New Zealand & Australian Wholesale Electricity Markets

1. New Zealand & AustralianWholesale Electricity Markets A Comparative Review Dr Ralph Craven Transpower NZ Ltd

2. Summary Background to Markets Market Characteristics Market Outcomes Current Market Issues NZ &Australian Wholesale Electricity Markets

3. Market Development - Background AUSTRALIA NEW ZEALAND 1991 Council of Australian Governments formed National Grid Management Council 1987 SOE’s formed, programme of separation and deregulation initiated Industry Reform Initiated 1998 National Electricity Market created. NEMMCO market management company and NECA (National Electricity Code Administrator) created. 1995 New Zealand Electricity Market commences. Further separation of Supply, Transmission and Retail/Distribution Electricity Markets Commence Commerce Commission – competition regulator NZEM – industry regulation Transpower – common quality and system security Initial Regulatory Structure ACCC & NECA AER – Aust Energy Regulator AEMC –Aust Energy Market Comm ACCC Commerce Commission EC – Electricity Commission 2004 Regulatory Structure 2007

4. Wholesale Electricity Markets – Australia and New Zealand Australia- NEM 20 million (18m) 195 TWh 28 GW peak 92 Power Stations 28 Network Providers 37 Market Customers 19 Specials 6 Traders New Zealand -WEM 4 million population 38TWh 6900 MW peak 43 Power Stations 3 Transmission Co’s 28 Distribution Co’s 7 Retailers Source NEMMCO Source Transpower

5. Market Characteristics – New Zealand 9 Generation Co’s: 3SOE (60%), 5 public co Generation Gross Pool LMP with 180 market nodes 2 sided market bids from supply and demand Uncapped ex post price Losses, tx constraints, security constraints and ancillary services co-optimised Dispatch 4 Ancillary Services: Instantaneous Reserves, Frequency Keeping, Black Start, Overfrequency Ancillary Services Open Access to transmission. Capacity allocated in Security Constrained Economic Dispatch Transmission 28 Distribution Co’s, permitted own generation not retail Distribution Largely vertically integrated with Generators Retail

6. Market Characteristics – Australia 62 Generation Co’s in 5 States Generation Gross Pool Zonal LMP with 6 nodes 1 sided market bids from supply Ex ante price for 30 min trading period based on 5 min dispatch. Price cap at VOLL $10k Fixed losses and heuristic constraints applied Dispatch 8 Frequency Control Ancillary Services Markets (4 Raise/4 Lower - at 6,60 sec and 5 min) Ancillary Services Open Access to transmission. Capacity allocated in Security Constrained Economic Dispatch Transmission Open Access distribution Distribution Retail Full Retail competition initiated

7. Market Outcomes – New Zealand Supply Reliability 11 years of market operation – no failure of market to supply. Includes 3 dry years. Supply margin reduced – July 2007 close to curtailment. Transmission Investment Market has delivered no Tx investment. With Regulator Transmission Investment regime outside market. Significant Investment planned next 10 years. Generation Investment Generation Investment has been left to Market for last 10 years. 19 generation projects delivering 2038 MW completed. After 11 years no active forward market has developed. 70% of load is hedged through vertical integration of Generator/Retail businesses. Availability of forward contracts questioned Forward/Hedge Markets Open access to Market dispatch as price taker with load forecast and dispatch control conditions. Build to 2007 modest (170 MW), Proposed build 1700MW introduces security concerns. Intermittent and Renewable Generation - Wind Spot price of energy 25% of consumer price. Early market below SRMC at $40/MW now set at $50-$60. Spot Prices/Consumer Prices

9. 2007 Installed 7 projects 170 MW Planned 12 projects 1760 MW

10. Market Outcomes – Australia Supply Reliability 9 years Market operation. Plant availabilities increased (93% cf 84% Pre market). Transmission Investment Market does not manage Transmission investment regime. Generation Investment Generation Investment has been left to Market for last 10 years. Significant investment required next 10 years. OTC bilaterals are common risk management tool. Not part of NEM Governance. Brokers trade 6 standard contracts. Active forward Market. Forward/Hedge Markets Open access to Market dispatch as non scheduled generators. Modest build to 2007 (617 MW), Proposed build 6000 MW introduces security Concerns that must be resolved. Intermittent and Renewable Generation - Wind NSW and Vic spot prices very low in early years of market. SA and Qsld higher. Recent prices compare across all states and show increases. Spot Prices/Consumer Prices

12. Intermittent Generation –Australia NEM 2007 Installed 27 projects 617 MW Planned 70 projects 5899 MW QSLD Installed 3 projects 12MW Planned 4 projects 176 MW SA Installed 7 projects 387 MW Planned 20 projects 1868 MW NSW Installed 4 projects 17MW Planned 18 projects 1080 MW VIC Installed 7 projects 134 MW Planned 23 projects 2380 MW TAS Installed 6 projects 67 MW Planned 5 projects 395 MW

13. Market Design Review Risk Management options – no financial markets Transmission alternatives Capacity Margin – optimal generation mix Market Information Transmission Investment Forward Price Market Security of Supply Current Market Issues – New Zealand

14. Retail Market Competition Congestion Management Comprehensive Reliability Review Current Market Issues - Australia