AEMO P I V O TA L T O A U S T R A L I A’S ENERGY FUTURE
A U S T R A L I A’ S ENERGY FUTURE
AEMO continues to evolve, adapt, and provide value to its stakeholders within a constantly changing energy landscape. Delivering value is central to our vision of being pivotal to markets that secure Australia’s energy needs; and our mission, which is to plan, develop, and operate markets that are responsive to energy sector needs and support long-term investment in Australia. This ultimately
Energy is fundamental to our quality of life and Australia’s continued prosperity relies on secure, reliable, and sustainable energy supplies. Energy plays a vital role in Australia’s economy. Australia is the world’s ninthlargest energy producer, accounting for around 2.7% of world energy production.1 The energy market landscape has shifted considerably in recent years with changes set to continue well into the future. Key influencing factors include declining electricity consumption against historical levels, the rise in renewable generation, changes to carbon reduction policies, a changing economic outlook, and the emergence of liquefied natural gas (LNG) export demand set to significantly increase demand. In contrast, domestic demand for gas-powered generation is forecast to be flatter in the short-term.
Electricity
Gas
Electricity consumption began to decline in 2010. Reasons for decline result from a combination of factors, including:
Increased demand for gas in Australia, and globally, has supported large-scale investment and development of new gas and LNG projects. This includes extraction of gas from coal seams on Australia’s east coast.
• Commercial and residential customers responding to higher electricity retail prices by reducing energy use and adopting energy efficiency measures. • Energy efficiency savings from new building regulations. • Continued increases in rooftop solar PV installations driven by government incentives and lower-cost technology. • Changing consumer attitudes and behaviours regarding energy supplies. • Weaker energy demand from the energy-intensive industrial manufacturing sector. These changes in electricity consumption are considered when making long-term investment decisions, including the augmentation of ageing assets. AEMO is exploring these developments to maintain reliable, secure energy supplies, and support least-cost energy delivery to Australian homes and businesses.
benefits all energy consumers across
Gas demand from Queensland’s LNG facilities is projected to rise from zero to approximately 1,450 petajoules per annum between 2014 and 2019. By 2033, LNG export is projected to account for 66% of total annual gas demand.2 Domestic demand is expected to grow more slowly from present annual consumption of around 620 petajoules per annum in 2014 to approximately 740 petajoules per annum by 2033. This incorporates a projected fall in gaspowered generation demand in the shortterm due to rising gas prices and lower carbon pricing projections.3 Growth in the east coast gas markets has presented a number of opportunities for AEMO to drive gas market developments. In March 2014, the Wallumbilla Gas Supply Hub commenced trading. The hub will increase transparency and facilitate seamless trade within and between wholesale gas markets.
eastern and south-eastern Australia. 1
Australian Government, Bureau of Resources and Energy Economics, Energy in Australia 2013.
2
Australian Energy Market Operator, Gas Statement of Opportunities 2013.
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IBID.
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WHO IS THE AUSTRALIAN ENERGY MARKET O P E R AT O R ? Energy markets
Planning
The way forward
Established in 2009, AEMO is an independent organisation working in the long-term interests of Australian energy consumers, and enabling the efficient operation of energy markets in eastern and south-eastern Australia. The electricity and gas systems in Western Australia and the Northern Territory operate independently.
AEMO operates the wholesale and retail electricity and gas markets across eastern and south-eastern Australia.
AEMO delivers essential planning advice and independent electricity and gas forecasting to guide long-term investment in Australia’s energy resource and infrastructure management.
AEMO’s strategic direction centres around developing efficient energy markets and continued energy market reform. To respond to energy sector requirements and support long-term investment, AEMO currently focuses on:
Our role as energy market operator and planner positions us to work closely with industry and government stakeholders.
System operations
While AEMO does not produce gas or generate electricity, we are pivotal to promoting efficient long-term investment in electricity and natural gas services. We also promote efficient market and system operation in terms of price, quality, safety, reliability, and security of supply for the long-term interests of consumers. AEMO also provides a range of planning services that support industry and efficient network development.
