Experiences of the Australian Electricity Market under power disturbances and financial stress Dr Brian Spalding Chief Operating officer WELCOME to NEMMCO’s Overview of the NEM. My name is Kathy Calokerinos, and I will be facilitating the workshop today. PARTICIPANT LAISION OFFICER for NEMMCO This role involves meeting and liaising with participant organizations, improving relations between NEMMCO and other players in the NEM. I have a background is in Economics and Finance and have worked in the electricity supply industry for the past 20 years in corporate roles with both Macquarie Generation, Pacific Power and Electricity Council of NSW. Since joining NEMMCO in Feb 1998, I have been responsible for: the co-ordination of the bi-monthly NEMMCO NEM Forum establishing various communication channels in NEMMCO managing the design and development of NEMMCO's education program based on the outcomes of an education needs analysis. Will spend next few minutes going over General HOUSEKEEPING Course content and structure

Overview Overview of Australia’s National Electricity Market (NEM) Recent major events in the NEM Power System Financial Recent Trends in Reform

Australia’s National Electricity Market covers the Eastern and Southern interconnected electricity system The Australian electricity industry is one of the most important sectors of the Australian economy underpinning growth and investment by providing cheap and reliable energy to businesses and households. With over $74 billion in assets 30,000 employees and annual investment of over $2.4 billion, Serves 7.7 million customers it directly contributes an estimated 1.33 percent gross domestic product (source ABS 2001/02). Australian electricity has been supplied to industry at prices well below that of most other OECD countries, supporting the development of a range of internationally competitive, energy intensive industries.(1 SthAfr, 2 Aust, 3 Can, 4USA, 5 UK,6 Japn Scale 1,000km

NEMMCO – Market and System Operator NEMMCO is the Market and System Operator for the Eastern and Southern Australia (92% by energy) NEMMCO Operate the Market, determines prices and settles the physical spot market Operate the Power System, responsible for power system integrity Co-ordinates inter-regional transmission planning Facilitates the operation of the retail market

NEM – The Electricity Market Gross pool (Compulsory) Generator production levels and prices are set each 5 minutes by NEMMCO on the basis of offer prices from Generators within a constrained optimisation 30 minute trading interval (Spot) price in each of 6 regions No physical delivery contracts as financial instruments (over the counter CFDs or hedging contracts, futures contracts) between participants manage the physical spot price risk NEMMCO settles the cash spot market but does not settle the financial instruments Annual spot market settlement transactions in 2006/2007 of about AU$11B (US$9.6B) Settlement is weekly, 4 weeks in arrears (about 33 days accumulation)

Wholesale versus Financial Market NEM - Cash Overview (hedging contracts) Financial Market Generators Retailers Settlement for 100% of energy Consumed Settlement for 100% of energy Generated Wholesale versus Financial Market Prudential Risk The value of pool transactions is around $7 billion per year Pool settlements take place every week Sustained high prices can quickly threaten companies liquidity if they are inadequately hedged (eg, $10,000/MWh*1 hour*2000MW = $20m in a hour) Bank letters of credit, margin calls, retailer of last resort Financial Risk High volatility, variable volumes of demand and load Market Participants use the financial market to hedge risks arising from the physical market Pool price affects cash settlements from financial transactions Spot Settlement (NEMMCO) Physical (Spot) Market

NEM - Market Pricing The NEM is a constrained real time (5 minutes ex-ante) priced spot market During disturbances prices will be volatile Real time pricing generally aligns with dispatch of generation Some aspects of NEM design have been developed to drive long term investment but in an emergency can break the linkage of pricing and dispatch When load is shed and cannot be all restored the Market Rules have the price being set to the Value of Lost Load ($10,000/MWh) There are few reasons to direct generators that are not responding to Power System needs but when generation is directed – the market is priced as if the direction had not been given

NEM Regions QLD NSW SA S Vic Tas 6 Price Regions Generators Paid Regional Price Customers Pay Regional Price NSW SA S Vic Tas

Recent NEM Events NEM performance has been sound over last 9 years. Investment forthcoming Competitive wholesale prices Fierce retail competition The IEA reported that the NEM is a competitive competitive and effective electricity market Survived two significant events this year – but not without opportunities for improvement 16 January 2007 – 2,200 MW of customer load interrupted following bushfire transmission line faults June 2007 – major increase in prices leading to the suspension of a retailer and the invocation of the Retailer of Last Resort process

