Andrew Reeves, Chairman

Asia-Pacific Partnership on Clean Development and Climate:Energy Regulatory and Market Development Forum

4 November 2010

Overview

1. Market Governance– Policy maker / regulator / operator separation

2. Gas and electricity market development– NEM / SWIS– Emerging gas market– Coal seam gas

3. Energy price drivers– Economic regulation in Australia– Recent decisions– Retail price impacts

Market governance

Electricity regulatory structure

QLD NSW ACT Vic Tas SA WA NT

LicensingOffice ofEnergy

Ministerfor

Energy/ IPART

ICRC ESCV OTTER ESCOSA

ERA UC

Retail PricingOffice ofEnergy

IPART ICRC DOIOTTER/ GPOC

ESCOSA

Non-priceRetail

Australian Energy Regulator (AER)Distribution

Transmission

Wholesale

CompetitionRegulation

Australian Competition and Consumer Commission (ACCC)

Overview of AER’s roles in energyWholesale gas

& electricity markets

Transmissionnetworks &

pipelines

DistributionNetworks for gas/electricity

Retail & other

distribution

We monitor wholesale markets and enforce rules

We regulate revenues of transmission businesses

We regulate revenues of distribution businesses

We will regulate non-price retail

activities

Australian electricity snapshot• Population ~ 22.2 million

– 65% in capital cities– 90% on east coast

• Electricity– energy 213TWh pa– peak 38,000MW – installed 50,200MW

Queensland

Demand 8,900

Capacity 12,050

New South Wales

Demand 14,300

Capacity 15,900Victoria

Demand

10, 450

Capacity

10, 000

South Australia

Demand 3300

Capacity 3,850

Tasmania

Demand 1,750 Capacity 2,400

Western Australia

Demand 4,000

Capacity 5,000

Northern Territory

Demand 300

Capacity 1000

Snowy*

* 3676MW at Snowy gen split between NSW & VIC

National electricity market

• fully interconnected AC power system

• covers 4500km• includes 3 DC links• regional pricing model • 5 regions• one market/system

operator

Generation mix

0

10

20

30

40

50

60

Black coal Brown coal Gas Hydro Wind Liquid Other

Per

cen

t o

f to

tal

gen

erat

ion

Capacity Output

Ownership of generation

2 000

4 000

6 000

8 000

10 000

12 000

14 000

16 000

18 000

Qld NSW Vic SA Tas

Meg

awat

ts

Government Government/private Private Private/government power purchasing agreement

NEM market design

South Australia - 7 February 2009

-500

0

500

1000

1500

2000

06:30 AM

07:30 AM

08:30 AM

09:30 AM

10:30 AM

11:30 AM

12:30 PM

01:30 PM

02:30 PM

03:30 PM

04:30 PM

05:30 PM

06:30 PM

07:30 PM

08:30 PM

09:30 PM

10:30 PM

11:30 PM

$/M

Wh

Wholesale electricity quarterly prices

0

50

100

150

200

250

Ma

r 99

Ma

r 00

Ma

r 01

Ma

r 02

Ma

r 03

Ma

r 04

Ma

r 05

Ma

r 06

Ma

r 07

Ma

r 08

Ma

r 09

Ma

r 10

$/M

Wh

Queensland New South Wales Victoria South Australia Tasmania

Futures prices - electricity

0

30

60

90

120

150

Q4

20

10

Q1

20

11

Q2

20

11

Q3

20

11

Q4

20

11

Q1

20

12

Q2

20

12

Q3

20

12

Q4

20

12

Q1

20

13

Q2

20

13

Q3

20

13

Q4

20

13

Q1

20

14

Q2

20

14

Q3

20

14

Q4

20

14

$/M

Wh

Queensland New South Wales Victoria South Australia

WA electricity market

NT electricity

Gas market development

New gas transmission

Wholesale gas prices

Market average price for Sep-Oct Price $/GJ

Victorian Gas Market (weighted average daily price)

$2.11

STTM – Sydney Hub (ex ante) $2.27

STTM – Sydney Hub (ex post) $2.82*

STTM – Adelaide Hub (ex ante) $3.11

STTM – Adelaide Hub (ex post) $3.20

*Excludes 8 October 2010 event

Coal seam gas (CSG)NSW QLD

WA and NT gas

Reporting on market outcomes

• Weekly report– Now produced for electricity and gas– market dynamics and forecasts

• Longer-term statistics - website

• Annual state of the market report

• www.aer.gov.au – market snapshot

Energy price drivers

• Economic regulatory regime

• Factors impacting on network prices

• Recent network revenue determinations

• Retail price outcomes

Network regulation - Building blocks

Return on capital

Depreciation

Operating costs

Tax

Allowable

revenue

÷Demand forecasts

Reference tariffs

RAB

Factors influencing network charges

• Capital expenditure– Ageing asset replacement – Demand Increase– New connections– Reliability and service standards

• Operating expenditure– increasing asset base– increasing input costs (labour and materials)

• Cost of Capital (WACC)• Bushfire safety standards

Network investment and replacement

$-

$10,000,000

$20,000,000

$30,000,000

$40,000,000

19401950

19601970

19801990

20002010

20202030

20402050

INIT

IAL

+ R

EP

LAC

EM

EN

T C

AP

EX

($p

a -

real

dol

lars

)

Initial investment

Indicative replacement investment

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2010 2011 2012 2013 2014

financial year end

Rea

l Ju

ne

09 $

m

Return on Capital Depreciation Opex Tax

Distributors revenue breakdown NSW only

Distribution regulatory asset bases

0

5,000

10,000

15,000

20,000

25,000

30,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Year

Re

al J

un

e 0

9 $

m

Qld NSW Vic SA ACT Tas

Distributor capex

0

500

1000

1500

2000

2500

3000

3500

2005 2007 2009 2011 2013 2015

Year

Rea

l Ju

ne

09 $

m

Qld Actual Qld Allowed NSW Actual NSW Allowed

Vic Actual Vic Allowed SA Actual SA Allowed

Distributor opex

0

200

400

600

800

1000

1200

1400

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Years

Rea

l Ju

ne

09 $

m

Qld Actual Qld Allowance NSW Actual NSW Allowance

Vic Actual Vic Allowance SA Actual SA Allowance

Electricity distribution revenue

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Year

Rea

l Ju

ne

09 $

m

Qld SA NSW ACT Vic Tas

What influences retail price

• Wholesale energy costs ~ 31 to 45% for electricity

• Network charges – Transmission ~ 10 %– Distribution ~ 40 to 50%

• Retailer costs ~ 4 to 15%• Regulation of retail tariffs by state

regulators (except Victoria)– Standing offers Vs market offers

Retail electricity pricesHistorically, Australia has had low retail electricity prices

Retail electricity prices

80

90

100

110

120

130

140

150

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Ind

ex

19

90

–9

1 =

10

0

Sydney Melbourne Brisbane Adelaide Hobart Canberra

Prices are now rising and are expected to rise further

Other development issues

• New low carbon generation

• Demand management

• Smart Grid trial

• Smart meter rollout

Questions