AEMO Energy Update December 2013

UPDATE DECEMBER 2013

GAS REPORT HIGHLIGHTS

OPPORTUNITIES

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MAKING THE MOST OF NETWORK INVESTMENTS

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AEMO SEEKS CONSUMER VIEWS

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UPDATE

FROM MANAGING DIRECTOR AND CEO MATT ZEMA

While most of Australia will shortly be enjoying their traditional leisure time over the holiday period, AEMO and its stakeholders are gearing up for another busy summer.

To prepare for the peak period and provide an update on the energy supply–demand outlook for Victoria, AEMO hosted the Summer Readiness Briefing in Melbourne last month.

Presenters forecast a hotter-than-usual summer and increased grassfire risk.

It remains incumbent on AEMO to be well-prepared to respond to potential hazards, and maintain strong relationships with our emergency management partners in government and industry. The good news is that the National Electricity Market (NEM) has sufficient reserve to meet demand during the hotter months; however, of course, localised supply outages can still occur.

Since my last update, we held our Annual General Meeting and Members’ Briefing, which reviewed the 2012-13 business year. We presented our Annual Report, which includes our financial results, with an annual surplus of more than $67 million, and our major activities for 2012-13 – see page 8 for more details.

CONTENTS 02 Update from the Managing Director and CEO 03 Making the most of network investments 04 AEMO releases consolidated gas report for Victoria 04 Gas report highlights opportunities available to support booming industry 06 AEMO seeks colleague and consumer views 06 Wallumbilla Gas Supply Hub: Registrations now open 07 Victorian energy industry ramps up summer preparations 08 AEMO publishes 2013 Annual Report 08 In brief 2

In October, I attended the New York GO15 and APEx conference events, which bring together power grid operators from around the world. Attending these gave AEMO a great opportunity to meet with our market and system operator peers and discuss the challenges we expect in the years to come. Perhaps unsurprisingly, a consistent theme was the significant change underway in the energy sector, including slower electricity consumption, and increasing renewable energy generation and rooftop PV installations.

To assist our stakeholders in keeping up with these developments, AEMO has released a number of new planning reports and updates.

An update of the National Electricity Forecasting Report (NEFR) released in November outlines revised electricity consumption forecasts for 2013-14, and the Supply–Demand Snapshot is a new quarterly publication that provides more frequent updates about changes in the NEM generation mix.

Last month, AEMO also released the 2013 Gas Statement of Opportunities (GSOO) report.

The GSOO highlights the need for investment to support rapid development of the gas sector in eastern and south-eastern Australia. Gas consumption is forecast to triple—from 745 petajoules in 2014 to 2,182 petajoules in 2033.

The National Transmission Network Development Plan (NTNDP) and Victorian Gas Planning Report (VGPR) were published last week—see our stories on page 3 and 4 respectively.

The NTNDP shows that the Large-scale Renewable Energy Target (LRET) continues to be the main driver of generation investment to 2020 and that the carbon price has a lesser impact on investment. Together, the LRET and reductions in electricity consumption forecasts, result in excess generation capacity, and in some cases a decrease in transmission asset utilisation.

The VGPR highlights that Victoria’s Declared Transmission System (DTS) has adequate gas supply and capacity to meet anticipated consumption to 2018. However, gas supply and system capacity will be tight on peak days when gas-powered generation (GPG) and increased exports to New South Wales are included.

In light of this, our industry has an opportunity to reassess the type and capacity of replaced assets, or to consider whether they need to be replaced at all. With that, there is an opportunity to provide better value to stakeholders.

MAKING

THE MOST OF NETWORK INVESTMENTS AEMO’s 2013 National Transmission Network Development Plan (NTNDP), released last week, shows that the Large-scale Renewable Energy Target (LRET) continues to be the main driver of generation investment to 2020.

AEMO is also broadening the scope of its national electricity forecasts.

The 2013 NTNDP looks at the impact of changing dynamics in the National Electricity Market (NEM) over the next 25 years. It finds that together, the LRET and reductions in electricity consumption forecasts, result in excess generation capacity, and in some cases a decrease in transmission asset utilisation.

“Against this backdrop, and in light of changing reliability standards, our industry has an opportunity to reassess the type and capacity of replaced assets, or to consider whether they need to be replaced at all,” he said.

