AEMO Energy Update October 2014

OCTOBER 2014

GAS BULLETIN BOARD PROGRESSING WELL P3 NEW NATIONAL VALUE OF CUSTOMER RELIABILITY P4 SA WIND GENERATION ON THE RISE P7

UPDATE FROM ACTING CHIEF EXECUTIVE OFFICER MIKE CLEARY It’s been an exciting couple of months for AEMO with the release of two reports: the connection point forecast report for Victoria, and the national value of customer reliability (VCR) study.

AEMO’s VCR study, the largest ever undertaken, identifies how much customers are willing to pay for the reliable supply of electricity.

AEMO’s electricity forecasting report of Victorian maximum demand at transmission connection point level found that while demand in the state is flattening on the whole, certain regions are growing and these may require network investment. This report follows our New South Wales and Tasmanian connection point forecast reports communicated in the August Energy Update, and our focus now turns to South Australia.

AEMO’s VCR study, the largest ever undertaken, identifies how much customers are willing to pay for the reliable supply of electricity. The VCR study is designed to assist electricity planners, asset owners, and regulators strike a balance between delivering secure and reliable electricity supplies and maintaining reasonable costs for consumers.

Another recent achievement has been streamlining our participant on-boarding process. Following broad consultation with our stakeholders, we have updated our existing content and developed new guides to make the process simpler for new market participants.

The NTNDP will identify credible scenarios for electricity demand and supply over a 25-year planning horizon, and will set out the most efficient strategy for national transmission grid development under each scenario.

The NGFR will illustrate transparent and modular demand forecasts, and will provide insights into the Australia’s rapidly evolving gas market.

We also anticipate a December launch for the redeveloped National Gas Market Bulletin Board, a project that has incorporated close collaboration with gas participants throughout its development.

With the summer high electricity demand period just around the corner, preparations are underway for briefing market participants and the wider energy industry on planning and weather forecasting initiatives. The NEM Emergency Management Forum and NEM External Communications Committee meetings are scheduled for 19 November, and the Victorian summer preparedness briefing is on 25 November.

Looking ahead to the end of the year, we are focused on a December release for both the National Transmission Network Development Plan (NTNDP) report and the inaugural National Gas Forecasting Report (NGFR).

CONTENTS

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03 Gas Bulletin Board redevelopment progressing well

07 South Australian wind generation on the rise

04 New national value of customer reliability

08 Falling consumption a paradigm shift

06 AEMO publishes first connection point forecast for Victoria

08 In brief

Energy Update October 2014

GAS BULLETIN BOARD REDEVELOPMENT PROGRESSING WELL With total annual gas demand expected to treble in the next 20 years, improving the transparency and effectiveness of eastern and south-eastern gas markets remains a key focus for the Council of Australian Governments (COAG). As part of this effort, AEMO is working with gas market participants to redevelop the National Gas Market Bulletin Board (NGMBB).

Established by AEMO in 2008, the webbased NGMBB facilitates trade in gas markets by providing readily available and transparent market information to market participants. In March 2014, the COAG Energy Council asked AEMO to overhaul the NGMBB functionality to better serve the needs of Australia’s fast-evolving gas markets.

Industry consultation is a major driver of this project with gas pipeline owners and operators, facility operators, major shippers, retailers, and NGMBB users invited to collaborate. Consultation commenced at project scoping stage— with a report delivered to COAG in June 2014—and has progressed to staged site development and testing, the latest round of which is scheduled to commence in mid-November.

APA Group Markets and Risk Manager John Jamieson said the NGMBB redevelopment is a key project for APA. As one of Australia’s largest gas infrastructure businesses, APA supplies a significant amount of data to the NGMBB. “APA is keen to be involved in the redevelopment process to help ensure that the available information on pipelines is as useful to everyone as it possibly can be,” said Mr Jamieson.

AEMO Group Manager Planning Louis Tirpcou said the NGMBB redevelopment, which is slated to go live in December, will lead to increased information and transparency for gas market participants.

