Putting WA’s electricity prices in perspective – how high are they, really? Mike Thomas 30-31 MAR 15

The Lantau Group

Agenda / Content

• Delivered electricity prices vary widely around the world

• Western Australian electricity prices (and costs) are perceived to be high

• What do we know that might help put these costs into perspective

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The Lantau Group

Why do tariffs get out of line?

• Underlying unavoidable realities

– You can only play the hand you are dealt

• Good decisions, bad outcomes

– Stuff happens

• Bad decisions, bad outcomes

– Poor planning and poor non-rigorous forecasting

– Ignoring risk in fuels and technologies

– Being bad at what you do

• Policy changes and factors

– Shifts in objectives

– Unintended consequences

2

Electricity Markets do not

promise the lowest prices always

They are better thought of as having self-

correcting tendencies – similar to

regulation, but using different incentives

and mechanisms

The speed and magnitude of those

tendencies depends on perceptions,

context and design detail

The challenge is not to over-react or overload a particular “solution” with more aspiration than it can reasonably achieve

(without other unintended consequences)

The Lantau Group

Forecasting needs to be unbiased and rigorous – but will not ever be perfect

Forecast peak demand in Luzon (1990-2015F)

3

Supply and demand in Luzon

(1986-2013)

Note: * Philippine Grid Code previously mandated 23.4% reserve be available, since 2011 it has required 4% for frequency regulation, a quantity equal to

the most loaded unit for contingency and a quantity equal to the second most loaded unit for dispatchable; ** Dependable capacity is the maximum

capacity factoring plant reliability and ambient limitations.

Source: DOE; NGCP

PHILIPPINE MARKET EXAMPLE

The Lantau Group

Faulting forecasts for missing underlying fundamental uncertainty risks missing

a more important point – prudent management of uncertainty adds costs

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0%

5%

10%

15%

20%

25%

30%

35%

40%

Dif

fere

nce

be

twe

en

Hig

h a

nd

Lo

w

Sce

nar

ios

/ M

ed

ium

Sce

nar

io

WEM

NEM

> 400 MW or 10% of

current peak demand

Variation in Peak Load Forecast for (Just) Six Loads

Normalised difference in forecast demand scenarios

Greater

relative

uncertainty

Very lumpy and

uncertain loads

WA MARKET EXAMPLE

The Lantau Group

A key part of rationalising “capacity” is to understand and agree the associated

reliability standards and policy expectations

Combined Demand and Supply Uncertainty

Capability to Handle Uncertainty

Too Little or

Just Right? MW

Ok for this system But what about this?

GENERIC POINT

The Lantau Group

Sometimes markets shift, exposing investors or consumers with outcomes that

may not align with their earlier decisions

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COAL WINDOW

1997 NPC/FirstGen sign GSPAs

with SPEX/OXY

2001 Inauguration of

Malampaya

The Philippines added ~2,700 MW of natural gas-fired generation capacity to a

system with (at the time) ~6,000 MW peak demand

Note: Crude price 1970-1979 Saudi Arabian Light, 1979-present Brent; Coal price Newcastle

Source: World Bank; TLG analysis

COAL WINDOW

1991 Discovery of

Malampaya gas

field

EXAMPLE: OIL / GAS AND COAL MARKETS SHIFT

The Lantau Group

This happens in all types of markets, from commercial to tightly managed

• RISIN

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Source: IEA (1971-2010), EMA website (2011 – 2012), 2013 and 2014 numbers are estimated

Singapore‟s fuel mix of electricity generation (1971- 2014)

The government regulatory decisions still drive Singapore‟s fuel mix and long term investment

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

Gas

Oil

To commit to develop

LNG terminal in mid „06

To commit to PNG take-

or-pay contracts in „90s

To stick with oil (not

building coal) in „80s

To introduce coal-based

imports in the future?

&

To provide incentives to

facilitate entry of solar

PV?

To induce the LNG uptake volumes through

“PNG moratorium” and “LNG vesting”

RISING GAS PRICES

(RELATIVE TO COAL)

RESPONSE?

