Australian Energy User 2012 Annual ConferenceSydney, 24 & 25 October 2012

Integrating policy objectives Integrating policy objectives Integrating policy objectives Integrating policy objectives regarding electricity issuesregarding electricity issuesregarding electricity issuesregarding electricity issues

Private and Confidential

OverviewOverviewOverviewOverview

• Overview of government policy objectives

• An example: the impacts of energy efficiency target programs on electricity price

• Integrating energy efficiency and peak demand in policy initiatives

• What if this was recognised and addressed?

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Private and Confidential

Governments have multiple objectives regarding electricityGovernments have multiple objectives regarding electricityGovernments have multiple objectives regarding electricityGovernments have multiple objectives regarding electricity

• Price-related

– Reducing prices

– Improving affordability

– Preparing consumers for the carbon tax

– Protecting/assisting ‘vulnerable’ consumers

• Reducing GHG emissions

• Improving energy efficiency

• Promoting user pays and reducing cross-subsidies

• Providing consumer protection

• Increasing competition

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but policies and programs often address only one of the objectives while ignoring impacts on others or believe that several objectives can be maximised simultaneously

Private and Confidential

EE programs’ objectives and scopeEE programs’ objectives and scopeEE programs’ objectives and scopeEE programs’ objectives and scope

Program Objectives Scope

VEET • Greenhouse gas reduction• Encourage the efficient use of electricity and gas• Encourage investment, employment and technology

development in industries that supply goods and services which reduce the use of electricity and gas by consumers

• Residential• Electricity and gas• Mandatory target on retailers • Tradable certificates

ESS • Assist households and businesses to reduce their electricity consumption and electricity costs

• Complement any national scheme for reducing carbon pollution by making the reduction of greenhouse gas emissions achievable at a lower cost

• Reduce the cost of, and the need for, additional energy generation, transmission and distribution infrastructure

• All customer sectors• Mandatory target on retailers • Tradable certificates

REES • Improve energy efficiency and reduce GHG• Assist households to prepare for energy price increases

due to gov’t policy• Reduce total energy costs for households, particularly low

income households

• Residential • Electricity and gas• Energy audits in disadvantaged

households• Mandatory target on retailers

EEO • Improve the identification and uptake of cost effective energy efficiency opportunities

• Enhance productivity• Reduce greenhouse gas emissions• Improve financial outcomes for program participants• Facilitate greater scrutiny of energy use by large energy

consumers

• Corporations using more than 0.5 PJ per year

• Mandatory reporting of opportunities and plans regarding measures with paybacks of 4 years or less

• Voluntary energy use reduction

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Private and Confidential

Static analysis results suggest upward pressure on pricesStatic analysis results suggest upward pressure on pricesStatic analysis results suggest upward pressure on pricesStatic analysis results suggest upward pressure on prices

Program VEET ESS REES EEO

Participant test 6.21 13.54 7.92 2.40

Total resource cost test

3.24 4.26 3.35 1.13

Ratepayer impact measure test

0.55 0.36 0.47 0.47

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• Participant Test Participant Test Participant Test Participant Test – quantifiable benefits and costs to the customer due to participation in the program.

• Ratepayer Ratepayer Ratepayer Ratepayer Impact Measure Test (RIM)Impact Measure Test (RIM)Impact Measure Test (RIM)Impact Measure Test (RIM) – the impact on per-unit electricity prices due to changes in utility revenues and operating costs caused by the program.

• Total Resource Total Resource Total Resource Total Resource Cost Test Cost Test Cost Test Cost Test ((((TRC)TRC)TRC)TRC) – the net costs of a demand-side management program as a resource option based on the total costs of the program

• Costs: all costs incurred by participants, the electricity supply chain and any external entities involved (financial incentives are transfers).

• Benefits: avoided electricity supply costs across the generation, transmission and distribution sectors, valued at marginal cost.

• Essentially the same as the Societal Test except for the incorporation of externalities, and the choice of discount rate used. This study included the carbon price.

Private and Confidential

Impact on electricity generation by fuel type (Impact on electricity generation by fuel type (Impact on electricity generation by fuel type (Impact on electricity generation by fuel type (GWhGWhGWhGWh) ) ) ) –––– REES, REES, REES, REES, VEET and ESS combinedVEET and ESS combinedVEET and ESS combinedVEET and ESS combined

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Private and Confidential

Cumulative impact on CO2 emissions (MTCO2e, 2012Cumulative impact on CO2 emissions (MTCO2e, 2012Cumulative impact on CO2 emissions (MTCO2e, 2012Cumulative impact on CO2 emissions (MTCO2e, 2012----2025202520252025))))

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-9.00

-8.00

-7.00

-6.00

-5.00

-4.00

-3.00

-2.00

-1.00

-

VEET

REES

ESS

Private and Confidential

Impact on installed capacity by plant type (MW) Impact on installed capacity by plant type (MW) Impact on installed capacity by plant type (MW) Impact on installed capacity by plant type (MW) –––– REES, REES, REES, REES, VEET and ESS combinedVEET and ESS combinedVEET and ESS combinedVEET and ESS combined