“Improving the functionality of the NGMBB will improve the useability, availability, and reliability of gas data and information for all participants in the south-east and east coast gas markets. This in turn is expected to bring efficiency benefits to upstream and downstream gas commodity markets,” said Mr Tirpcou.

For more information on the NGMBB redevelopment project, please contact AEMO Gas Bulletin Board Development Manager Antara Mascarenhas.

BENEFITS OF THE NEW NGMBB: •

Improved useability and availability of gas market and system information.

•

Enriched data quality, consistency, and completeness.

•

Better functioning submission and transacting processes for facility operators.

•

Stronger investment signals for future supply infrastructure projects.

Energy Update October 2014

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N E W N AT I O N A L VA L U E O F CUSTOMER RELIABILITY AEMO recently published a National Electricity Market (NEM)-wide review of the value of customer reliability (VCR), providing nationallevel VCR values for the first time.

AEMO completed the largest-ever review of this type at the request of the COAG Energy Council.

This latest review updates the state-level VCR values derived from VENCorp’s 2007–08 Victorian-based study. The new VCR values will be used by AEMO as part of its Victorian and national transmission planning functions, which adopt an economic planning approach.

VCR values represent, in dollars per kilowatt hour, how much customers are willing to pay for the reliable supply of electricity. The VCR values assist electricity planners, asset owners, and regulators to strike a balance between delivering secure and reliable electricity supplies and maintaining reasonable costs for consumers.

“The aim of our review was to improve our understanding of customers’ expectations of supply reliability by surveying customers of different sizes, locations, and consumption patterns across the NEM, and to derive more granular VCR values from the results,” said AEMO Executive Officer Jo Witters.

“Our study found that average residential customer VCR values are similar across all NEM regions. The most influential outage characteristics in this customer group were outage duration, and whether the outage coincided with the NEM daily peak.

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Energy Update October 2014

On average, business customer VCR values continue to be higher than residential values, consistent with other studies.

“The study found that the majority of residential and business customers are satisfied with their current level of power supply reliability and consider it to be of a high standard,” Ms Witters said.

Although residential VCR values have not substantially changed since 2007–08, the survey showed that customer concern about electricity price rises since then has heightened their focus on implementing energy efficiency measures.

“Business customers across different sectors also indicated a focus on electricity price increases,” said Ms Witters.

On average, business customer VCR values continue to be higher than residential values, consistent with other Australian and international studies.

Larger businesses tend to have a lower VCR value than smaller businesses, reflecting the likelihood that they are better equipped to mitigate the impact of power outages.

AEMO conducted a workshop with external stakeholders in October to discuss the VCR survey results and seek feedback on its recently-published draft VCR Application Guide.

Further information about the VCR study, including the report and application guide, is available on AEMO’s website.

T H E VA L U E O F CUSTOMER RELIABILITY While electricity interruptions or blackouts can be costly, it can also be disproportionately expensive to avoid these completely.

• Independent market operator, AEMO is looking at how the electricity industry can foster efficient transmission investment into the future.

• VCR values are a measure used to indicate what different types of

customers (residential, business, and large industrial) are prepared to pay to maintain reliable electricity supplies in different conditions.

• Different customer groups place different values on the reliability of their

electricity supply depending on how they perceive a power outage will affect them. An industrial customer whose processes rely on uninterrupted power supply may place a higher value on reliability than a business that can modify its power usage patterns to avoid an outage.

• Energy planners consider VCR values when evaluating cost-effective ways to build or upgrade network infrastructure, which comprises around half of an average customer’s electricity bill.

• VCR values provide information about customer expectations of supply reliability which are factored into electricity infrastructure planning and investment decisions, to ultimately benefit electricity customers.

• VCR values help electricity planners, asset owners, and regulators to strike a balance between delivering secure and reliable electricity supply and maintaining reasonable costs for electricity customers.