The NTNDP shows that the carbon price has a lesser impact on investment.

“The NTNDP identifies asset refurbishment and replacement decision-making as a network planning priority requiring a high degree of transparency.

Coal remains the dominant generation fuel over the outlook period; however, changes in NEM dynamics could lead to an oversupply of up to 4,000 MW of electricity generation capacity. This further reduces the need for new large-scale generation investment.

“There is also a need to consider adopting economic reliability standards where the economic benefits of the additional reliability outweigh the costs, and implement non-network solutions in place of conventional network augmentation,” Mr Zema said.

Investment in network augmentations is relatively small compared to investment in transmission asset refurbishment and replacement over the outlook period.

The NTNDP also shows that network prices will increase if electricity consumption continues to decline.

This is because network pricing is based on recovering the network asset value over a (declining) energy base, rather than on the service delivered by the network.

“Network augmentations that had been under investigation or already committed have been delayed or cancelled, and asset refurbishment and replacement will be the dominant investment driver,” said AEMO Managing Director and Chief Executive Officer Matt Zema.

AEMO is pursuing a range of initiatives to enable efficient investment decision-making, including developing independent transmission connection point forecasts and identifying network investment needs for New South Wales and Tasmania.

AEMO is also reviewing projects under a new incentive scheme to improve usage of existing network assets. As national transmission planner, AEMO’s role is to prioritise and rank the projects that will deliver best value for money for consumers.

The 2013 NTNDP is available on AEMO’s website.

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AEMO

RELEASES UPDATED GAS PLANNING REPORT FOR VICTORIA The 2013 Victorian Gas Planning Report (VGPR) released by AEMO last week provides an overview of the Declared Transmission System (DTS), and gas supply and consumption forecasts over the five-year outlook period from 2014–18.

The VGPR provides information on the capacity of the DTS, and on pipeline and facility capacity.

It also includes system augmentation details, including those which support increased exports to New South Wales.

The VGPR highlights that the DTS has adequate gas supply and system capacity (1,349 terajoules (TJ) per day) to meet 1-in-2 and 1-in-20 year peak day system demands; both of which are forecast to increase at an average annual rate of 0.9% over the outlook period.

System capacity is the ability of the DTS to transport gas supplies to meet system demand, including residential, commercial, and industrial gas users. When gas-powered generation (GPG) and increased exports to New South Wales are added, gas supply and system capacity are expected to be tight on peak days.

DTS consumption is expected to grow at an average annual rate at 0.3 petajoules (PJ) per year over the outlook period. This is a reduction on the 0.8 PJ per year forecast in 2012, and levels remain lower than peak GPG levels experienced in 2007 during the drought.

Exports to New South Wales via Culcairn will increase by 145% from winter 2015. APA Group will loop, or add a parallel pipeline to, sections of the Wollert to Barnawartha Pipeline to increase export capacity by 67 TJ per day (113 TJ per day). Export capacity is expected to increase by 11 TJ per day (to 57 TJ) for winter 2014.

The South West Pipeline (SWP) will be expanded from winter 2015 with a new compressor station at Winchelsea. This will provide additional gas to support peak day system demand and increased exports to New South Wales.

The VGPR consolidates and replaces information previously contained in the Victorian Annual Planning Report, Victorian Gas System Adequacy, Victorian Gas Medium Term Outlook, Victorian Gas Declared Transmission Capacity, and Victorian Gas Planning Approach publications. The forecasts in this year’s report incorporate the most recent information from winter 2013.

The next VGPR will be published in March 2015, after which it will be published every two years.

The VGPR report and supporting information are available on AEMO’s website.

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Photo courtesy of QGC.

GAS REPORT HIGHLIGHTS OPPORTUNITIES AVAILABLE TO SUPPORT BOOMING INDUSTRY

AEMO’s recently released Gas Statement of Opportunities (GSOO) highlights opportunities for investment in natural gas infrastructure and the need for reserves development to address potential shortfalls in eastern and south-eastern Australia.

Total annual gas consumption is expected to treble over the GSOO’s 20-year study horizon, largely driven by growth in liquefied natural gas (LNG) exports by 2019.

“The Queensland LNG export industry will increase from nothing in 2013 to approximately 1,450 petajoules (more than ten times New South Wales’ 2013 annual gas consumption) by 2019, and that will affect the entire eastern and south-eastern gas industry,” said AEMO Managing Director and Chief Executive Officer, Matt Zema.