EXAMPLE: OIL / GAS AND COAL MARKETS SHIFT

The Lantau Group

Network investment casts a very long shadow – as capacity added is typically

lumpy and forward-looking, but cash-flow recovery is relatively front-loaded

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0.00

0.50

1.00

1.50

2.00

2.50

2007 2008 2009 2010 2011 2012 2013 2014

CLP Hong Kong

Western Power

Sources: TLG analysis, CLP, Western Power annual reports, IMOWA

Change in Net Fixed Assets (PPE)

(indexed to 1.0 in 2007)

The Lantau Group

Faster or slower growth drives how quickly past mistakes are absorbed –

slower growth implies greater risk of lumpy decisions

9

Take-or-pay gas c. 2,700 MW

Hydro „must-take‟ c.400 MW

Geothermal „must-take‟ c.400 MW

Total „non-coal‟ c.3,500 MW

Coal pmin (2013 exc. GNP) 1,325 MW

Total „must-take‟ c.4,800 MW

In 2007, many coal plants could barely run due to insufficient opportunity; by 2013 things had changed

MW

Load-Duration Curves (2007-13)

Percentage of hours

(2007)

Only 50-60% of hours where coal

can run above their minimum

Technical levels – inefficient and

costly

(2013)

Most coal can finally run

at least above technical

minimum

2007

2013

Source: PEMC; TLG analysis

4,800

The Lantau Group

WA‟s reserve margin increased significantly, and is a lightening rod for

attention

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0%

10%

20%

30%

40%

50%

60%

70%

80%

2010 2011 2012 2013 2014

Hong Kong

Singapore

Western Australia

Philippines

Western

Australia Singapore Hong Kong

Philippine

WESM*

2010 27% 51% 31% 37%

2011 34% 50% 33% 43%

2012 46% 56% 31% 44%

2013 50% 61% 33% 38%

2014 50% 71% 26% 33% * Dependable capacity used rather than installed capacity

Sources: TLG analysis, CLP, Western Power annual reports

! ! !

The Lantau Group

The Shower Analogy

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WATER TOO HOT TO BE COMFORTABLE

WATER TOO COLD TO BE COMFORTABLE

“Temperature”

Impa

ct

Pure value transfer

Pure Value Transfer

A reliable, adequate, temperature-appropriate shower

Overall Comparison: Residential Customer

5800 kWhs per annum

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The Lantau Group

Residential prices vary widely – against a sample of major cities

0

5

10

15

20

25

30

35

40

45

50AUD¢/kWh

13

> 4X

Mostly Europe Mostly Asia

Sources: TLG analysis, EIA, Eurostat, departments of energy and departments of statistics of different countries

Perth

The Lantau Group

Residential prices vary widely – against a sample of major cities

0

5

10

15

20

25

30

35

40

45

50AUD¢/kWh

14

N. America

Asia

Europe

Mostly Europe Mostly Asia

> 4X

Sources: TLG analysis, EIA, Eurostat, departments of energy and departments of statistics of different countries

Perth

The Lantau Group

A large part of delivered prices is unrelated to energy

0

5

10

15

20

25

30

35

40

45

50AUD¢/kWh

Energy cost Total operator charges

Use of system charges Market operator charges

Power system operator charges Other charges

Taxes

Sources: TLG analysis, EIA, Eurostat, departments of energy and departments of statistics of different countries

NON-ENERGY

ENERGY

Perth

The Lantau Group

Energy costs in the residential tariff

0

5

10

15

20

25

30

35

40

45

50AUD¢/kWh

Sources: TLG analysis, EIA, Eurostat, departments of energy and departments of statistics of different countries

Perth

The Lantau Group

0

5

10

15

20

25

30

35

40

45

50

AUD¢/kWh

Perth‟s residential energy costs are higher than average, but much closer to

the middle than to either end of the spectrum

Perth

The Lantau Group

Perth has a higher proportion of natural gas and liquid fuel, but domestic fuel

pricing provides some protection compared to Tokyo, Manila, and Singapore

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0

5

10

15

20

25

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Sto

ckholm

Zuri

ch

Shan

ghai

Melb

ourn

e

Sydn

ey

Fra

nkfu

rt

Vie

nna

Copen

hage

n

Auckla

nd

Hong K

on

g

Seou

l

Lo

ndon

Taip

ei

Bru

ssels

Mad

rid

Hanoi

Jakart

a

New

York

Rom

e

Dublin

Kuala

Lum

pur

Adela

ide

Am

ste

rdam

Tokyo

Pert

h

Man

ila

Lo

s A

ngele

s

Bang

kok

Sin

gap

ore

Natural Gas Oil Residential energy charge

AUD¢/kWh

Avg Gas Price

(AUD$/GJ) WA Singapore Germany UK US

Apr-Sep 2014 8.0 – 9.0 17.2 8.9 7.7 4.4

Sources: TLG analysis, IEA, EIA, Eurostat, departments of energy and departments of statistics of different countries

Perth

The Lantau Group

Network-related costs are a particularly variable component across the sample

0

5

10

15

20

25

30

35

40

45

50

AUD¢/kWh

Sources: TLG analysis, EIA, Eurostat, departments of energy and departments of statistics of different countries

Perth

The Lantau Group

0

5

10

15

20

25

30

35

40

45

50

AUD¢/kWh

Perth‟s network costs are at the higher end, reflecting a newer network with

higher return and depreciation costs

Sources: TLG analysis, EIA, Eurostat, departments of energy and departments of statistics of different countries

