1. Wholesale Electricity Market – Western Australia APEx Conference 2008 – Sydney Allan Dawson 13 October 2008

2.  The South West Interconnected System covers much of the populated portion of Western Australia  Population just over 2 million  Peak Demand approx. 3500 MW  Geographically isolated from other jurisdictions (not interconnected)  Strong summer peak demand South West Interconnected System

3. History  Aug 2001 to Oct 2002 – Consideration of market design options by Energy Reform Task Force  Nov 2002 – Government endorsement of recommendations  Feb 2003 to Apr 2003 – Review of market design  Aug 2003 to Sep 2004 – Industry develops market rules  Oct 2004 – Market rules published  Dec 2004 – IMO established  2005 – First reserve capacity cycle undertaken  Apr 2006 – Disaggregation of Western Power  Sep 2006 – Energy market commencement

4. Western Power Verve Energy (Generation) Synergy (Retail) Western Power (Transmission & Distribution) Horizon Power (area outside of South West Interconnected System)

5. Market Objectives  Promote economic, efficient, safe, reliable electricity in South West Interconnected System  Encourage competition between generators and retailers, including entry of new competitors  Avoid discrimination against particular energy options and technologies  Minimize long-term cost of electricity  Encourage energy efficiency

6. Market Design Drivers  Small isolated system  Desire to reduce risk and encourage private investment  Significance of reliability objective to Government  Provide downward pressure on prices  Recognise current limited competitive tensions  Fairness for all technology and energy options

7. Market Structure - Overview Reserve Capacity Mechanism Wholesale Electricity Market Energy TradingServices IMO System Mgmt Bilateral Contracts Auction Bilateral Contracts Short Term Energy Market Balancing Ancillary Services 2 – 3 Years aheadDay AheadReal Time

8. High Level Comparison  Wholesale Electricity Market (WA) Reserve Capacity Mechanism Net Market Short Run Marginal Cost Based Market Caps (~$286/$763/MWh) Ex-Ante Market No Nodal Dispatch or Transmission Model  National Electricity Market (East) No Reserve Capacity Mechanism Gross Spot Market Market Based Spot Cap ($10,000/MWh) Real Time Market Nodal Dispatch with Complex Transmission Model

9. Market Performance Small but growing –Load growth = 3.9 % p.a. over the next 10 years –Registered generators = 22 (6 new since market start) –Register retailers = 15 (5 new since market start)

10. Impressive Investment 700 MW new generation – in service 1100 MW new generation – under construction Renewable capacity doubled (125 MW to 250 MW) Funded entirely by the private sector!!

11. Generation Market Share

12. Fuel Diversity 45% gas fired 15% dual (gas and oil) fired 25% coal fired; and 10% renewable BUT – single dependency on a one natural gas pipeline (1600 km)

13. Price response

14. Market Volumes

15. Retail Market > 160 MWh per annum – Contestable (approx. 2,000 customers) 50 MWh to 160 MWh per annum – can chose a regulated tariff (approx. 15,000 customers) < 50 MWh per annum – non-contestable on a regulated tariff (approx. 960,000 customers)

16. Retail Tariffs Last domestic price change – 1997/98 (10 years ago) Not reflective of costs!!! Requires a State subsidy of A$790 Million over the next 4 years (excluding transmission) Proposal to increase by over 100%  > 70% generation costs  > 30% transmission investment But - Change of government!

17. Issues The current market an evolutionary step –Too complex – particularly settlement –Not responsive to intra-day events –Balancing Market uncompetitive –Market design predicated on an unconstrained grid

18. Challenges Accommodating renewables Investment uncertainty

19. Thank you