Non-regulated Interconnectors NECA Seminar

1. Non-regulated InterconnectorsNECA Seminar Tuesday 8 December 1998

2. Opening Remarks Stephen Kelly NECA

3. Introduction • Code provisions • programme • key issues

4. Obligations on promoter • establish connection agreements with NSPs • register as market participant • provide an access undertaking to ACCC • apply to NECA

5. Obligations on NECA • establish rules for market participation • within two years of market launch, develop provisions to address financial risk to promoter as a result of need for augmentation

6. Change in status • provision to switch from non-regulated to regulated link, subject to conditions • meets Code criteria and technical standards • passes “net public benefit” test

7. Programme • a role for entrepreneurial interconnectors? • a proponent’s perspective • introduction to working group proposals • market participation • structural and competition issues • extensions and alternatives • overall assessment • conclusions and next steps

8. Key issues • generator competitors or TNSP companions? • regulated and non-regulated links: can they co-exist? • hermaphrodite links: a freak of nature? • access, market power: how light-handed can we be? • safe harbour provisions: smothering at birth?

9. WHY NON-REGULATED INTERCONNECTORS ?An advocacy statement .. Stephen Orr Hazelwood Power

10. A REGIONAL MARKET DESIGN • NEM is regionalised - conscious choice • Simplified version of full nodal pricing - • few intra-regional constraints (in real regions) • mechanism to redefine if constraints occur • Inter-regional constraints create heavy risks for participants; market awakening 25 Nov 97

11. NEMMCO IRH PROCESS • Settlement Residue Auction (SRA) process developed as interim access to SR to underwrite inter-regional hedges and mitigate IR risk • Also developed view of the future, issues being: • network performance drivers and standards • firm inter-regional access - leading to IRHs • regulatory risk for investing participant - hence non-regulated interconnectors

12. ISSUES FOR PARTICIPANTS • Particularly generators, but others too • Interconnectors look like wires, but … ... • They perform like competitors, ie - • They introduce remote generation as new entrants into a region • Conversely they add remote load to a region • They also potentially redefine the region

13. INVESTMENT RISK • Investment criteria for regulated interconnectors don’t match market criteria, eg: • n-1 transmission reliability standard • Demand with 10% probability of exceedance • ACCC reviewing criteria for NEMMCO to approve regulated status for interconnectors

14. INVESTMENT RISK contd • Regulated interconnectors see little investment risk - if transmission planner sees the need, customers pay until next optimisation • Even if investment rules become market-commercial, regulated interconnector not at risk of failure • Hence, some propose higher discount rates for regulated interconnector assessments

15. REASONABLE INVESTMENT CERTAINTY • Regulated interconnectors threaten the price signals which underpin local generation and demand-side investment = regulatory risk • Generation/demand investor confidence up if interconnector faces equivalent market risk • “If you think it’s a good deal, you build it!”“If you don’t, don’t ask the market to underwrite your errors ………

16. NON-REGULATED INTERCONNECTORS • Are competitively neutral • Reduce the need for central intervention • Require a change in thinking away from conventional interconnector perspectives • Can be free-flowing and open like normal transmission lines, or alternatively … … • Can be actively traded in the market through price-differential/volume offers

17. NON-REGULATED INTERCONNECTORS • Potentially remove the need for regulated interconnectors at all, ie - • if regulated rules changed to achieve competitive neutrality, no for regulated • if commercial hurdles not met, governments and others can build NRIs, and take the risk

18. TODAY’S SESSION • Reflects the initial results of efforts of a diverse industry group to define the nature and operation of non-regulated interconnectors • The group has diverse views on some key issues, but sufficient consensus on the fundamentals to encourage others to join the debate

19. A Proponent’s Perspective Tony Cook TransÉnergie Australia

20. Outline • Code requirements • DirectLink • Transmission in a competitive market

21. National Electricity CodeObligations of Proponents • Clause 5.6.6 (f) requires a connection applicant, in relation to a non-regulated interconnector, to: • apply to NECA in accordance with clause 3.10 to determine the rules that will apply in terms of the connection applicant’s participation in the market as a market participant in relation to that interconnector. • TransEnergie Australia and NorthPower made application to NECA on 1 October 1998.

22. National Electricity CodeObligations of NECA • Clause 5.6.6 (g) provides that, if an application is made to NECA under clause 5.6.6 (f) (4), NECA must determine those rules within a reasonable time after receipt of the application.

23. DirectLink Features • 180 MVA capacity between Qld and NSW. • DC technology. • 1 January 2000 commissioning date. • Non-regulated interconnector • Recoup costs through trading in financial instruments tied to the interconnector capacity.

24. Geographic Location

25. Transmission in Competitive Markets • Objective: • Provide sufficient transmission capacity to ensure a competitive energy market, while fairly and efficiently pricing the use of that capacity. • Outcomes: • Facilitate competition in: • generation, • transmission (as an alternative to local generation).

26. Transmission in Competitive Markets • Commercial framework for transmission expansion: • “Top Down” projects for reliability and competition - determined by NEMMCO • “Bottom Up” projects in response to energy price differentials - proposed by developers.

27. Transmission in Competitive Markets • Top Down Projects • Competitive tendering e.g. Victoria • Bottom Up Projects • Entrepreneurial interconnectors.