This includes the National Electricity Market (NEM); the Declared Wholesale Gas Market in Victoria (DWGM); the gas Short Term Trading Markets (STTM); the Wallumbilla Gas Supply Hub; and energy retail markets. AEMO oversees the vital system operations and security of the National Electricity Market Power System and the Victorian Gas Declared Transmission System (DTS). AEMO operates the interconnected NEM power system from two control centres located in different states. Both centres operate 24 hours, 7 days a week, and are equipped with identical technology, so that electricity supply remains constant and secure, even in unexpected circumstances.
In Victoria, AEMO works closely with infrastructure investors and customers to make decisions on when and where new transmission network infrastructure should be built. AEMO produces a suite of comprehensive annual and long-term forecasting and planning reports that provide essential information to government, investors, and stakeholders to enable competitive markets, efficient investment and operations, and network planning.
• Understanding the impact of increased renewable energy on the NEM, and supporting its integration. • Working closely with industry to align electricity forecasts to improve network planning and investment across the NEM. • Developing gas market reforms to increase transparency and competition across east coast gas markets, including the Gas Bulletin Board (GBB) redevelopment. • Introducing mechanisms that leverage smart metering technology to enable greater consumer choice.
AEMO also assists the National Gas Emergency Response Advisory Committee to provide emergency management services for the entire interconnected eastern Australian gas grid.
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MARKETS O P E R AT E D BY AEMO
WHOLESALE MARKETS
The National Electricity Market The NEM is a wholesale electricity market operated by AEMO. It comprises five interconnected market regions: Queensland, New South Wales (including the Australian Capital Territory), Victoria, South Australia, and Tasmania. Generators and customers in each region sell and buy their electricity at the wholesale or “spot” price for that region, determined every 30 minutes. The main customers are energy retailers, who bundle electricity with network services for sale to residential, commercial, and industrial energy users. AEMO runs a central dispatch process every five minutes, which determines the electricity each generator must dispatch to meet demand at least cost, and electricity prices for each region based on this dispatch outcome. The volume and price of electricity in each five-minute dispatch period varies. Generators participate in the central dispatch process by submitting offers to supply in competition with other generators, and by following the dispatch instructions they receive.
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Photo courtesy of SP AusNet
AEMO uses sophisticated systems to instruct generators how much electricity to produce so that supply constantly matches demand. Prices fluctuate in response to supply and demand. AEMO’s key responsibilities as NEM operator include: • Maintaining power system security. • Ensuring supply reserves meet reliability standards. • Central dispatch and pricing in the NEM. • Metering and settlement of the NEM.
One of AEMO’s long-term challenges is to maintain system security and supply reliability as the NEM generation mix continues to evolve and consumption patterns change. AEMO is exploring ways to successfully integrate changes arising from such developments. NEM infrastructure comprises both government-owned and private assets. AEMO identifies long-term options to strengthen the NEM transmission system to provide stronger interconnection between regions and to accommodate new generation, which may be located far from existing transmission infrastructure in the future.
• Directing generators to increase production during periods of supply shortfall. • Instructing load shedding to rebalance supply and demand and protect power system operations. • Emergency management. • Facilitating retail competition to enable customer choice of electricity supplier.