Energy Update October 2014

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AEMO PUBLISHES FIRST CONNECTION POINT FORECASTS FOR VICTORIA

AEMO’s first electricity report detailing transmission connection point level maximum demand (MD) forecasts for Victoria finds that while overall demand is flattening, some connection points are growing and require network investment.

The forecasts, published in late September, were developed using AEMO’s connection point forecasting methodology. They comprise 10% and 50% probability of exceedance MD forecasts over a 10-year outlook period for summer and winter, for each connection point.

Summer demand is expected to remain flat over the outlook period, reflecting increased residential and commercial consumption being offset by industrial closures, increased rooftop photovoltaic penetration, and increased energy efficiency. These drivers are modelled in AEMO’s 2014 National Electricity Forecasting Report (NEFR).

Victoria’s average annual MD growth rate for summer is 0.1% for both 50% and 10% POE forecasts; a figure that aligns with the 2014 NEFR data. Winter growth is higher, at 0.9% for both 50% and 10% POE.

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Energy Update October 2014

To maintain a nationally-consistent and transparent approach to connection point forecasting, AEMO applied the same forecasting methodology to the Victorian forecasts as the New South Wales and Tasmanian forecasts published in July.

AEMO is currently extending this work to South Australia and Queensland, and the forecasts for all NEM regions will be updated annually.

AEMO Group Manager Forecasting Joe Spurio said that together with the regional level MD forecasts published in the NEFR, these connection point forecasts provide an independent and holistic view of electricity demand in the NEM. “This increased transparency of MD forecasts helps to inform efficient network development decisions to meet demand, ultimately benefitting consumers through improved reliability and price outcomes,” said Mr Spurio.

In developing the Victorian report, AEMO consulted widely with stakeholders and in particular with the relevant distribution network service providers. AEMO also engaged external consultants Frontier Economics to independently review its forecasting methodology and statistical integrity.

The connection point forecasts are available on AEMO’s website.

SOUTH AUSTRALIAN WIND G E N E R AT I O N ON THE RISE For the first time ever, wind generation in South Australia was sufficient to meet the state’s entire consumption during a five-minute dispatch interval on 27 June 2014.

AEMO’s latest South Australian Wind Study Report (SAWSR) explores the contribution of wind to the state’s generation mix and finds that increased generation from existing wind farms in 2013–14 and a 23% rise in wind generation capacity compared to 2012–13 contributed to the milestone.

Total wind generation capacity in South Australia reached 1,475 MW by the end of 2013–14, with the commencement of operation at the Snowtown Stage 2 Wind Farm.

South Australia has the highest wind generation capacity of any NEM region.

South Australia also saw a 25% increase in the maximum five-minute generation from existing wind farms, a 4% rise in installed wind generation capacity as a percentage of total installed generation, and a 6% increase in the ratio of annual wind energy to annual total energy consumption.

Increasing wind generation combined with declining electricity consumption and higher interconnector imports contribute to a more challenging operational environment in South Australia.”

AEMO Group Manager Planning Louis Tirpcou

The SAWSR’s analysis of South Australia’s wind generation also finds potential for sudden variations in generation from wind farms. For 90% of the time, South Australian wind generation varies by less than 2% across five-minute intervals and by around 3% across 10-minute intervals.

This reflects the geographic diversity of South Australia’s wind generation fleet.

AEMO also recently published the South Australian Electricity Market Economic Trends Report (SAEMETR), which provides load and price duration curves, information about regional reference prices, and annual energy requirements in South Australia.

The SAEMETR and SAWSR are available on AEMO’s website.

“Increasing wind generation combined with declining electricity consumption and higher interconnector imports contribute to a more challenging operational environment for the South Australian power system,” said AEMO Group Manager Planning Louis Tirpcou.

“Upgrading the Heywood Interconnector capacity from 460 MW to 650 MW from July 2016 provides a net market benefit by allowing greater volumes of lower-cost generation from Victoria and additional exports of South Australian wind generation,” Mr Tirpcou said.