Perth

The Lantau Group

Relative change in net book value of network PPE account since 2007

21

0.00

0.50

1.00

1.50

2.00

2.50

2007 2008 2009 2010 2011 2012 2013 2014

CLP Hong Kong

Western Power

Sources: TLG analysis, CLP, Western Power annual reports, IMOWA

Ratio Change in Net Fixed Assets (PPE)

(indexed to 1.0 in 2007)

REPEATED POINT

The Lantau Group

Energy plus network-related costs

0

5

10

15

20

25

30

35

40

45

50

AUD¢/kWh

Energy cost Use of system charges

Sources: TLG analysis, EIA, Eurostat, departments of energy and departments of statistics of different countries

Perth

The Lantau Group

-

5

10

15

20

25

30

35

40

45

50

AUD¢/kWh

Energy cost Use of system charges

Perth‟s overall core costs (energy + network) is at the higher end

Sources: TLG analysis, EIA, Eurostat, departments of energy and departments of statistics of different countries

Perth

Various Subsidies

or Cross-Subsidies

The Lantau Group

Tariff structure also matters

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0

10

20

30

40

50

60

70

100 200 300 400 500 600 700 800 900 1,000

AUD¢/kWh

Monthly consumption (kWh)

Perth

Seoul

Sydney

New York

London

Singapore

Hong Kong

Adelaide

Melbourne

Overall Comparison: Commercial LT Customer

109,000 kWhs per annum

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The Lantau Group

0

5

10

15

20

25

30

35

40

45

50

AUD¢/kWh

Energy Cost Total operator charges Grid Charge

Market operator charges Power system operator charges Other charges

Taxes

Perth has high commercial electricity charges

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Asia Pacific only

Sources: TLG analysis, EIA, Eurostat, departments of energy and departments of statistics of different countries

Perth

The Lantau Group

A modest reduction in commercial energy costs would

move Perth to the middle of the sample

27

Asia Pacific only

0

5

10

15

20

25

30

35

40

45

50

AUD¢/kWh

Sources: TLG analysis, EIA, Eurostat, departments of energy and departments of statistics of different countries

Perth

The Lantau Group

0

5

10

15

20

25

30

35

40

45

50

AUD¢/kWh

Australian network costs, however, are exceptional

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Asia Pacific only

Sources: TLG analysis, EIA, Eurostat, departments of energy and departments of statistics of different countries

Perth

The Lantau Group

A low load factor and a rapidly growing network present a core challenge

Western

Australia Singapore

Hong

Kong

Philippine

WESM

2007 49% 80% 54% 73%

2008 50% 80% 51% 75%

2009 49% 80% 55% 73%

2010 47% 80% 52% 73%

2011 56% 80% 53% 74%

2012 55% 81% 54% 75%

2013 49% 81% 54% 74%

2014 50% 81% 53% 72%

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Load factor = Total GWHS Generated / (Peak demand MW * 8760 *1000)

Sources: TLG analysis, CLP, Western Power annual reports

The Lantau Group

Summary

• Energy pricing is complex

– no simple story, no silver bullet

• Most newer networks go through a lengthy period of higher prices due to the cost-recovery

framework

– can always revisit this to determine if the methodologies align with value

• Excess reserve capacity is a part of the problem, but is exaggerated and confused

– and readily fixed

• A combination of other issues require a holistic / tidy-up approach

– well identified in the options paper

• It‟s not just about changing prices, but about providing the tools to manage risk without

introducing opportunistic shocks

– my personal view

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The Lantau Group

Thank you

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For more information please contact us:

By email

Mike Thomas mthomas@lantaugroup.com

By phone +852 9226 2513 (mobile)

By mail 4602-4606 Tower 1, Metroplaza

223 Hing Fong Road,

Kwai Fong, Hong Kong

Online www.lantaugroup.com

Rigour

Value

Insight

Energy Power Utilities

The Lantau Group

Every jurisdiction has a different exposure to fuel prices

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Coal Natural Gas Hydro Other Renewables Nuclear Oil Other

Sources: TLG analysis, IEA, EIA, Eurostat, departments of energy and departments of statistics of different countries

The Lantau Group

The great city cover-up

• Beijing

• Taipei

• Hanoi

• Kuala Lumpur

• Shanghai

• Bangkok

• Stockholm

• Hong Kong

• Jakarta

• Los Angeles

• Zurich

• Vienna

• Singapore

• Brussels

• Seoul

• Auckland

• Perth

• Melbourne

• London

• Manila

• Sydney

• Madrid

• New York

• Rotterdam

• Amsterdam

• Dublin

• Tokyo

• Adelaide

• Munich

• Frankfurt

• Rome

• Copenhagen

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