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M
line th Nor as Pipe nd G nsla
WHOLESALE MARKETS
Declared Transmission System Other Transmission Pipelines Injection Point
NEW SOUTH WALES
SYDNEY
Moranbah
Barcaldine Rockhampton Curtis Island
Gladstone
City Gate
Compression Station
LNG Liquified Natural Gas Storage
DCG Dandenong City Gate
Ballera
Wallumbilla
Ro
ma Pip - Bri eli sba ne n
e
Moomba
BRISBANE
Koonoomoo
Power Station
line Pipe elaide - Ad
SYDNEY
ADELAIDE
Woolert CS
Brooklyn CS Winchelsea CS (2015) Bass Gas LNG Longford Cobden South West Gooding CSLongford DCG Pipeline Pipeline Geelong VicHub and SEA Gas Longford Lurgi Pipeline UGS Iona Casio, Minerva, Geographe and Thylacine Fields
Substation
ne eli Pip
Portland
y ne yd -S
NSW Interconnect Euroa
Western Transmission System
TRANSMISSION INFRASTRUCTURE
ba
Ballarat
m oo
Bendigo Carisbrook
Hamilton
Aulbury Wodonga
Springhurst CS
M
Gas Pipelines Victoria
SEA Gas Pipeline
Culcairn
Echuca Kyabram
Moo mba
VICTORIA
Eastern Gas Pipeline
CANBERRA
SEA Gas Pipeline
Hamilton
Portland
MELBOURNE Iona
Bass Gas
Eastern Gas Pipeline
Longford
Bass Straight Fields
Yolla
275 kV Transmission Line 220 kV Transmission Line 66 kV Line DC Link
DC 3
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Victoria’s DWGM enables competitive, dynamic trading. Gas trading is based on injections into and withdrawals from the transmission system that links producers, major users, and retailers.
QLD
Multiple Circuit Lines
• Has around 200 large generating units and 13 major distribution networks that supply electricity to end users. • Trades over $11 billion of electricity annually to meet the demand of 19 million residents.
SA
Brisbane
• Includes approximately 40,000 km of transmission lines and cables.
DC
In addition to providing a mechanism to trade imbalances (the differences between the amount of gas participants supply and the amount they or their customers withdraw) this market also enables: • Cost-efficient supply and demand management throughout the day.
• Has installed generating capacity of around 50,000 megawatts.
• Information gathering for efficient pipeline operation.
• Supplies about 200 terawatt hours of energy to businesses and households each year. • Is one of the longest geographically interconnected power systems in the world extending over 5,000 km— from far north Queensland to Tasmania, and as far west as Adelaide and Port Augusta.
HOBART
Victoria’s Declared Wholesale Gas Market
132 / 110 kV Line
The NEM:
State border
Tasmanian Gas Pipeline
330 kV Transmission Line
• A reliable and secure system for gas transportation.
NSW DC
Sydney
Adelaide Canberra
VIC
ACT Melbourne
• A market-based balancing service that determines price and gas flow quantities. • Market settlement and prudential risk management.
The Short Term Trading Market AEMO operates, administers, and develops the DWGM; registers market participants; and facilitates retail customer transfer (competition) and metering. Since the market’s inception, a significant development included intra-day trading intervals from 2007, allowing participants to revise their gas bids and demand forecasts throughout the day. DWGM arrangements apply to Victoria’s main transmission system known as the Declared Transmission System (DTS). This transports gas to most Victorian households and businesses. The DWGM supports: • About 1.9 million customers with the highest residential natural gas usage in Australia. • Annual demand of about 189 petajoules.
The STTM is a wholesale market for short-term trading of natural gas using market-driven, daily prices. It enhances gas market transparency and competition by setting prices based on supply and demand conditions. Price transparency ensures that the daily gas price set by the market reflects the true supply-anddemand situation. This in turn provides a more reliable price indicator for future investment in gas infrastructure. The STTM operates at demand hubs in Adelaide, Sydney, and Brisbane. The hubs are transfer points that link transmission pipelines and distribution systems. AEMO operates the STTM, develops and applies the procedures that govern it, and provides mechanisms to balance the supply and withdrawal of gas at each hub. AEMO’s STTM operations do not extend to the operation of production facilities, transmission pipelines, storage facilities, or distribution networks. The STTM supports: • 33 organisations participating at hubs in Queensland, New South Wales, and South Australia. • Over 2 million customers.
DC
TAS
• Metering data management for operational and market balancing.
Other demand point
STTM facility Other pipeline
Windfarm
500 kV Transmission Line
STTM hub
Production facilities Gas supply hub
• Total annual demand 161 petajoules.
Hobart
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WHOLESALE MARKETS GLADSTONE s la n d Q u e e n e li n e ip P s Ga
Roma
S o u t h We s t Q l d Pipeline
WALLUMBILLA Ro
ma Pip - Br eli isba ne ne
BRISBANE Wallumbilla Gas Supply Hub AEMO led the development of Australia’s first gas supply hub at Wallumbilla, Queensland. Establishing the hub was a major step in Council of Australian Government (COAG) led gas market reforms aimed at increasing transparency and competition in east coast gas markets.
