An Overview of the Australian National Electricity Market Brian Spalding Chief Operating Officer

2 NEMMCO – Overview of Operations  Framework of NEM  Market Operation  Power System Operation  Successes and Issues

The Framework

4 Australia’s National Electricity Market covers the Eastern and Southern interconnected electricity system Scale 01,000km

5 NEM – The Parties in the NEM  6 State jurisdictions  100 Registered Participants 5 main Transmission companies 15 main Retailers 20 main Generating companies generating systems totalling 36,700MW  Approx. 7.7 million customers  Maximum Demand 32,000MW and 190TWh

6 NEMMCO – Market Operator and System Manager  NEMMCO the only Market and System Operator  NEMMCO Operates, determines prices and settles the physical spot market Responsible for power system integrity Co-ordinates inter-regional transmission planning

Market Market processes determine generators’ loading targets and prices each 5 minutes.

8 NEMMCO’s Core Task Power system security Quality of Supply Generation Offers Operate within limits Power system reliability Prescribed standards The Task To maximise the value of trade in electricity while managing the power system

9 Pool R R Wholesale Customer G Generators Generating Company Market Customers (Retailers) End Users GGG Wholesale Market Structure

10 NEM – The Pool  Gross pool (Compulsory)  Generator production levels set each 5 minutes  30 minute trading interval price in each of 6 regions  Annual settlement transactions about A$7B (US$5B)  No physical delivery contracts as Financial instruments between participants manage pool price risk

11 SA Tas Vic Snowy  6 Regions  Participants lie within a Region  Generators Paid Regional Price  Customers Pay Regional Price NSW G G G C C C G C G NEM Regions Qld C G

12 GeneratorsRetailers Physical Electricity Flows Dispatch Instructions Offers Settlement Payments Financial Contract Payments (hedges) Information Generator – NEMMCO – Retailer Relationships

13 Prices determined each 5 minutes

14 Wholesale Prices

Power System Operation NEMMCO maintains a secure power system, NEMMCO facilitates a reliable power system, by informing, constraining power flows, acquiring services or, if necessary, directing the market.

16 Transmission Coys Generators Dispatch Optimisation Forecast consumption Data Offers NEMMCO Dispatch and Power System Security

17 Transmission Coys Generators Constrain to System capability Dispatch Optimisation Forecast consumption Data Technical limits Offers NEMMCO Dispatch and Power System Security

18 Transmission Coys Generators Constrain to System capability Dispatch Optimisation Check integrity Override process Forecast consumption Data Technical limits Offers NEMMCO Dispatch and Power System Security

19 Transmission Coys Generators Constrain to System capability Dispatch Optimisation Check integrity Override process Forecast consumption Data Dispatch Loading levels Prices to Market Technical limits Offers NEMMCO Dispatch and Power System Security

Successes

21 NEM - Successes  Stable operation since 1998  Efficient average wholesale prices and real reductions in most retail prices  High generation availability  Generation investment maintains reliable supply with few interventions  Very active retail transfers (25% pa in Victoria)  No financial failures of Retailers or Generators

Issues

23 Issues  Power system security  Accommodation of large scale Wind Generation  Generator technical performance and compliance  Incidence of multiple contingency events  Setting appropriate reserve standards  Industry Structure  Vertical integration  Horizontal integration  Ownership (Government v’s Private)  Prudential  Risks of failure  Availability of credit support  Interest in netting off spot and contract transactions

24 Issues  Market Mechanisms  Lack of demand side response  Transparency and short term liquidity in Financial markets  Transmission  Planning and operation as a National Grid  Incentives on Transmission companies  Data and Process  Data volumes with increasing interval meters  B2B transactions

25 NEMMCO – Overview of Operations  Framework of NEM – a competitive national approach  Market Operation – which drives the power system operation  Power System Operation – ensuring a secure and reliable system  Successes and Issues – opportunities for further efficiencies