AEMO Energy Update October 2013

UPDATE OCTOBER 2013

RENEWABLE ENERGY

INTEGRATION

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DEMAND

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AEMO EXPLAINED

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RESPONSE MECHANISM

IN FIVE MINUTES

UPDATE FROM ACTING CEO DAVID SWIFT

The changing generation mix and subdued electricity consumption are presenting a number of challenges for the energy industry and AEMO is now looking at the longer-term impacts of these fundamental changes.

We expect the National Electricity Market (NEM) to see a big increase in large-scale renewable energy connections by 2020. Our just-released Integrating Renewable Energy – Wind Integration Studies Report sets out the possible challenges of an estimated 8.88 GW of wind generation coming online by 2020. It’s part of our broader work program to better understand the impacts of increased renewable energy on the NEM, and prepare for their integration.

Meanwhile, the gas industry is reflecting a completely different set of drivers, with rising export demand behind the need for substantial investment in reserve and infrastructure development. In response, a number of important gas reforms are underway to increase market transparency and openness, and help drive competition.

CONTENTS 02 Update from the Acting CEO 03 Report explores renewable energy integration 04 2013 emergency exercises a success 04 Winter gas in review 05 New gas supply hub aligns with energy summit outcomes 06 Putting a value on customer reliability 06 Working groups strike a chord with industry 07 Demand response mechanism a step closer 08 In brief

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The government energy reform agenda is continuing apace and AEMO is playing a key role by progressing several important projects.

The Wallumbilla Gas Supply Hub, which is due to go live in March 2014, is one way of increasing gas and pipeline capacity trading and price transparency.

In line with the government’s agenda to increase demand-side participation in the NEM, AEMO is developing a demand response mechanism (DRM) for large industrial customers. The mechanism was recommended by the Australian Energy Market Commission (AEMC) as part of its Power of Choice review and is being developed

by AEMO at the request of the Standing Council on Energy and Resources (SCER). This is coupled with a separate body of work to enable smaller customers with smart meters to select different retailers to deliver individual energy products.

AEMO has been working with industry to design the processes required for the DRM to operate efficiently across the NEM. To this end, AEMO believes that collaboration will deliver the most workable solution for all. That’s why we have engaged industry representatives to lead key components of the DRM project.

Finally, on behalf of AEMO, I would like to welcome new directors, Mr Jon Hubbard and Ms Sibylle Krieger, who will formally join the Board next month. Mr Hubbard and Ms Krieger each bring a deep understanding of the operational and commercial issues affecting the gas and electricity industries.

I would also like to thank our outgoing Board members, Dr Mike Sargent AM and Mr Ian Fraser, whose terms conclude on 7 November 2013. Their contribution has been considerable, and I wish them both the very best in their future endeavours.

REPORT EXPLORES RENEWABLE

ENERGY INTEGRATION

AEMO has released a new report outlining the operational impacts of an estimated 8.88 GW of new wind generation capacity coming online in the National Electricity Market (NEM) by 2020. This is part of AEMO’s broader work exploring the impacts of integrating increased levels of renewable energy into the NEM. “This Integrating Renewable Energy – Wind Integration Studies Report is the second of two publications that assess some of the challenges of integrating high levels of renewable energy into the NEM. Both reports reflect AEMO’s ongoing work on the impacts of renewable energy on the electricity grid,” said AEMO Group Manager Planning, Louis Tirpcou.

“Further operational impacts are expected to arise from ongoing technological innovation, including increased distributed generation such as rooftop PV. We will continue to explore these developments,” he added.

Primarily driven by the Federal Government’s 41 TWh Large-scale Renewable Energy Target, the expected new wind generation capacity will add to the 2.67 GW of wind generation currently installed in the NEM. AEMO’s previous report on the large-scale integration of wind generation, which investigated wind turbine plant capability, recommended an assessment of the challenges specific to the particular technical and operational characteristics of the NEM. The latest report advises that while the NEM design incorporates several features that will assist in managing the expected new wind generation, this level of wind will present certain challenges in terms of operating the power system and the electricity market.

The report says these challenges are expected to arise first in South Australia and Tasmania, where forecast levels of wind generation are highest compared to demand.

new ancillary services or changes to connection standards are required.

The report says these challenges are expected to arise first in South Australia and Tasmania, where forecast levels of wind generation are highest compared to demand.

AEMO’s ongoing work on integrating renewable energy into the NEM will also see improved modelling of wind generation for AEMO’s operational and planning tools and process, improving their accuracy as wind generation levels increase.