Playford B (240 MW)

Northern (546 MW)

Hallett 4 - North Brown Hill (132.3 MW) Hallett 1 - Brown Hill (94.5 MW) Hallett (228.3 MW) Snowtown (98.7 MW) Snowtown North (148 MW) Snowtown South (126 MW) Mintaro (90 MW)

Mt Millar (70 MW)

Clements Gap (56.7 MW)

Port Lincoln (73.5 MW) Cathedral Rocks (66 MW)

Pelican Point (478 MW) Torrens Island (1280 MW) Osborne (180 MW)

Hallett 2 - Hallett Hill (71.4 MW) Waterloo (111 MW)

Angaston (50 MW) Quarantine (224 MW) Dry Creek (156 MW)

Wattle Point (90.75 MW)

“These factors also combine to reduce existing synchronous generation output within South Australia, which has potential implications for the state’s power system.”

Key Existing Power Stations Coal Diesel Gas Wind Farms (Operating)

Ladbroke Grove (80 MW) Snuggery (63 MW) Canunda (46 MW) Lake Bonney 1 (80.5 MW) Lake Bonney 2 (159 MW) Lake Bonney 3 (39 MW)

South Australian key existing generating systems

Energy Update October 2014

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IN BRIEF FA L L I N G C O N S U M P T I O N A PA R A D I G M S H I F T As a member of the International Council on Large Electrical Systems (CIGRE), AEMO is participating in a collaborative study committee tasked with investigating electricity markets and regulation.

Among other projects, the study committee is researching system implications of new generation technologies, as well as market design for integrating intermittent generation.

Together with senior executives from Hydro Tasmania, AGL Energy, SKM Consulting, the Australian Energy Market Commission, PSC Consulting, and Powerlink, AEMO’s Executive General Manager Corporate Development, David Swift, presented a paper at the 2014 CIGRE Session in late August.

The group outlined how falling consumption represents a paradigm shift for Australia’s NEM, discussing recent market shifts and the drivers underlying these fundamental changes.

STUDY COMMITTEE C5

FALLING DEMAND INTRODUCTION TO THE AUSTRALIAN MARKET

“Not only has electricity consumption fallen, the forecast is for much lower growth over the rest of the decade than previously expected. One of the major drivers is growth of embedded generation such as rooftop photovoltaic systems.

It’s a paradigm shift for Australia’s electricity sector, and a trend that’s just as much of an issue for our international counterparts,” he said.

HYDRO TASMANIA, AGL Energy, SKM CONSULTING, AEMC, PSC CONSULTING, POWERLINK AND THE AUSTRALIAN ENERGY MARKET OPERATOR

The Australian National Electricity Market (NEM) covers the eastern and southern portions of Australia and consists of five regions which map broadly onto the existing states of Queensland, New South Wales, Victoria, South Australia and Tasmania. The NEM commenced in 1998 and has operated successfully for 15 years.

THE RECENT SHIFT IN THE MARKET

Compound Annual Growth Rates of Electricity Consumption

The energy sold through the NEM rose steadily for the first ten years but has been declining since 2009-10. This decline has occurred despite Australia’s economy continuing to grow. Not only has current electricity consumption fallen, the forecast is for much lower growth over the rest of the decade than previously expected. A very slow growth or negative growth outlook is a paradigm shift for the Australian electricity industry.

DRIVING FACTORS OF CHANGE EMBEDDED GENERATION

The growth of embedded generation, specifically rooftop solar

Annual Energy generated GWh

2,500

2008

2,000 1,500 1,000

-

Customers responding to rising retail pricing

Calendar year

3,000

500

INCREASE IN RETAIL PRICING

Large scale renewable energy qualities

Solar PV growth within the Australian NEM

“Falling consumption has implications for market operation, not just in Australia but internationally,” said Mr Swift.