There are enough gas resources to meet this forecast consumption, provided investment occurs to develop and transport these resources to where they are needed.

In the short term, demand for gas to supply new LNG export facilities at Gladstone is expected to create opportunities for industry to provide up to 250 terajoules (TJ) per day of additional supply in Queensland and between 50–100 TJ per day in New South Wales by 2018-19.

Total annual gas consumption is expected to treble over the GSOO’s 20-year study horizon.

Projected production and supply shortfall profile Investors are already considering several short-term opportunities to address these shortfalls. Solutions include increasing production in Queensland to meet shortfalls there. Higher gas prices may also dampen domestic consumption, alleviating shortfalls.

In New South Wales, adequacy is linked to continued supply from Moomba. Other supply alternatives include a combination of augmenting the Eastern Gas Pipeline, constructing storage at Newcastle—now underway—and new supply from the Gloucester and Gunnedah basins.

The New South Wales – Victoria Interconnect is also likely to be upgraded, reducing the potential New South Wales shortfall.

In the longer term, by 2027, known reserves are consumed in the Otway basin (an onshore and offshore basin in southern Victoria and South Australia) and this presents challenges for gas supplies in the southern states. The GSOO identifies several options to locate new supply sources in South Australia, Queensland, or New South Wales.

The GSOO report, methodology, and supporting information are available on AEMO’s website.

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WALLUMBILLA GAS SUPPLY HUB: REGISTRATIONS NOW OPEN Interested parties, particularly potential Wallumbilla Gas Supply Hub market trading participants, are invited to register for a market trial starting on 24 February 2014.

AEMO SEEKS COLLEAGUE AND CONSUMER VIEWS

AEMO recently surveyed representatives from a number of industry organisations to seek their feedback on its performance and service delivery. AEMO is also undertaking a major survey to seek a range of consumer views on the value they place on power reliability.

These two key surveys influence work that AEMO will undertake in the coming year and beyond.

Developing a value of customer reliability

Stakeholder survey

This survey will develop an index that, along with the supporting methodology, will be available to asset owners, governments, and regulatory authorities for use in electricity planning and investment decision-making. The updated VCR measures will also be used as an input to help set the market price cap level— the upper limit at which electricity generators are paid for their energy in the NEM.

AEMO is driven by a continuous commitment to deliver value to its members, stakeholders, employees, and ultimately the broader community. In line with that commitment, AEMO invited more than 200 representative stakeholders to take part in a survey with a view to further improving its operational performance and service delivery.

The survey, held across September and October, was directed at representatives from a range of levels within their organisation, reflecting the multitude of interfaces that participants have with AEMO. Executive feedback is also being sought at a strategic level, and those interviews are in progress. AEMO has commissioned a market research firm to undertake the survey process and analyse the results. This process is currently underway, and AEMO plans to review the collated results and advise stakeholders about how it will respond to the feedback early in 2014.

For more information contact Acting Group Manager, Regulatory Policy, Jo Witters.

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AEMO will soon undertake a large-scale survey of customers across the National Electricity Market (NEM) to establish updated value of customer reliability (VCR) figures—a measure used to indicate what different types of customers (residential, commercial, and industrial) are prepared to pay to maintain reliable electricity supplies.

The gas supply hub is designed to support efficient trade and movement of gas between regions; enhance transparency of gas trading; and set a reference price for gas so participants can manage their portfolio risk. It will also offer forward and pipeline capacity trading products for listing on the exchange.

During October and November, around 180 people from 24 organisations attended training across Adelaide, Melbourne, Sydney, and Brisbane; a number of organisations have indicated they will participate in the market when it goes live in March 2014. Participants are required to register by 7 February 2014 to take part in the trial.

“This is an exciting time before the market formally starts in March 2014,” said AEMO Project Readiness Coordinator Darryl White.

“Interested parties, whether they intend to be active traders or viewing participants, will be able to trade in the market trial as if it were live.

“AEMO will provide some scenarios that participants can use to test different types of transactions and encourage trading. We welcome participant feedback so we can refine the market before it goes live,” he said.

Registration documents are available on AEMO’s website and include a registration form, user guide, and associated documents.