16 January 2007 – Bushfire Event Bushfires in Victoria for the previous 40 days Maximum demand for year in Victoria – about 9,200 MW All interconnectors were at maximum flow into Victoria Generation reserves adequate Power System operated to cover for any single contingency Two single circuit 330kV lines (same easement) from NSW/Snowy to Victoria tripped and locked out of service Six other transmission lines tripped out of service System separated into three island systems Victorian “island” had a major generation deficit Automatic under-frequency relays interrupted 2,200MW of customer load in Victoria and averted a major disturbance

Before the event QLD S/NSW SA 1690MW Vic 300MW 484MW Tas $190/MWh

After the event QLD S/NSW SA 400MW Vic 200MW Tas $90/MWh $12/MWh 2200MW shed $8,500/MWh 200MW Tas $60/MWh

16 January 2007 – Outcomes – System All transmission line protections operated as designed The automatic under-frequency load shedding effectively controlled the Victorian low frequency and averted major Victorian collapse Most power stations maintained capability and contributed to system management There were no issues with the control of transmission voltages in Victoria during the stabilisation period South Australia reconnected to Victoria in 40 minutes and all island systems were reconnected in 3 hours (delays as the fire authorities would not give clearance for lines to be restored for fire fighting and safety reasons) All load restored in 4.5 hours

16 January 2007 – Outcomes - Frequency

16 January 2007 – Outcomes - Operation Review the process to determine when to operate the Power System to withstand a multiple contingency event ie when to cover for the loss of two separate 330kV lines Man machine interface – Challenge to provide Operators with rapid view 8 lines tripped across a wide geographic area 3 islands Took some minutes to be clear on system state Need to control multiple separate frequency control areas Looking to more flexible systems Market System flexibility Need to continue to function and dispatch appropriate generation in an islanded environment Simulate these events for further training

16 January 2007 – Outcomes - Market Real Time Pricing in emergencies Simplify Rules in an emergency – do not require power system operators to be considering market impacts during disturbances as they are focused on Power System security Ensure incentives on generators align with Power System need. By artificially setting a price to the Value of Lost Load regardless of the generator offers can create complex incentives and market outcomes.

The power system responded well and the event was contained 16 January 2007 – Outcomes The power system responded well and the event was contained Some processes can be improved Some Market design issues need to be reconsidered

Financial Event – Drought Drought conditions had been worsening over the last 12 months Some thermal generators put on standby to conserve cooling water Most hydro generators with limited water Greater gas fired generation Spot and contract prices up by 80% since January 2007 High volume in futures contract trading High wholesale prices made it difficult to source supply at reasonable cost Retailer stress due to regulated retail tariffs NEMMCO commences publishing projected energy assessments in addition to routine capacity (Supply/Demand) assessments

Financial Event – June 2007 June 2007 (Winter) was cold in South and East Australia Some record electricity demands but within capability of supply Large Generator (13% of NEM, 35% of NSW region) bidding behaviour Pricing a substantial portion of its capacity at near VoLL just for the peak period of the day June 2007 prices in New South Wales $230/MWh for month (Jun 2006 was $31.47/MWh) 42 half hours greater than $5,000/MWh

NEM Market Outstandings

Futures Contract Prices

June 2007 Event Consequences Opportunities Small retailer suspended from trading as it could not honour its customer contracts Two other retailers in obvious financial stress Retailer of Last Resort (RoLR) enacted transferring 6,000 customers to a new retailer following suspension Suspended retailer was co-operative Smooth processes experienced Opportunities More efficient cash and settlement processes Review length of Settlement cycle Review effectiveness of netting spot and contract settlement Test RoLR for very large customers numbers

Trends in Operation and Reform Renewable Generation Increasing wind generation – greater need for increased wind generation forecasting, more complex reliability assessment, and network management complexities Increasing gas generation Integration of Gas and Electricity Fuel balance implications under periods of heavy gas fired electricity generation Emergency management of both gas and electricity incidents Many Retailers involved with both fuels Trend to National market in both fuels Australian Energy Market Operator (AEMO) to be formed from July 2009 to combine NEMMCO and Gas Markets

Trends in Operation and Reform National Approach to Transmission Planning State planners have clear state reliability obligations No clear obligations to benefit National trading AEMO as a National Transmission Planner Very large increases in data movement between the industry Interval meter role out Retail customer churn – 25-30% in Victoria and South Australia B2B transactions

Overview Overview of Australia’s National Electricity Market (NEM) Real time constrained gross market Recent major events of the NEM Tested process and showed opportunities for improvement Recent Trends in Reform Closer linkages between electricity and gas