Market Evolution: The Situation in Asia Pacific

1. Market Evolution: The Situation in Asia Pacific Allan Dawson Chief Executive OfficerEnergy Market Company

2. Agenda • Asia - hot spot of global growth, energy investment and change • Australia and New Zealand more mature electricity markets • Regional overview • China, India • Japan, Korea • Philippines, Indonesia, Singapore • Australia and New Zealand • Summary of key themes

3. Asia - Overview

4. Asia: Hot spot of growth • Asia (especially India and China) are key global growth areas • Total energy consumption is high but per capita consumption is low • Developmental disparities within the region • Electricity sector reform is progressing … slowly

5. Investment Requirements Source: International Energy Agency (IEA) World Energy Investment Outlook 2003

6. Electricity Investment Source: International Energy Agency (IEA) World Energy Investment Outlook 2003

7. Electricity Market Reform • Diversity in regional development reflected in: • Level of electrification • Quality and reliability of supply • Level of subsidies • Most nations are somewhere along the reform path: • Reforming legislation • Establishing new institutions and markets • Introducing competition to supply and demand

8. Electricity Market Reform • Main driver for liberalisation is encouraging private sector participation and attracting investment • Another driver is improving country’s competitiveness by introducing competition into a key sector of economy • There is also desire to reform state-owned incumbents to improve efficiency

9. China Industry overview • Large and growing economy • Electricity market is second largest after US • Installed generation capacity in excess of 350GW but per capita consumption low • Facing supply shortage and associated blackouts • Transmission system is fragmented • Surplus supply cannot be moved to where it is needed

10. China Investment requirements • US$1.9 trillion investment required for electricity generation by 2030 • Significant investment to build transmission corridors to move electricity to energy-hungry regions • Major supply reliability issues • Central government has put in measures to help taper investment in high energy consuming industries

11. China Reforms: Pilots • Trial market project in 1999 • 5 provinces + Shanghai • Objective to allow separation of generation and grid interests and encourage competitive supply • The experiment was short lived in all pilot areas because: • Increased demand in 2001 that absorbed excess supply • Monopoly utilities created unfair competition

12. China Reforms: Next wave • State Power Corp was broken up in 2002 into 5 generation companies and 2 grid companies • State regulator established in 2003 – State Electric Regulatory Commission • Recent unexpected power shortages have led government to consider market orientated policies to attract new investment • The measures the government is pursuing or has implemented include: • Regulatory changes • Electricity pricing reform • Investment reform

13. India Industry overview • 100GW of generation capacity by 2012 • Private participation is essential if growth targets to be met • Quality, access, theft and subsidies are big issues • Industrial consumers pay the bulk of the money collected • Little price signals or incentives for efficient production and transmission or investment • State corporations dominate the sector • They are in various stages of being disaggregated and will provide building blocks for a market

14. India Reforms: Corporatisation • 1990s – Corporatisation of State Electricity Supply Boards • Structured so they could be broken up into potentially competing generation, transmission and distribution companies • Private sector participation in supply

15. India Reforms - Electricity Act 2003 • Eases requirements for private entry into generation • Opens transmission and distribution to private participation • Requires all transmission utilities to provide non-discriminatory open access • Proposes a new tariff framework based on competitive bidding • Designed to encourage competition in electricity supply but basic framework for power markets is yet to be determined • Requires contracts for new projects to be determined by competitive bidding

16. Japan • Sector dominated by 9 regional franchises • J-Power only major player that operates in multiple regions • Large consumers are contestable • Mid-sized consumers will become contestable in 2005 • Full deregulation is scheduled for 2008 • New energy exchange will be established so generators can price electricity sold onto the national grid • IPO of J-Power is the biggest in Japan for 6 years (US$3.4b)

17. Korea • KPX established in 2001 to operate the one-way bidding pool based on marginal costs and capacity payments • Marginal costs are determined by a committee, so generators can submit only capacity offers, not price offers • A two-way bidding pool (TWBP) has not yet been established as planned • Government is rethinking plan to introduce competition in the power distribution sector • Genco privitisation programme well behind schedule

18. Philippines • Legislation passed in 2001 • Renegotiation of PPAs • Regulator and market operator established • Market rules written and systems currently being developed and implemented • Net pool with distributed utilities required to trade at least 10% of its total demand from spot market • Locational marginal pricing methodology • Expect market trials to commence in June/July 2005 and commercial operations in December 2005/ January 2006 • Process to sell transmission operator and gencos continues

19. Indonesia • Legislation passed 2002 • Tariffs to be increased to economic levels by 2005 • Requirement to establish a trial market by 2007 • Renegotiation of PPAs

20. Singapore • Market liberalisation programme began in 1995 • Reform designed to promote the supply of competitively-priced electricity • New arrangements for wholesale trading commenced on 1 January 2003 • Prices established every half-hour for approximately 400 locations • Recent participation of demand side in reserves market • Retail contestability for large and medium sized customers • Full retail competition deferred at this stage

21. Key themes in Asia • Investment requirements are astonishing • Electricity market reform is progressing …slowly • Reform delays in most jurisdictions • About face by Thailand and Malaysia • Investment climate for asset sales yet to improve • Attention also focused on energy security and diversification due to oil price increase • If oil prices and shortages bite, focus on reform likely to resume

22. Australia • NEM operating since 1998 • Zonal market but now considering nodal pricing • Bass link will allow participation by Tasmania in 2005 • Reform underway in Western Australia • FRC - 5.5m customers are contestable • Likely changes to regulatory structure

23. New Zealand • NZEM operating since 1996 • Establishment of Electricity Commission represents a major regulatory shift • Minister and Commission have strong involvement now whereas before it was a voluntary self-regulated market • Implications: • Mandatory pool • ‘Dry-year’ supply contracted by Commission making it a regulator and market participant • Commission likely to adopt new approaches for transmission investment and transmission pricing