AER Consumers Forum Brisbane 18 December 2014 Thoughts on DM in the QLD network businesses’ regulatory proposals

Different motives exist for DM GHG emissions reductions Wholesale market peak demand reductions Network system peak demand reductions Network augmentation deferral Motivation Reduce GHG emissions Additional risk management tool Reduce price excursions Protect supply reliability Reduce transmission charges Improve overall utilisation factor Reduce capex in the loner term Defer capital expenditure for system augmentation Reduce load at risk Reduce transmission charges Strategies Reduced consumption Increased energy efficiency Fuel switching Temporary and irregular load shedding, load reduction, load shifting or fuel substitution Load control Tariff signals (ToU, CPP, PTR) Temporary and irregular load shedding, load reduction, load shifting or fuel substitution Load control Tariff signals (CPP, PTR) Main Outcomes Reduced GHG emissions Lower end user bills (possibly Lower risk mgmt costs Reduced contract prices or cash payments for customers Reduced wholesale price volatility (potentially lower forward contract prices) Increased supply system reliability Lower capex (longer term) Lower distribution tariffs (longer term) Lower capex Lower distribution tariffs 1

Network augmentation deferral is the most challenging RequirementGHG emissions reductions Wholesale market peak demand reductions Network system peak demand reductions Network augmentation deferral Reduction of network load at risk Location Virtually anywhere on the grid Anywhere on the grid that is experiencing high pool or ancillary services prices Anywhere on the grid Location specific Only in those portions of the system that require augmentation within 3 to 5 years Location specific Only where load exceeds applicable capacity rating Timing Virtually anytime, except when marginal generation is cleaner than the DM alternative and non-storable Whenever high prices occur Whenever periods of high demand could occur At peak demand periods on these parts of the system Whenever load exceeds applicable capacity rating Amount Any amount is valuable, and all kWh are worth the same Even small amounts may be valuable, and all kWh are worth the same All reductions are assumed to be valuable Specific quantum of firm DM must be available before the time the system element would need to be in service Any amount is valuable, but risk is not eliminated until a specific quantum is achieved 2

Overview of Energex and Ergon DM approaches and proposals EnergexErgon Investment$95 m 5.5% of opex 1% of overall revenue $70.5 m 3.8% of opex 1% of revenue Peak demand reduction target 170 MVA80 MVA Another 20 MVA possible based on outturn growth in peak demand Value of capital reduction$75.1 m$70 - $200 m ApproachBroad-based, residential and business Load control Incentives Targeted on local areas that need augmentation Tailored to specific opportunities in local area 3

Strengths and risks of the two approaches Broad-basedTargeted StrengthsLess costly Consistent signal to market Easier to engage 3 rd parties More likely to reduce network costs in the near term and therefore put downward pressure on tariffs More likely to be favoured by AER (note Ausgrid outcome) Risks / weaknesses Benefit targeted is longer term and some risk that benefits of expenditures may never be realised Likely to put upward pressure on tariffs in the near term Potential for AER to disallow the expenditure (note Ausgrid outcome) More costly – high transaction costs Start – stop market signal Where not successful will put upward pressure on tariffs 4

5 Lance Hoch Oakley Greenwood Pty Ltd 214C Maundrell Terrace Aspley QLD