Wholesale Electricity Market –

Western AustraliaAPEx Conference 2008 – Sydney

Allan Dawson

13 October 2008

The South West Interconnected System covers much of the populated portion of Western Australia Population just over 2

million Peak Demand approx. 3500

MW

Geographically isolated from other jurisdictions (not interconnected)

Strong summer peak demand

South West Interconnected System

History

Aug 2001 to Oct 2002 – Consideration of market design options by Energy Reform Task Force

Nov 2002 – Government endorsement of recommendations Feb 2003 to Apr 2003 – Review of market design Aug 2003 to Sep 2004 – Industry develops market rules Oct 2004 – Market rules published Dec 2004 – IMO established 2005 – First reserve capacity cycle undertaken Apr 2006 – Disaggregation of Western Power Sep 2006 – Energy market commencement

Western Power

• Verve Energy (Generation)

• Synergy (Retail)

• Western Power (Transmission & Distribution)

• Horizon Power (area outside of South West Interconnected System)

Market Objectives

Promote economic, efficient, safe, reliable electricity in South West Interconnected System

Encourage competition between generators and retailers, including entry of new competitors

Avoid discrimination against particular energy options and technologies

Minimize long-term cost of electricity

Encourage energy efficiency

Market Design Drivers

Small isolated system

Desire to reduce risk and encourage private investment

Significance of reliability objective to Government

Provide downward pressure on prices

Recognise current limited competitive tensions

Fairness for all technology and energy options

Market Structure - Overview

Reserve Capacity Mechanism

Wholesale Electricity

Market

Energy Trading Services

IMO IMOSystem

Mgmt

Bilateral Contracts

AuctionBilateral Contracts

Short Term Energy Market

BalancingAncillaryServices

2 – 3 Years ahead Day Ahead Real Time

High Level Comparison

Wholesale Electricity Market (WA)

• Reserve Capacity Mechanism

• Net Market

• Short Run Marginal Cost Based Market Caps (~$286/$763/MWh)

• Ex-Ante Market

• No Nodal Dispatch or Transmission Model

National Electricity Market (East)

• No Reserve Capacity Mechanism

• Gross Spot Market

• Market Based Spot Cap ($10,000/MWh)

• Real Time Market

• Nodal Dispatch with Complex Transmission Model

Market Performance

• Small but growing – Load growth = 3.9 % p.a. over the next 10

years

– Registered generators = 22 (6 new since market start)

– Register retailers = 15 (5 new since market start)

Impressive Investment

• 700 MW new generation – in service

• 1100 MW new generation – under construction

• Renewable capacity doubled (125 MW to 250 MW)

• Funded entirely by the private sector!!

Generation Market Share

Verve Energy Alinta Synergy Goldfields Power NewGen Griffin Power Perth Energy Other

2007/08 Reserve Capacity Year

2008/09 Reserve Capacity Year

Energy Market Commencement

2009/10 Reserve Capacity Year

2010/11 Reserve Capacity Year

Fuel Diversity

• 45% gas fired

• 15% dual (gas and oil) fired

• 25% coal fired; and

• 10% renewable

• BUT – single dependency on a one natural gas pipeline (1600 km)

Price response

Market Volumes

Retail Market

• > 160 MWh per annum – Contestable (approx. 2,000 customers)

• 50 MWh to 160 MWh per annum – can chose a regulated tariff (approx. 15,000 customers)

• < 50 MWh per annum – non-contestable on a regulated tariff (approx. 960,000 customers)

Retail Tariffs

• Last domestic price change – 1997/98 (10 years ago)

• Not reflective of costs!!!• Requires a State subsidy of A$790 Million over

the next 4 years (excluding transmission)• Proposal to increase by over 100%

> 70% generation costs > 30% transmission investment

• But - Change of government!

Issues

• The current market an evolutionary step

– Too complex – particularly settlement – Not responsive to intra-day events – Balancing Market uncompetitive – Market design predicated on an

unconstrained grid

Challenges

• Accommodating renewables

• Investment uncertainty

Thank you