Gas Bulletin Board The hub provides a centralised settlement and clearing facility through an online portal and enables generators, users, producers and retailers to manage their daily and future gas requirements: • It uses best practice from around the world to provide a new trading environment.
Gunnedah Using a brokerage model, the hub • The 1 terajoule contract size allows Gloucester Gloucester Basin supports efficient trade and transfer for trading flexibility. Basin Basin of gas between regions, enhances gas • It provides another trading mechanism trading transparency; and sets a reference for participants already operating in price for gas so participants can manage the STTM. portfolio risk. AEMO offers spot and forward-dated This voluntary market responds to products for participants to trade at the unprecedented growth in Queensland’s Wallumbilla Gas Supply Hub. The spot gas sector, driven by a significant LNG Sydney Sydney transactions include a core “day-ahead” export program that has increased the Basin product and a “balance-of-day”. The Basin need for more flexible and transparent balance-of-day product enables parties upstream transactions between parties. to adjust their portfolio closer to real-time The greater flexibility in gas trading and to manage imbalances within the gas benefits both domestic and day. The market will also offer a weekly export markets. product for the month ahead.
A pipeline capacity listing service will also be available. The listing service allows traders to advertise their interest to buy or sell capacity on any pipeline on the east coast and will support the liquidity of the Wallumbilla hub. The hub further increases overall participation in gas markets by attracting large users such as LNG plants, industry, and gas-powered generators. Gas is traded via 1 terajoule contracts, allowing smaller players to enter the market. Over time, the Wallumbilla Gas Supply Hub will foster the entry of more participants in the market, increase competition, and create a price reference point.
The GBB is a website operated by AEMO to improve market transparency and competition. The GBB provides information on the supply, demand, and capacity across the interconnected gas transmission pipelines in Queensland, New South Wales, Australian Capital Territory, South Australia, Victoria, and Tasmania. The GBB also covers major gas production plants, storage facilities, demand centres, and management of gas emergencies and system constraints. The GBB currently lists 23 gas production facilities, 12 major gas transmission pipelines and three gas storage facilities. At the request of the COAG Energy Council, AEMO will redevelop the GBB to improve functionality and integrate information from existing gas markets. The redevelopment will bring a range of benefits to gas market participants. These include enhanced market transparency, supporting market liquidity in gas commodity and gas capacity markets, promoting a more efficient use of, and investment in, infrastructure, and ultimately more efficient gas prices for end consumers. The GBB can be accessed at www.gasbb.com.au.
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Gippsland Basin
Photo courtesy of Alinta
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R E TA I L M A R K E T S
Electricity retail markets
Metering
AEMO develops and operates retail markets for gas and electricity in Queensland, New South Wales, the Australian Capital Territory, Victoria, and South Australia. We also provide a similar service to Western Australia for gas under contract with REMCo. In Tasmania, AEMO manages the electricity retail market only.
Since the NEM commenced, electricity consumers have progressively gained the right to choose their retailer. AEMO’s responsibilities have extended from managing the wholesale market to providing systems and processes that support competition and consumer choice in the retail electricity market.
Metering tallies all market participant accounts.
AEMO’s retail market systems and processes are integral to competitive energy markets as they:
Understanding both wholesale and retail market design helps to provide systems that interact effectively.
• Allow customers to choose or change their retailer, facilitating large volumes of customer transfers.
Delivering full retail competition (FRC) has required new systems that can transfer customers between retailers in the NEM. FRC or “contestability” between electricity retailers continues to increase, and new and unique products for customers continue to be introduced.
• Manage business transactions between retailers and distributors to provide contestable services to customers. • Manage large volumes of metering data to ensure energy usage is properly measured, reconciled, and allocated. • Simplify billing information and customer service.
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Making energy purchasing easier and more efficient improves productivity and lowers costs. Efficient systems make investment in both the supply and consumer sides of the market less risky and more attractive to investors.