28. Benefits to Consumers and Generators • Effective competition in generation. • Lower transmission costs.

29. Introduction to the Working Group’s Proposals John Howarth VPX

30. WG’s Terms of Reference • One of the group’s terms of reference is - • “recommend rules to govern the participation of entrepreneurial interconnectors in the national electricity market and advise on implications for other aspects of the market design such as network augmentation criteria.” • this is a problem - how can you write rules for an unregulated interconnector? • need to define the boundary of acceptable behaviour without being prescriptive

31. WG’s Terms of Reference • Addressed in three stages: • identify “safe harbour” provisions • define the degree of discretion used in other approvals • define scope for future extensions and variations to the “safe harbour” provisions • This workshop is a result of the first stage and some progress has been made on the other stages • The work presented today is new and requires a change in thinking - there are still many challenges • inter-regional hedging • completion of other stages etc

32. Other Terms of Reference • Remaining Tasks • “if possible recommend a practical and effective implementation path for introducing firm link-based inter-regional hedges, i.e. inter-regional hedges that are underwritten by settlements residues and are as firm as practicable against residual risks such as those associated with network availability.” • “advise on the scope and appropriateness of aligning the inter-regional and intra-regional hedging provisions with frameworks such as the transmission congestion contract concept and others. This should include identifying the implications for other aspects of the market design.”

33. What are “Safe Harbour” Provisions • Safe harbour provisions. • A set of provisions conformance to which would ensure an application’s approval. There is no implication that non-conforming applications would necessarily be rejected, although they would not be assured of receiving approval. • not code requirements but a set of criteria to judge automatic acceptability. • because we are naturally risk adverse the provisions are conservative.

34. What are “Safe Harbour” Provisions • Obligations • Configuration limits • Must be scheduled • Must have controllable flow • Pay network service charges • Enter into connection agreements • Exposure to costs and benefits of interconnector • NEMMCO to have power to direct • Subject to competition • Sunset clause • Subject to market power provisions • Ring-fencing provisions • Must make an access undertaking

35. What are “Safe Harbour” Provisions • Rights • Entitled to the spot market revenue • Can enter into Reserve Trader contracts • Option to convert to regulated status • Having fulfilled the obligations, the entrepreneurial interconnector has access to spot market revenue

36. Status of Working Group Paper • The WG has not endorsed all the provisions • There are still differing views • However the WG has agreed that it is time for wider consultation and exposure of the proposal • WG may need to review provisions in the light of feedback from this workshop

37. Post - implementation Review • WG recommends post - implementation review • > one application but, • < 3 years • Needed due to keep pace with innovation! • Needed because the concepts are new and quite different from other approaches - therefore need to consider developments

38. Definitions • Interconnector.A network element that connects networks located in different regions of the National Electricity Market (NEM). • Entrepreneurial interconnector.An interconnector for which there is an entitlement to derive income through its participation in the spot market. • Non-regulated interconnector. An entrepreneurial interconnector for which there is no entitlement to recover any revenue through regulated network service charges.

39. Definitions cont’d • Regulated interconnector.An interconnector for which there is an entitlement to recover a determined level of revenue through the imposition of regulated network service charges. There is no entitlement to retain any additional revenues arising from the operation of the interconnector in the spot market.

40. Definitions cont’d • Hybrid interconnector.An entrepreneurial interconnector for which there is an entitlement to recover some revenue through the imposition of regulated network service charges. As with other entrepreneurial interconnectors, income may also be obtained through participation in the spot market. • A mix of regulated and non-regulated has been identified but further work required. This and general areas where the safe harbour provisions can be extended in the future will be the subject of Rod Ward and Dave Roberts talk at 2:15pm

41. NECA WORSHOP ON ENTREPRENEURIAL INTERCONNECTORS Introduction - End User Perspectives Roman Domanski Executive Director Energy Users Group Sydney Airport Sheraton 8 December 1998

42. Entrepreneurial Interconnectors • Supportive of Concept • Why? • ‘virtual’ generator & competition for generators • competition for TNSPs - ‘right’ to provide • adds depth to NEM by strengthening links between regions • can help augmentation become more competitive • consistent with reform

43. How do I stop my entre- preneurial interconnector getting torpedoed? Simple, just park it in this ‘safe harbour’ Safe Harbours

44. ‘Safe Harbors’ Concept • Could go without rules, but • Rules provide some certainty for a new concept • certainty for investors, owners & customers • may improve chances of getting proposals up • Rules should not hinder proposals • Need to be flexible enough to foster change • but firm enough not to stop investment

45. Need for Debate As rules are new and innovative, important to expose to broader debate and get feedback. Need to be prepared to modify SHP to take account of informed comment. Need to also consider links between this work and ACCC review of regulated interconnectors

46. Competition Issues • Market Power • considerable discussion about threshold market shares • Access • Ring Fencing • Hybrids • Conversion These issues need broader input

47. The Future • Monitor and review • Adapt to practical experience & NEM/reform goals:e.g. • review requirement that flow must be independently controllable • perhaps move to calculating the price difference with and without interconnector • Should all future links be entrepreneurial • intra- & inter-regional?

48. Market Participation Stephen Wallace Snowy Mountains Hydro-Electric Authority Michael Green Transend Networks Pty Ltd

49. Overview • Market issues • bidding, dispatch and pricing • spot market revenues • system security • contracting • Network issues • configuration and controllability • connection agreements and network pricing

50. Spot Market Participation • Networks characterised by • economies of scale • short run marginal costs are insufficient to cover costs of optimally sized interconnector • Three models for interconnector operation • passive participation • bids capacity • bids price differential (above marginal losses)