AEMO has already surveyed around 500 residential and business customers as part of a project pilot in November and December.

The full survey will be carried out early in 2014 after further consultation with industry.

This is the first time a survey of this type has been conducted across the whole of eastern and south-eastern Australia.

Reviewing the VCR is part of AEMO’s Planning and Forecasting value proposition for 2013-14 and this survey is part of a larger body of work that has involved extensive consultation with industry and regulatory bodies throughout 2012-13.

For more information see AEMO’s VCR fact sheet for electricity customers.

Photo courtesy of QGC.

VICTORIAN ENERGY INDUSTRY RAMPS UP SUMMER PREPARATIONS AEMO recently hosted the 2013 Summer Readiness Briefing as part of the Victorian energy sector’s preparations for high temperatures, inclement weather, and increased fire risk during the 2013-14 peak summer season.

In partnership with the state’s emergency services community, AEMO presents the annual Victorian summer readiness process each spring. It provides an overview of the expected Victorian gas and electricity supply–demand forecast, and National Electricity Market (NEM) capability for the peak summer period. It also identifies potential issues that may affect market and power system operations over summer.

AEMO Managing Director and Chief Executive Officer Matt Zema introduced the briefing and noted that despite Victoria’s mild winter conditions and wet spring, extreme

weather is always possible and the sector would need to be ready.

“The Summer Readiness Briefing is an important part of AEMO’s and the industry’s preparation for the peak period and in highlighting the risks ahead; whatever the conditions, we need to be well-prepared,” said Mr Zema.

“Our strong partnerships with Victoria’s emergency services mean our emergency arrangements are robust.”

Industry and jurisdictional stakeholders from the energy and emergency services sectors attended the briefing, which included presentations by the Victorian Director of the Bureau of Meteorology, and senior representatives of the Country Fire Authority and Victoria Police.

“Our strong partnerships with Victoria’s emergency services mean our emergency arrangements are robust.”

The presentations showed that warmer-than-normal temperatures in 2013 and the risk of fast-moving grassfires over the summer period suggest a challenging summer ahead.

AEMO’s outlook assessment summary for the summer period confirmed there are no expected supply–demand issues; however, localised outages are always possible in specific areas.

General power system risks include fires, floods, cyclones, storms, and earthquakes. Planned outages, restrictions on power transfer or supply, and transmission constraints can also affect the NEM.

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IN BRIEF

AEMO TRAINING AEMO has now combined the eLearning and face-to-face components of its NEM Overview course into a single, integrated course.

AEMO PUBLISHES 2013 ANNUAL REPORT ing, t a r e P O , Planning Delivering

The consolidated course costs $880, including GST. NEM Overview Canberra 21 February 2014 Network and FCAS Constraints in the NEM Brisbane 13-14 March 2014 NEM Overview Sydney 21 March 2014 NEM Overview Melbourne 28 March 2014

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For more details and how to register for a course, visit AEMO’s Learning Centre.

TELL US WHAT YOU THINK AEMO Energy Update welcomes your feedback.

If you have suggestions and comments or wish to change your contact details, please email media@aemo.com.au.

AEMO presented its 2013 Annual Report at the Annual General Meeting on 7 November 2013.

The report highlights AEMO’s financial performance for 2012-13, including a surplus of $67.4 million. This surplus was primarily driven by the recovery of a deficit from the 2011-12 financial year related to AEMO’s Victorian transmission network service provider function, as well as higher-than-expected settlement residue income, and lower-than-budgeted operating expenditure.

Compared to the 2012-13 budget, AEMO reduced its operating expenditure by $10 million, which has contributed to a reduction in AEMO’s National Electricity Market (NEM) fees from $0.40 to $0.37 per megawatt hour in 2013-14.

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In addition, the report focuses on AEMO’s system operation performance, and reflects on the delivery of our 2012-13 value propositions.

Highlights of 2012-13 include improvements in the approach to forecasting electricity consumption, streamlining market processes, changes in industry consultation through working groups, and a continued emphasis on driving cost efficiencies.

In 2012-13, AEMO also published a new analysis on integrating renewable energy into the NEM, and progressed the Wallumbilla Gas Supply Hub development.

The 2013 AEMO Annual Report, together with presentations made at the Annual General Meeting and Members’ Briefing, is available on AEMO’s website.