Metering information is used to correctly determine the volume of electricity produced and consumed, and facilitates the process of measuring and recording such data. AEMO uses metering information to perform the settlements process. This ensures that: • Generators are paid for the energy they supply to the NEM. • Wholesale customers are accurately billed for the energy they purchase directly from the NEM. • Retailers are accurately billed for the energy they purchase on behalf of their customers.
Gas retail markets Transmission and distribution network service providers use metering information to determine their “use of system charges” for transporting electricity across the network.
Gas retail markets are integral to wholesale markets as they determine consumption, allow consumers to change retailers, and support information exchange between market participants.
Retailers use metering information to bill their customers.
Key gas retail market services administered by AEMO include:
The systems that facilitate this function contain one of the largest metering databases in the world. They accept data from a variety of electricity meter types and can process information from up to 10 million meters.
• Delivery point management of customer transfer for gas delivery points and the associated market data between retailers, and between retailers and distribution businesses.
AEMO registers, accredits, and audits a range of services undertaken by metering service providers. These service providers measure the volume of electricity supplied, validate meter data, and forward the data to AEMO for financial settlement.
• Procedure change management involves ongoing development of the procedures governing retail gas market operation under the National Gas Law and National Gas Rules. • Operating the central IT systems that facilitate retail market services, for example meter readings used by retailers to bill customers in a timely way.
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R E TA I L PRICING
In Australia, prices paid by retail customers for gas and electricity include wholesale energy costs, transmission and distribution networks costs, and retail services. Recent electricity price increases reflect investment in infrastructure to support increases in peak demand, despite declines in overall demand. As at July 2014, all states except Victoria, South Australia, and New South Wales apply some form of retail price regulation for electricity supplied under a standard retail contract. Only New South Wales applies retail price regulation for gas for small customers. All regulated prices are set by state or territory government agencies; the Australian Energy Regulator (AER) does not regulate retail prices.
A typical residential gas and electricity bill in eastern and south-eastern states comprises the following major cost components*:
*
• Calculated as the average of the same cost components for Victoria, South Australia, New South Wales and Queensland. • The annual energy consumption assumed for each state is based on typical usage levels for gas and electricity users. • Calculated on 2012-2013 financial year costs. Given that actual costs can vary by retailer and network area, this breakdown is indicative. • Carbon costs are excluded. • Network costs are calculated based on a typical metropolitan user’s consumption. Electricity network costs comprise distribution and transmission costs. For gas bills, this cost component accounts for the distribution costs. Transmission and distribution costs are based on published tariffs. • Retail costs include: Retail Margin— assumes a gross operating margin of 7%; Retail Operating Costs—$90 per customer. Other costs include retail market fees, green energy policy costs and other incentive programs. Advice on these costs have been obtained from the Australian Energy Market Commission (AEMC). • Wholesale costs covers the cost of the energy purchased, RET costs, and AEMO’s wholesale market fees.
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ENSURING EFFICIENT ENERGY MARKET SETTLEMENT SERVICES Energy market settlements in the NEM and gas markets
Prudential supervision
AEMO provides market participants with a financial settlement service for the billing and clearance of all market trading transactions.
AEMO manages prudential arrangements to maintain the financial integrity of both the electricity and gas markets.
The settlement process ensures that gas and electricity producers (market generators) are paid for the energy they provide, and retailers and wholesalers (market customers) pay for the energy they purchase. The settlement cycle occurs weekly for the electricity market and monthly for gas markets. Settlement transactions administered by AEMO may include, but are not limited to, spot market energy transactions, participant fees, and ancillary service transactions. Markets settled by AEMO include: • National Electricity Market. • Declared Victorian Wholesale Gas Market.
Settlement transactions in the NEM amount to around $150 million each week, and around $25 million in the gas markets each month. As bills are paid four weeks in arrears, this creates a significant amount of credit risk. To manage the credit risk, AEMO’s daily prudential monitoring system estimates each participant’s total liability to maintain a prudential buffer at all times between accrued liabilities and collateral held. If liabilities exceed the acceptable level, AEMO works with the participant to restore the buffer within strict timelines. AEMO sets financial guarantee levels for every participant in accordance with the National Gas Rules and National Electricity Rules. Guarantees are only accepted from institutions that meet acceptable credit provider criteria.
