SLIDE 1 ENERGY MARKET LEADERS FORUM August 2013 PRESENTED BY AEMO

SLIDE 2 NEM PERFORMANCE

SLIDE 3 NEM MARKET DESIGN NEM energy-only market design valuing capacity low  Other designs would do the same during over- supply What would US-style capacity markets deliver?  During oversupply, capacity value = $zero, Comparable outcome to energy-only market  Market operator has complex and controversial role Is the ‘energy-only’ part really the problem? Is protection against asset stranding related to market design?

SLIDE 4 NEM SUSTAINABILITY? Numerous drivers are combining to create a generation oversupply: o Falling market demand, caused in turn by:  High AUD/declining manufacturing  Network/environmental price rises: Consumption elasticity  Dramatic falls in PV costs: Now retail price competitive  Numerous state and federal energy efficiency initiatives o Investment in anticipation of demand growth o Renewable Energy Target  Separately funded new generation pushed into the market even when demand and price is falling o Direct construction grants: ARENA, CEFC, etc.

SLIDE 5 INTERVENTIONS AND THE MARKET Some claim market spoiled by political interventions including: o RET and GOC investments o Feed-in tariffs and other policy initiatives o Carbon price (albeit with compensation) But non-government factors also at play; e.g.: o AUD strength and changes in Australia’s economy o Falling PV technology costs Challenging to distinguish ‘fair’ from ‘unfair’ factors o Is any market free of distortion in practice? o A ‘distortion’ to one might be an ‘opportunity’ to others.

SLIDE 6 CUSTOMERS’ PERSPECTIVE Are customers benefiting from oversupply? o Ex-carbon wholesale prices are <~1/4 of customer bill What happens when demand/supply return to balance? o NEM design can drive price high - supports reliability o Will investors be wary / build in a risk premium ? Investors hurting now = customers hurting later? What is better for the customer over time? o Market-facing generation funded by high risk investors?, or o Protected generation funded by low risk investors?

SLIDE 7 SHOULD WE FOCUS EXTERNALLY? The market will always be risky, but some causes of external risks may be lessened through greater caution o Can we lessen distortions and therefore risk? o Encourage greater caution by policy makers? What can we do? o Encourage examination of impacts on all investors for relevant government policy o Promote understanding that what is bad for industry is ultimately bad for customers o Perhaps encourage industry to be cautious about arguing for outcomes based on short-term benefit that encourage poor policy and harm other investors