The Integrating Renewable Energy – Wind Integration Studies Report and the earlier report, Wind Turbine Plant Capabilities (published in June), are available on AEMO’s website.

It looks at how the operation and limits of the NEM will be affected by this increase in wind capacity, what the effects on business-asusual activities might be, and what

Energy Update October 2013 3

WINTER GAS

IN REVIEW

AEMO’s review of Victorian winter gas operation and market outcomes shows milder winter conditions contributing to an 8.8% decrease in total demand, at 114 petajoules (PJ). It reports that system pressure levels were maintained within requirements at all times during winter, and gas supply across Victoria remained reliable.

This figure excludes gas exports to NSW, which were 46% higher than last year (at 7 PJ), and significantly higher than the last four years.

The 8.8% decrease results from a reduction in both system demand and gas-powered generation (GPG). The downward GPG trend, evident since 2007, reflects hydro water storage recovery, the increase in alternative electricity supplies, and more non-DTS (declared transmission system) connected GPG, such as Mortlake Power Station.

Victoria’s 2013 peak gas day demand was 6.5% higher than last year (at 1,163 terajoules); this was well under the record of 1,280 TJ set in 2007.

In comparison, the 2013 average daily demand of 746 TJ was 8.8% lower than last year.

Winter weather conditions in Victoria this year were generally mild, with the exception of a single week commencing on 20 June 2013.

That week saw daily demand of over 1,000 TJ, and included the single largest gas demand day for the last three years.

Injections into the South West Pipeline were slightly lower than in 2012 (by 0.3%). Combined with injections from BassGas, which had been offline for maintenance in winter 2012 but was back online this year, there was a resulting decrease in Longford injections compared to 2012.

Liquefied natural gas dispatch was required twice for peak shaving gas this winter (on 21 and 24 June). These were the two highest demand days and also coincided with the Yallourn Power Station outage.

In terms of market outcomes, the weighted average market price was $4.25 per gigajoule.

This was 11% lower than 2012 but 24% higher than 2011. Prices were affected by the return of BassGas, which injected an average 50–60 TJ/day at $0 per gigajoule throughout winter, compared to 2012 when it was offline due to maintenance work.

For more information about AEMO’s Victorian gas market operations, see AEMO’s website.

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2013 EMERGENCY

EXERCISES A SUCCESS The 2013 National Electricity Market Emergency Management Forum (NEMEMF) emergency exercises held during September have been noted as a worthwhile experience by participants involved.

Historically the NEMEMF exercise has been centrally coordinated, with participants remaining in their jurisdiction and participating remotely.

This year participants came together in Adelaide and Brisbane to observe activities above and beyond their own specific involvement in a controlled “desktop” format.

Emergency scenarios are developed for the exercises so participants can experience how a real-life situation might evolve. This year’s scenario involved a systematic, coordinated attack on a range of electricity network elements combined with extreme temperatures and multiple supply failures.

Both southern and northern jurisdictions played out the scenario, and successfully practised their respective decision-making procedures to safeguard supply, manage disruption, and minimise any impact on the community.

The northern exercise involved the Commonwealth, Queensland, New South Wales and the Australian Capital Territory; and the southern exercise involved the Commonwealth, Victoria, Tasmania, and South Australia.

Emergency scenarios are developed for the exercises so participants can experience how a real-life situation might evolve.

AEMO Principal Emergency Advisor, Shonal Dessmann, said the new face-to-face format allowed participants to gain a deeper understanding of managing a NEM incident and served as a timely reminder that systematic, coordinated attacks are a real threat.

“Participant feedback has indicated that the format proved to be invaluable with the discussion-based exercise allowing for a better understanding of jurisdictional processes and issues as well as providing useful networking opportunities,” Ms Dessmann said.

“A final exercise report is currently being developed that will outline all the learnings from the events and any recommendations for improvement. The report will be presented and reviewed by the NEMEMF committee for endorsement, and a work plan will be developed to revise procedures and protocols, if required.”

The emergency exercises are conducted annually to ensure that jurisdictional arrangements across the NEM are robust and appropriate for maintaining NEM security across a range of emergency scenarios.

NEW GAS SUPPLY HUB Gas supply was a key focus at the recent New South Wales Energy Security Summit; its outcomes align with the new Wallumbilla Gas Supply Hub development in Queensland, which will introduce further opportunities to trade gas in eastern and southeastern Australia.

The summit outlined the need for a government gas pipeline strategy to foster optimal pathways and capacity for gas supply and demand.