• Short Term Trading Market. • Queensland Retail Gas Market. • Wallumbilla Gas Supply Hub.
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A E M O ’S PLANNING ROLES
AEMO provides the energy markets with quality information and expert advice to assist with sound investment decisions in energy resource and infrastructure management. We prepare independent forecasts and a suite of planning reports, which provide a basis for infrastructure investment. AEMO has several planning roles across the energy markets. As the National Transmission Planner, AEMO provides investment signals to the market by projecting electricity consumption and supply, and identifying transmission infrastructure requirements. As part of a multi-year strategy, AEMO is developing more informed forecasts at both the regional (state-based) and connection point (transmission) levels. This granular level will assist with future planning and development of the transmission network, and lower long-term costs for end-use consumers.
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As the Transmission Network Service Provider for Victoria, AEMO works with industry to plan future developments of Victoria’s transmission infrastructure, overseeing new capacity and connections to the electricity transmission system. AEMO: • Produces independent and transparent electricity forecasts for the NEM, and gas forecasts for eastern Australia. • Oversees strategic development of the NEM power system, including future scenario modelling, advising how markets might develop under those scenarios, and leading market development to meet forecast energy requirements. • Assesses the need for electricity network investments in Victoria. • Provides advice to the South Australian government to support long-term development of the South Australian grid.
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AEMO’S PLACE IN THE ENERGY INDUSTRY
Australian energy market governance structure
Governance
AEMO performs its functions under the National Electricity Law and Rules and the National Gas Law and Rules. AEMO forms one arm of Australia’s Energy Governance Structure, operating alongside the AER and the AEMC. • The AER is the national energy market regulator, which oversees economic regulation and compliance with the National laws and rules; reports on generator bidding behaviour in the NEM; and regulates electricity and gas transmission and distribution systems. • The AEMC establishes the rules and undertakes energy market reviews. The Council of Australian Governments (COAG) is the peak intergovernmental forum in Australia compromising Commonwealth and all state and territory jurisdictions. The role of COAG is to promote policy reforms that are of national significance, or which need coordinated action by all Australian governments.
COAG is supported by interjurisdictional, ministerial-level Councils that facilitate consultation and cooperation between the Commonwealth and the states and territories in specific policy areas. The COAG Energy Council, has replaced the former Standing Council on Energy and Resources (SCER); and comprises Commonwealth, state and territory ministers responsible for energy and resources. AEMO, AER, and the AEMC provide reports to the COAG Energy Council who is responsible for policy decisions related to the energy markets. These institutions have assumed many of the electricity regulatory arrangements that were previously the responsibility of state government authorities.
COAG
AEMO operates on a cost recovery basis as a corporate entity limited by guarantee under the Corporations Act. AEMO fully recovers its operating costs through fees paid by participants. AEMO’s ownership structure is split between government and industry members across the eastern states of Australia. Membership comprising 60 per cent government and 40 per cent industry—including generators, transmission companies, distribution businesses, resource companies and investment companies. AEMO is governed by a Board comprising the Managing Director/Chief Executive Officer and nine non-executive directors, who are each appointed to meet a required skills matrix. The day-to-day management of AEMO is delegated by the Board to the Managing Director/Chief Executive Officer with support and oversight from Board Committees as appropriate.
COAG Energy Council Energy market policy development
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AER
AEMC
AEMO
Energy market economic regulation and rule enforcement
Energy market rule setting
Energy market operator
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Photo courtesy of Alinta
OUR VISION
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T O B E P I V O TA L T O M A R K E T S T H AT S E C U R E A U S T R A L I A’ S ENERGY NEEDS
July 2014 CONTACT AEMO Postal Address: GPO Box 2008 Melbourne VIC 3001 T: 1300 858 724 E: media@aemo.com.au www.aemo.com.au ABN 94 072 010 327