State of the market

The Australian Energy Regulator (AER) released its fourth State of the energy market report in December 2010, providing a high-level overview of energy market activity in Australia.

The report provides an overview of Australia’s electricity and natural gas markets over the past 12-to-18 months. It supplements the AER’s extensive technical and compliance reporting on the energy sector and is intended to meet the needs of government, industry and the broader community.

According to the report, electricity distribution determinations in 2010 reflected a number of factors when assessing the needs of each network.

The Queensland networks have pressing capital requirements associated with population growth, new connections and industrial demand, as well as rising demand per customer. The networks are also obliged to improve performance in response to stricter reliability standards.

The South Australian network requires significant investment to meet rising load growth and peak demand driven by the use of air conditioners during summer heatwaves. The network also needs to address reliability risks from ageing assets and new reliability standards for the Adelaide central business district (involving complementary upgrades to transmission and distribution systems). Investment costs in Queensland and South Australia have also been rising as a result of real increases in the cost of labour and materials.

The Victorian distributors operate mostly mature and comparatively reliable networks. While the AER considers past expenditure (in what has been a relatively stable operating environment) provides a good starting point for assessing future needs, it also accounted for the need to replace ageing infrastructure, address Victoria’s new bushfire safety standards, and maintain reliability in the face of growing costs and demand. While these considerations led it to approve higher levels of investment, the AER did not accept the full extent of the increases proposed by distribution businesses.

“The global financial crisis has significantly increased debt financing costs for all networks. The rate of return on capital in the next regulatory periods has thus increased by more than 100 basis points compared with the rate in previous periods. Recent AER determinations reflected that higher debt costs increased the revenue requirements of distribution businesses by 5–9 per cent from requirements in previous regulatory periods,” the report states.

A feature of energy market reporting in the media in 2010 has been concerns about rising energy charges. While some reporting in this area fails to adequately distinguish between volume and price changes, retail energy charges have risen significantly in most jurisdictions. The increases have been mostly attributed to rising network charges and wholesale energy costs, but retailer costs and climate change policies (including renewable energy targets, incentives for small scale solar generation and energy efficiency schemes) have also contributed.

“The continued growth in peak electricity demand, combined with the twin pressures of customer expectations for reliable supply and rising costs of service provision, pose increasingly complex dilemmas for energy customers, network businesses, governments and regulators. This environment presents important responsibilities for ensuring efficient service delivery and customer confidence to participate in the market.”

With the transfer of a range of retail regulatory functions to a national framework expected between 2011 and 2013, the Australian Energy Regulator (AER) is consulting with energy customers, consumer advocacy groups, energy retailers, jurisdictional regulators and ombudsmen and government departments to ensure an efficient transition and continuing protections for energy customers.

The full report can be downloaded from www.accc.gov.au/content/index.phtml?itemId=961581


Spot price rise

Average spot prices in 2009–10 rose significantly in South Australia, to $82 per megawatt hour (MWh), and New South Wales, to $52 per MWh. Strategic generator bidding and rebidding to take advantage of opportunities for exceptional prices contributed to these outcomes.

Tasmania recorded its lowest average spot price ($30 per MWh) since joining the NEM in 2005. This reflected more favourable conditions for hydroelectric generation and less evidence of the opportunistic bidding that caused record high prices in 2008–09. Queensland ($37 per MWh) recorded its second consecutive year of average spot prices below $40 per MWh. Victoria ($42 per MWh) was the only mainland region to record a reduction in spot prices in 2009–10.

While conditions were generally benign in most regions in 2009–10, the spot price exceeded $300 per MWh in 330 trading intervals and exceeded $5000 per MWh in 95 intervals.

Price spikes can have a material impact on market outcomes. If prices approach the market cap of $12500 per MWh for just three hours in a year, then the average annual spot price may rise by almost 10 per cent.

The bulk of extreme price events in 2009–10 occurred in South Australia and New South Wales. These regions jointly accounted for over 62 per cent of spot prices above $300 per MWh and 71 per cent of spot prices above $5000 per MWh.

The AER monitors spot market activity to screen for noncompliance with the National Electricity Rules. While bidding capacity at high prices and rebidding prices and ramp rates do not breach the rules, opportunistic bidding by some generators is a continuing cause of extreme price events. The AER will continue to monitor and report on generator bidding behaviour.