In an official communique, the summit called for the availability of better information to improve AEMO’s Gas Statement of Opportunities and enhance trading arrangements to encourage participation by both small and large operators. The summit also recommended optimising pipeline capacity and access, and new pipeline investment.

The summit also endorsed greater transparency in gas pricing and market operation through trading hubs to be

ALIGNS WITH ENERGY SUMMIT OUTCOMES pursued at an intergovernmental level, contributing to a more competitive market.

AEMO Group Manager Business Strategy, Peter Geers, said these outcomes are in line with the work AEMO has underway.

“The gas supply hub we are implementing at Wallumbilla is one way to facilitate greater gas trade and price transparency. Pipeline capacity will be one of the products offered through this new voluntary gas market,” Mr Geers said.

“It was encouraging to hear industry representatives supporting this approach at the summit. This bodes well for our market start in March 2014,” he said.

Implementation of the new voluntary market is ramping up.

Over 150 people from 18 different organisations have already registered for training in Adelaide, Sydney, Melbourne, and Brisbane throughout October and November.

AEMO is finalising an exchange agreement to enable trades via 1-terajoule (TJ) contracts following input from industry, and will publish a participant guide shortly.

The next step is registration for a “go live” trial in November in preparation for market start in March 2014.

For more information about the hub see AEMO’s website.

“The gas supply hub we are implementing at Wallumbilla is one way to facilitate greater gas trade and price transparency...”

Energy Update October 2013 5

PUTTING A VALUE ON

CUSTOMER RELIABILITY

To better understand the value energy consumers place on reliable electricity supply, and to put a price on the level of reliability they want, AEMO is developing a Value of Customer Reliability (VCR) index for the NEM. VCR measures will be applied to revenue regulation, price determinations, and for NEM planning and operational purposes, and will ultimately drive more efficient market outcomes.

“This review aims to deliver VCR measures that put a price on the level of supply reliability customers want. This will support improved decision-making across the electricity industry,” said AEMO Acting Group Manager, Regulatory Policy, Jo Witters.

“The ability to pinpoint customer expectations about electricity supply reliability will provide greater clarity in NEM regulatory decisionmaking and ensure that the services and infrastructure provided better meet community needs,” Ms Witters said.

AEMO’s review follows a Standing Council on Energy and Resources (SCER) recommendation

that was part of its response to the Australian Energy Market Commission’s (AEMC) Review of the Effectiveness of NEM Security and Reliability Arrangements in light of Extreme Weather Events, which concluded in 2010.

AEMO has already received strong stakeholder support from industry, government, and relevant institutions for its proposed VCR methodology.

As a next step AEMO will undertake a survey of customers across the NEM, and has engaged a market research firm with prior experience in designing and implementing similar reviews.

Surveys are due to commence later in November 2013, and AEMO has also sought advice from the Australian Bureau of Statistics.

by April 2014, once the survey results are collated,” Ms Witters said.

“A detailed survey has not been undertaken in Victoria since 2007, when AEMO’s predecessor organisation (VENCorp) conducted a review.

This current review is an opportunity to develop a more consistent and robust NEM-wide index that can be used in each NEM region,” she said.

The VCR Issues Paper is available on AEMO’s website, and is designed to canvass stakeholder views on how to best determine VCRs and under which NEM circumstances planners, system or network operators, regulators and policy-makers should apply the values.

“AEMO is currently working to develop draft VCR figures, which are on track to be published

WORKING GROUPS

STRIKE A CHORD WITH INDUSTRY AEMO’s new National Electricity Market Wholesale Consultative Forum (NEMWCF) is right on track, according to recent feedback from participants, and positive outcomes are being reported across all the newly restructured forums.

A new NEMWCF feedback mechanism enabled participants to advise AEMO that they found the forum to be very useful, and that the recent changes are positive, with scope to further develop the groups.

In 2013 AEMO reinvigorated its approach to stakeholder engagement. It implemented a more structured framework for all consultative forums and working groups to provide greater clarity and visibility of purpose, interactions, and outputs.

The restructure involved consolidating more than 50 groups into two key leadership forums and five committees. The new leaders’ forums—the Energy Market Leaders’ Forum and the Retail Market Leaders’ Forum—are supported by the

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NEM Wholesale Consultative Forum, the Gas Wholesale Consultative Forum, the Planning and Modelling Forum, the Energy Market IT Steering Committee, and the NEM Operations Committee (NEMOC). The NEMOC already existed but was expanded to include a wider membership.

The recent participant feedback showed that most people found the information presented at the NEMWCF to be valuable.

