New Zealand & Australian Wholesale Electricity Markets A Comparative Review Dr Ralph Craven Transpower NZ Ltd

NZ &Australian Wholesale Electricity Markets Summary –Background to Markets –Market Characteristics –Market Outcomes –Current Market Issues

Market Development - Background AUSTRALIANEW ZEALAND Industry Reform Initiated 1991 Council of Australian Governments formed National Grid Management Council 1987 SOE’s formed, programme of separation and deregulation initiated Electricity Markets Commence 1998 National Electricity Market created. NEMMCO market management company and NECA (National Electricity Code Administrator) created New Zealand Electricity Market commences. Further separation of Supply, Transmission and Retail/Distribution ACCC & NECAInitial Regulatory Structure Commerce Commission – competition regulator NZEM – industry regulation Transpower – common quality and system security Regulatory Structure 2007 AER – Aust Energy Regulator AEMC –Aust Energy Market Comm ACCC Commerce Commission EC – Electricity Commission 2004

Australia- NEM 20 million (18m) 195 TWh 28 GW peak 92 Power Stations 28 Network Providers 37 Market Customers 19 Specials 6 Traders New Zealand -WEM 4 million population 38TWh 6900 MW peak 43 Power Stations 3 Transmission Co’s 28 Distribution Co’s 7 Retailers Source NEMMCOSource Transpower Wholesale Electricity Markets – Australia and New Zealand

Market Characteristics – New Zealand Generation9 Generation Co’s: 3SOE (60%), 5 public co Dispatch Gross Pool LMP with 180 market nodes 2 sided market bids from supply and demand Uncapped ex post price Losses, tx constraints, security constraints and ancillary services co-optimised Transmission 4 Ancillary Services: Instantaneous Reserves, Frequency Keeping, Black Start, Overfrequency Ancillary Services Open Access to transmission. Capacity allocated in Security Constrained Economic Dispatch 28 Distribution Co’s, permitted own generation not retailDistribution Retail Largely vertically integrated with Generators

Market Characteristics – Australia Generation62 Generation Co’s in 5 States Dispatch Gross Pool Zonal LMP with 6 nodes 1 sided market bids from supply Ex ante price for 30 min trading period based on 5 min dispatch. Price cap at VOLL $10k Fixed losses and heuristic constraints applied Transmission 8 Frequency Control Ancillary Services Markets (4 Raise/4 Lower - at 6,60 sec and 5 min) Ancillary Services Open Access to transmission. Capacity allocated in Security Constrained Economic Dispatch Distribution Retail Open Access distribution Full Retail competition initiated

Supply Reliability Market Outcomes – New Zealand Transmission Investment 11 years of market operation – no failure of market to supply. Includes 3 dry years. Supply margin reduced – July 2007 close to curtailment. Market has delivered no Tx investment. With Regulator Transmission Investment regime outside market. Significant Investment planned next 10 years. Generation InvestmentGeneration Investment has been left to Market for last 10 years. 19 generation projects delivering 2038 MW completed. Spot Prices/Consumer Prices After 11 years no active forward market has developed. 70% of load is hedged through vertical integration of Generator/Retail businesses. Availability of forward contracts questioned Intermittent and Renewable Generation - Wind Open access to Market dispatch as price taker with load forecast and dispatch control conditions. Build to 2007 modest (170 MW), Proposed build 1700MW introduces security concerns. Spot price of energy 25% of consumer price. Early market below SRMC at $40/MW now set at $50-$60. Forward/Hedge Markets

2007 Installed7 projects 170 MW Planned12 projects 1760 MW

Supply Reliability Market Outcomes – Australia Transmission Investment 9 years Market operation. Plant availabilities increased (93% cf 84% Pre market). Market does not manage Transmission investment regime. Generation InvestmentGeneration Investment has been left to Market for last 10 years. Significant investment required next 10 years. Spot Prices/Consumer Prices OTC bilaterals are common risk management tool. Not part of NEM Governance. Brokers trade 6 standard contracts. Active forward Market. Intermittent and Renewable Generation - Wind Open access to Market dispatch as non scheduled generators. Modest build to 2007 (617 MW), Proposed build 6000 MW introduces security Concerns that must be resolved. NSW and Vic spot prices very low in early years of market. SA and Qsld higher. Recent prices compare across all states and show increases. Forward/Hedge Markets

Intermittent Generation –Australia QSLD Installed 3 projects 12MW Planned 4 projects 176 MW NSW Installed 4 projects 17MW Planned 18 projects 1080 MW VIC Installed 7 projects 134 MW Planned 23 projects 2380 MW SA Installed 7 projects 387 MW Planned 20 projects 1868 MW TAS Installed 6 projects 67 MW Planned 5 projects 395 MW NEM 2007 Installed 27 projects 617 MW Planned 70 projects 5899 MW

Current Market Issues – New Zealand Market Design Review –Risk Management options – no financial markets –Transmission alternatives –Capacity Margin – optimal generation mix –Market Information Transmission Investment Forward Price Market Security of Supply

Current Market Issues - Australia Retail Market Competition Congestion Management Comprehensive Reliability Review