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Private and Confidential

Impact on generation system load factor Impact on generation system load factor Impact on generation system load factor Impact on generation system load factor –––– REES, VEET and REES, VEET and REES, VEET and REES, VEET and ESSESSESSESS

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Private and Confidential

Cumulative impact on system fixed and operating costs Cumulative impact on system fixed and operating costs Cumulative impact on system fixed and operating costs Cumulative impact on system fixed and operating costs ($2011 millions) ($2011 millions) ($2011 millions) ($2011 millions) –––– REES, VEET and ESS combinedREES, VEET and ESS combinedREES, VEET and ESS combinedREES, VEET and ESS combined

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-400

-350

-300

-250

-200

-150

-100

-50

-

50

Fixed

Operating costs (carbon)

Operating costs (excl carbon)

Private and Confidential

Impact on timeImpact on timeImpact on timeImpact on time----weighted average spot price ($2011/weighted average spot price ($2011/weighted average spot price ($2011/weighted average spot price ($2011/MWhMWhMWhMWh) ) ) ) ––––REES, VEET and ESS combinedREES, VEET and ESS combinedREES, VEET and ESS combinedREES, VEET and ESS combined

Jurisdiction Max decrease Max increase Average change

QLD -0.66 0.25 -0.08

NSW -0.73 0.09 -0.24

SA -1.54 0.27 -0.48

VIC -1.20 0.30 -0.38

TAS -1.28 0.32 -0.25

NEM -0.83 0.22 -0.29

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Private and Confidential

Conclusions about the programsConclusions about the programsConclusions about the programsConclusions about the programs

• Produce significant benefits for program participants

• Have had modest beneficial impacts to date on the wholesale market of the NEM in terms of reducing both the capital and operating costs of the generation sector

• Are cost-effective from an economic perspective (avoided costs exceed all costs associated with the programs)

• But are likely to put upward pressure on per-unit electricity prices

– Reduced load factors will result in more infrastructure being required per unit of electricity served

– Depending on how the direct and indirect costs of the programs are recovered by the various parts of the utility supply chain, this could have inequitable or regressive distributional effects despite the programs being accessible to a wide cross-section of all electricity users

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Private and Confidential

Approaches for improving a NESIApproaches for improving a NESIApproaches for improving a NESIApproaches for improving a NESI

• Modify the current ESI design to incentivise peak demand reductions as well as energy efficiency

– A separate set of incentives for demand reduction measures

– Modification of the EE incentive to reflect measure specific impact on system loadshape

• Develop a separate scheme to incentivise peak demand reductions

– Could be a separate obligation on a party to achieve specified reductions in peak demand

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Private and Confidential

How much demand response might we get?How much demand response might we get?How much demand response might we get?How much demand response might we get?

Market Approximate MW of

DR in place

Demand response as a %

of system peak demand

PJM (PA, NJ, MD) 14,118 7.6%

ISO-NE (New England) 2,164 6.6%

MISO (all or parts of 11 US north central midwest states and the Canadian province of Manitoba)

(N/A) 8.1%

NYISO (New York) 2,248 6.5%

Average 7.2%

WEM 2012-13 (Western Australia) 499 8.2%

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Private and Confidential

Recent estimates of the values of DSP in the NEMRecent estimates of the values of DSP in the NEMRecent estimates of the values of DSP in the NEMRecent estimates of the values of DSP in the NEM

• AGL: Improving system load factors by around 11 per cent could reduce an average annual consumer bill by around 12 per cent, or $245.28

• ESAA/Deloitte: dynamic pricing, direct load control, electric vehicle to grid technology, energy efficiency measures and small scale solar generation could provide economic benefits between $1.5 billion and $4.6 billion by 2021.

• AEMC/EY: removing the top one per cent of peak demand periods between 2011 and 2030 could provide an indicative value of between $3.3 billion and $11.1 billion in network cost savings across the NEM

• Ausgrid: each additional megawatt (MW) delivered by the electricity system requires around $3.3 million worth of investment in assets.

• Energex: total cost per MW of $3.5 million

• EnerNOC/CME: total cost per MW $5.3 million; total avoided cost of $15.8 billion (assuming 3,000 MW available) or $1,700 per connection

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Private and Confidential

Impact of DR on NEM annual system load factorImpact of DR on NEM annual system load factorImpact of DR on NEM annual system load factorImpact of DR on NEM annual system load factor

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62.0%

63.0%

64.0%

65.0%

66.0%

67.0%

68.0%

69.0%

70.0%

71.0%

BAU

With DR

• Load factor improves from 65.4% in BAU to 70.4% with DR

• $169 bill savings per year, based on AGL figures

• equates to between 36% and 74% of the nominal price increase in average residential bills in the NEM jurisdictions since 2006

• Based on:

– AEMO 2012 National Electricity Forecasting Report (Scenario 3, Planning, 50POE, sent out electricity, regional demands and 0.92 diversity) factor, which includes the energy and peak demand impacts of existing government policies and programs

– 8% DR achieved per year

Private and Confidential16

Lance HochLance HochLance HochLance HochGPO Box 4345Melbourne 3001+614 1172 1386

lhoch@oakleygreenwood.com.aulhoch@oakleygreenwood.com.aulhoch@oakleygreenwood.com.aulhoch@oakleygreenwood.com.au