1. The Australian Market Evolution Dr Brian Spalding Chief Operating Officer NEMMCO

2. 2 Australian Market - Overview  NEM design  Recent major reviews of NEM  Evolving Areas

3. Australian Markets  Two Australian Electricity Markets  Western Australian Wholesale Market –Operated by the IMO and covers South West Interconnected System –Market started in September 2006 –Operates around physical bilateral contract positions –Includes a separate capacity market  National Electricity Market (NEM) –Operated by NEMMCO (also operates the power system) –Covers eastern coast of Australia –Includes more than 90% of Australia’s electrical energy –Market started in December 1998 –Energy only, mandatory, 100% physical spot market –Market directly dispatches the power system (no physical contracts) –Financial contracts exist around the NEM (This presentation focuses only on the NEM) 3

4. NEM Statistics Volume of Sent-out Energy (2007-08) 199,000 GWh Value of Sent-out Energy (2007-08) AU$10.2 billion (Physical Spot) Maximum NEM Demand 34,425 MW Installed Scheduled Generation 40,700 MW

5. 5 NEMMCO’s Core Task Power system security Quality of Supply Generation Offers Operate within limits Power system reliability Prescribed standards The Task To utilise the least “cost” Generation while maintaining the integrity of the power system

6. 6 NEM – Physical Spot Market  Gross pool (compulsory) and energy only market  Generator offers to supply received each day with reoffers up to 5 minutes before real time  Generator production levels and dispatch prices set each 5 minutes as a result of a market optimisation  No physical delivery contracts at wholesale level as financial contracts between participants manage pool price risk  NEMMCO does not deal with financial contracts

7. 7 NEM - Market Design  Wholesale spot price determined at each of five regional reference points as average of 5 minute prices  Spot price determined as the “cost” to supply the next unit  Same spot price paid regardless of offer price – a common clearing price market  Market outcomes constrained to ensure physical power system remains secure

8. 8 SA Tas Vic  5 Regions  Participants lie within a Region  Generators Paid Regional Price  Customers Pay Regional Price NSW G G C C C G C G NEM Regions Qld C G

9. Recent NEM Reviews  Reviews performed by the Australian Energy Market Commission  Reviews examine potential to improve the NEM design  Congestion Management Review –After reducing price regions from 6 to 5, congestion not material –More transparency in operation of transmission constraints –Clarify rights of generators who fund transmission developments  Comprehensive Reliability Review –NEM is reliable and confirmed standard (0.002% unserved) –Increase market price cap from $10,000 to $12,500/MWh –Routine Energy Adequacy Assessment  National Transmission Planning –National body to develop annual national plan out 20 years 9

10. NEM Evolving Areas  Drought  Energy limitations  Increasing wind generation  forecasting  Semi dispatch of wind  Smart Metering  Emissions Trading Scheme and renewable generation requirements  Integration of Gas and Electricity 10

11. Australian Drought  Much of Australia is effected by drought  Impacts both hydro power stations and most inland coal fired power stations  NEMMCO performs assessments of likely energy supply shortfalls and generation loading profiles looking out 2 years  Allows generators, water authorities and government policy departments to plan water allocations  Moving to become a routine Energy Adequacy Assessment Process  Latest report projects energy shortages under low continued rainfall in Victoria and South Australia for summer 2009/10 11

12. Increasing Wind generation 12 South Australia 800MW operating 1,900MW planned Victoria 100MW operating 2,000MW planned Tasmania 140MW operating 320MW planned NSW, QLD 30MW operating 2,450MW planned

13.  Project to accommodate increasing wind generation  Forecasting wind generation is essential to maintaining the accuracy of NEM dispatch and pricing processes  Project financed through Commonwealth Government  Forecast timeframes for dispatch (5 minutes ahead) out to 2 years ahead  Collection and analysis of information to support research Australian Wind Energy Forecasting System (ANEMOS)

14. Western Europe Anemos Partners

15. InputsOutput Historical data Weather forecasts x 3 Real time measurements (SCADA) Forecasting models Wind Generation forecasts ANEMOS System Terrain Information 5 minutes to 2 years

16. Semi Dispatch of Wind generation  From March 2009  Significant wind generation must be able to be semi- dispatched (output controlled downward)  Limit output of wind generation at times when it would otherwise violate network capability  Wind farms:  Submit dispatch offers and plant availability  Compete with other scheduled generation on the basis of offers  Receive loading (dispatch) instructions from NEMMCO  Must comply with NEMMCO loading instructions 16

17. Smart Metering  Several States and the Federal Goverments promoting the role out of “Smart meters”  Victoria has initiated a policy requirement  Federal Government has established a high level committee to progress  Cost benefit studies have very wide range of outcomes  NEMMCO requires metering data to settle retailers  Currently reading 565,000 interval meters (max 8 million) 17

18. Emissions Trading Scheme  Federal Government keen to progress in July 2010  Plus 20% renewable by 2020  Yet to pass legislation  Impact on coal fired generation  Lead to changed dispatch merit order and shut down of highest polluting plant  Need to ensure that the rate of closure of coal is matched by investment in low CO2 plant  AEMC given task to review the framework of the NEM in the context of ETS and RET 18

19.  Australian Energy Market Operator (AEMO) to commence operations on 1 July 2009  Electricity and Gas market operation in single entity  Electricity System operation for all NEM and Gas System operation in Victoria  Looking at Gas and Electricity emergency operation  Gas and Electricity becoming integrated at both the supply and retail sectors Integration of Gas and Electricity

20. 20 Australian Market - Overview  NEM design  Spot market drives the power system operation  Recent major NEM reviews  Congestion, reliability, transmission planning – no major design shifts  NEM Evolution  Drought, wind generation, smart metering, ETS, integration of gas & electricity – similar to most markets