D BOWKER, A CRUICKSHANK, R DUDLEY, J EGGLESTON, V FRANCISCO, G MULHERIN AND D SWIFT

A PARADIGM SHIFT FOR THE AUSTRALIAN NATIONAL ENERGY MARKET

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

> Over the past decade, a range of various Commonwealth and State government schemes provided financial incentives to install rooftop solar. > Rebates of up to A$8,000 per installation were offered to grow the industry. > Although the rebate ceased, the cost of hardware installation has considerably decreased over the past five years. > Generous feed-in-tariffs were offered from 2008.

2013-14 financial year = 3,260 Gwh of solar generation, equates to 1.7% of customer consumption.

ENERGY EFFICIENCY

The impact of a range of energy efficiency initiatives supported by government policy Year

Target in MWh

Renewable Power Percentage

6,800,000

3.14%

8,100,000

3.64%

12,500,000

5.98%

2005-06 2006-07 2007-08

Consumption per capita (GWh/a) 7,135 7,064 7,006

2009 2010 2011

10,400,000

5.62%

2010-11

6,745

2012

16,763,000

9.15%

2011-12

6,532

2013

19,088,000

10.65%

2012-13 (est)

6,364

Retail prices have risen in real terms during the past few years driven by a range of factors, including: > The rising cost of networks given a high level of investment in network augmentations and the refurbishment and replacement of ageing assets. > The cost of various schemes promoting renewable energy, both at the utility scale and in embedded generation. > The cost of various schemes promoting energy efficiency. > During the past financial year, a cost on carbon.

2008-09 2009-10

7,014

CHANGING MIX OF THE AUSTRALIAN ECONOMY The changing makeup of the Australian economy, with a focus on the services sector, mining and resources The change in the mix in Australia’s economy has been an important factor in the decline in energy intensiveness, reducing growth in electricity that might have otherwise been expected.

6,947

Customers have responded to rising electricity prices and reductions in the demand relative to population have been observed.

That reduction in energy consumption per customer has been aided by a number of government policies aimed at improving energy efficiency. Technology improvements at both the industrial and the household scale have also contributed.

While electricity prices have risen significantly in recent years, the Australian Energy Market Commission’s recent 2013 price trends report indicates that, at a national level, residential electricity price increases should moderate over the three years from 2012-13 to 2015-16, with an average rate of increase of 1.2% in nominal terms.

“Manufacturing consumption fell steeply, by 7.6 per cent between 2008 and 2012, fuelled by a decline of economic activity in manufacturing, but commercial and services consumption moved in the opposite direction, rising by 4.2 per cent, showing the effect of greater economic activity in commercial and services sector despite higher electricity prices,” state Vivid Economics.

THE AUSTRALIAN EXPERIENCE IS CONSISTENT WITH INTERNATIONAL TRENDS > An outlook of rising use of renewable energy, increasing efficiency in the use of energy, rising energy costs and continuing low demand growth is common in many OECD countries.

> The International Energy Agency (IEA) World Energy outlook forecast that electricity consumption in the OECD will only grow at 1.1% per annum under current policies.

MORE THAN JUST A CHANGE—IT’S A PARADIGM SHIFT > Traditionally, electricity has been seen as a utility or essential service and has not seen the same impetus to understand its customers as many other industries. This needs to change to assist electricity markets to adapt.

INTERNATIONAL COUNCIL O N LARGE ELECTRIC SYSTEMS

> It is clear that the competitive market sectors adjusted to changing market conditions more quickly than the regulated sector. The slow adaptation by the regulated network services has actually exacerbated the situation. To better meet the challenges of the future, regulatory regimes need to adapt quicker, provide incentives for innovation and the supply of efficient, customer-focussed services.

http://www.cigre.org

Conseil International des Grands Reseaux Électriques

The presentation was well-received by the 3,200 conference delegates representing international power industry experts and decision-makers from across the globe.

CIGRE provides opportunities for involvement in knowledge and best practice exchange, particularly in relation to future-proofing power systems.

For more information about CIGRE, visit http://www.cigre.org/.

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Overview of the Victorian Gas Market

Melbourne 7 November

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12–14 November

Overview of the Short Term Trading Market

Sydney

21 November

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

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Energy Update October 2014

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