets. • Retail gas prices rose in most jurisdictions, driven by • The cost of capital in AER distribution network higher pipeline charges and rising gas contract prices. determinations made in 2015 ranged from 5.41 per cent • The majority of electricity customers in Victoria, South (NSW gas) to 6.68 per cent (NSW electricity). In previous Australia, NSW and south east Queensland now have a determinations, the cost of capital was 10.4 per cent market contract rather than a standing offer. for NSW gas (2010) and 10.02 per cent for NSW • The AEMC found electricity markets in Tasmania, regional electricity (2009), following merits review by the Australian Queensland and the ACT are not effectively competitive. Competition Tribunal. • New retail products are emerging. • AER benchmarking identified material operating inefficiencies in some electricity networks. • On 1 July 2015 Queensland became the fifth jurisdiction to adopt the National Energy Retail Law. • Distribution network costs are estimated to be around $250 lower for a typical NSW electricity customer in • The Federal Court imposed penalties on retailers in 2015–16 than immediately before the current regulatory 2015 for failing to obtain the explicit informed consent of period. The estimated reduction for Queensland, South customers; misleading conduct or representations; and Australia and ACT electricity customers, and NSW gas false or misleading statements on available discounts customers is around $100–200. under energy plans. • Network owners and consumer groups applied to the Australian Competition Tribunal for merits review of determinations on the NSW electricity and gas networks, and the South Australian and ACT electricity networks. • Preparatory work is underway to launch competition in metering services and more cost‑reflective distribution tariffs by 2017. Image courtesy of AGL Energy MARKET OVERVIEW A.1 Introduction A.2 National Electricity Market Demand for electricity in the National Electricity Market Wholesale electricity in eastern and southern Australia is (NEM) declined or remained flat for six consecutive years traded through the NEM, spanning Queensland, NSW, to 30 June 2015. While weakening industrial demand was Victoria, South Australia, Tasmania and the Australian significant, rising electricity prices drove consumers to cut Capital Territory (ACT). A transmission grid covering their energy use by adopting measures such as solar water five state based networks and several cross‑border heating and energy efficient airconditioning. Consumers interconnectors physically links the