“Always a collective discussion and learning on a broad range of high-level issues. A great time saver,” said EnergyAustralia representative Ralph Griffiths.

“The forum has wide coverage and so is not always directly relevant to every individual.

However this also provides an excellent opportunity to hear about issues you may be less familiar with," added Fiona Simon of ERM Power.

Participants discuss a wide variety of general and forum-specific topics.

Recent discussion topics across the groups have included AEMO’s governance review; current challenges for the energy industry; an IT energy market strategy; the value of AEMO’s planning publication content and evolution; and AEMO’s load-forecasting strategy.

The Retail Market Leaders’ Forum (RMLF) recently assisted AEMO and industry in identifying top issues and steps toward further development of retail energy markets, customer transfers, Retailer of Last Resort (RoLR), and the accuracy of information and data.

AEMO will consider the recent feedback in developing upcoming papers and further topics for discussion.

DEMAND RESPONSE MECHANISM A STEP CLOSER

In recent months AEMO has been consulting with industry about how to implement the DRM.

Photo courtesy of APA Group

A demand response mechanism (DRM) to enable large customers to play a greater role in the NEM is a step closer, with a rule change to implement the Australian Energy Market Commission’s (AEMC) proposal due to the AEMC in December.

The Standing Council of Energy and Resources (SCER) has tasked AEMO with developing a DRM for large customers, and a separate body of work which will enable smaller customers with smart meters to choose several retailers to deliver different energy products. For example, a customer could potentially choose one retailer for their general household use and another to charge their electric car.

These two pieces of work arose from the AEMC’s Power of Choice review, which is part of a broader government agenda to develop greater demand-side participation in the NEM.

AEMO will deliver a rule change proposal to the AEMC incorporating industry contributions gathered throughout the consultation process.

setting baselines that will determine how much large customers would be paid to reduce their load during times of high spot prices.

“Industry representatives have provided invaluable insights into several aspects of this project and we believe that collaboration will deliver the most workable solution for everyone,” said AEMO’s Manager Retail Strategy, Liz Aitken.

AEMO will deliver a rule change proposal to the AEMC incorporating industry contributions gathered throughout the consultation process.

AEMO expects that the AEMC will make a final decision on whether the proposed DRM structure meets the National Electricity Objective during 2014.

For more information see AEMO’s website.

In recent months AEMO has been consulting with industry about how to implement the DRM. This includes discussing methodologies for

Energy Update October 2013 7

IN BRIEF

AEMO EXPLAINED IN FIVE MINUTES AEMO has produced a new video animation that explains its role in delivering a more integrated, secure, and cost-effective national energy supply.

AEMO ANNUAL GENERAL MEETING IN NOVEMBER

The video has been designed to simplify the complexities inherent in AEMO’s functions.

It touches on how AEMO operates the energy markets and systems, and the planning advice it delivers in eastern and south-eastern Australia.

AEMO’s Annual General Meeting (AGM) is scheduled for 7 November 2013. For the first time, this year the AGM will be broadcast to all AEMO sites via video conference for the convenience of members in all regions.

AEMO members—comprising governments and industry participants—are invited to attend the AEMO AGM. AEMO encourages stakeholders to apply for membership in accordance with the Constitution, which is available on AEMO’s website.

Items to be tabled include AEMO’s Annual Report, and the 2012–13 financial results.

For meeting details and RSVPs, contact caroline.byrne@aemo.com.au.

AEMO TRAINING Declared Wholesale Gas Market Melbourne, 8 November NEM Overview Melbourne, 22 November For more details and how to register for a course, visit the AEMO Learning Centre.

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www.aemo.com.au 8

MR JON HUBBARD

MS SIBYLLE KRIEGER

AEMO BOARD WELCOMES TWO NEW DIRECTORS AEMO has appointed two new non-executive directors to the Board— Mr Jon Hubbard and Ms Sibylle Krieger.

They will both formally take up their positions in November 2013.

Mr Hubbard brings extensive knowledge of the energy industry and experience across the NEM and Australian gas markets. Ms Krieger brings strong legal and commercial experience, an understanding of issues arising in the gas and electricity industry, and extensive experience dealing with all levels of government.

The Board will farewell Dr Mike Sargent AM and Mr Ian Fraser, who complete their second terms on 7 November 2013.

AEMO Chairman, Tom Parry AM, thanked both outgoing directors for their valued contributions on behalf of the Board.

“Mr Ian Fraser served as Chair for the People and Remuneration Committee, and Dr Sargent’s technical input has been much appreciated throughout his tenure. I wish them all the best for the future,” said Mr Parry.