1. 1 Allan Dawson Chief Executive Officer Energy Market Company Market Evolution: The Situation in Asia Pacific

2. 2 Agenda  Asia - hot spot of global growth, energy investment and change  Australia and New Zealand more mature electricity markets  Regional overview  China, India  Japan, Korea  Philippines, Indonesia, Singapore  Australia and New Zealand  Summary of key themes

3. 3 Asia - Overview

4. 4 Asia: Hot spot of growth  Asia (especially India and China) are key global growth areas  Total energy consumption is high but per capita consumption is low  Developmental disparities within the region  Electricity sector reform is progressing … slowly

5. 5 Investment Requirements Regions2001-20102011-20202021-2030 Total 2001-2030 OECD North America OECD Europe OECD Pacific 1,062 650 381 1,179 717 333 1,247 697 287 3,488 2,064 1,000 Total OECD2,9032,2282,2316,552 Russia Other transition economies 269 168 391 221 389 233 1,050 622 Total transition economies4386126221,672 China Other Asia (including India) Middle East Africa Latin America 578 489 268 248 339 787 689 332 392 440 888 876 444 567 558 2,253 2,055 1,044 1,208 1,337 Total developing countries1,9232,6413,3327,897 Inter-regional transportation97129134360 Total World4,5515,6106,32016,481 Annual Average455561632549 Source: International Energy Agency (IEA) World Energy Investment Outlook 2003

6. 6 Electricity Investment Source: International Energy Agency (IEA) World Energy Investment Outlook 2003

7. 7 Electricity Market Reform  Diversity in regional development reflected in:  Level of electrification  Quality and reliability of supply  Level of subsidies  Most nations are somewhere along the reform path:  Reforming legislation  Establishing new institutions and markets  Introducing competition to supply and demand

8. 8 Electricity Market Reform  Main driver for liberalisation is encouraging private sector participation and attracting investment  Another driver is improving country’s competitiveness by introducing competition into a key sector of economy  There is also desire to reform state-owned incumbents to improve efficiency

9. 9 China Industry overview  Large and growing economy  Electricity market is second largest after US  Installed generation capacity in excess of 350GW but per capita consumption low  Facing supply shortage and associated blackouts  Transmission system is fragmented  Surplus supply cannot be moved to where it is needed

10. 10 China Investment requirements  US$1.9 trillion investment required for electricity generation by 2030  Significant investment to build transmission corridors to move electricity to energy-hungry regions  Major supply reliability issues  Central government has put in measures to help taper investment in high energy consuming industries

11. 11 China Reforms: Pilots  Trial market project in 1999  5 provinces + Shanghai  Objective to allow separation of generation and grid interests and encourage competitive supply  The experiment was short lived in all pilot areas because:  Increased demand in 2001 that absorbed excess supply  Monopoly utilities created unfair competition

12. 12 China Reforms: Next wave  State Power Corp was broken up in 2002 into 5 generation companies and 2 grid companies  State regulator established in 2003 – State Electric Regulatory Commission  Recent unexpected power shortages have led government to consider market orientated policies to attract new investment  The measures the government is pursuing or has implemented include:  Regulatory changes  Electricity pricing reform  Investment reform

13. 13 India Industry overview  100GW of generation capacity by 2012  Private participation is essential if growth targets to be met  Quality, access, theft and subsidies are big issues  Industrial consumers pay the bulk of the money collected  Little price signals or incentives for efficient production and transmission or investment  State corporations dominate the sector  They are in various stages of being disaggregated and will provide building blocks for a market

14. 14 India Reforms: Corporatisation  1990s – Corporatisation of State Electricity Supply Boards  Structured so they could be broken up into potentially competing generation, transmission and distribution companies  Private sector participation in supply

15. 15 India Reforms - Electricity Act 2003  Eases requirements for private entry into generation  Opens transmission and distribution to private participation  Requires all transmission utilities to provide non- discriminatory open access  Proposes a new tariff framework based on competitive bidding  Designed to encourage competition in electricity supply but basic framework for power markets is yet to be determined  Requires contracts for new projects to be determined by competitive bidding

16. 16 Japan  Sector dominated by 9 regional franchises  J-Power only major player that operates in multiple regions  Large consumers are contestable  Mid-sized consumers will become contestable in 2005  Full deregulation is scheduled for 2008  New energy exchange will be established so generators can price electricity sold onto the national grid  IPO of J-Power is the biggest in Japan for 6 years (US$3.4b)

17. 17 Korea  KPX established in 2001 to operate the one-way bidding pool based on marginal costs and capacity payments  Marginal costs are determined by a committee, so generators can submit only capacity offers, not price offers  A two-way bidding pool (TWBP) has not yet been established as planned  Government is rethinking plan to introduce competition in the power distribution sector  Genco privitisation programme well behind schedule

18. 18 Philippines  Legislation passed in 2001  Renegotiation of PPAs  Regulator and market operator established  Market rules written and systems currently being developed and implemented  Net pool with distributed utilities required to trade at least 10% of its total demand from spot market  Locational marginal pricing methodology  Expect market trials to commence in June/July 2005 and commercial operations in December 2005/ January 2006  Process to sell transmission operator and gencos continues

19. 19 Indonesia  Legislation passed 2002  Tariffs to be increased to economic levels by 2005  Requirement to establish a trial market by 2007  Renegotiation of PPAs

20. 20 Singapore  Market liberalisation programme began in 1995  Reform designed to promote the supply of competitively-priced electricity  New arrangements for wholesale trading commenced on 1 January 2003  Prices established every half-hour for approximately 400 locations  Recent participation of demand side in reserves market  Retail contestability for large and medium sized customers  Full retail competition deferred at this stage

21. 21 Key themes in Asia  Investment requirements are astonishing  Electricity market reform is progressing …slowly  Reform delays in most jurisdictions  About face by Thailand and Malaysia  Investment climate for asset sales yet to improve  Attention also focused on energy security and diversification due to oil price increase  If oil prices and shortages bite, focus on reform likely to resume

22. 22 Australia  NEM operating since 1998  Zonal market but now considering nodal pricing  Bass link will allow participation by Tasmania in 2005  Reform underway in Western Australia  FRC - 5.5m customers are contestable  Likely changes to regulatory structure

23. 23 New Zealand  NZEM operating since 1996  Establishment of Electricity Commission represents a major regulatory shift  Minister and Commission have strong involvement now whereas before it was a voluntary self-regulated market  Implications:  Mandatory pool  ‘Dry-year’ supply contracted by Commission making it a regulator and market participant  Commission likely to adopt new approaches for transmission investment and transmission pricing