Published on March 12, 2014
WEM Review and Consumer Impact WA Power & Gas Conference March 2014
– Lower Electricity Costs – Encourage private investment – Reduce government subsidies • Verve-‐Synergy merger locks in higher costs, deters private investment and raises subsidies to Synergy • Merger shocked the market and casts sovereign risk shadow over WA • Merger puts the cart before the horse and will hurt consumers unless WEM Review overwhelms its negaAve impact WEM review objecGves could already fail before review starts
SalvaGon is in the people working on & contribuGng to market review • Minister is eﬀecAve • New Synergy Board & Exec Mgmt are quality • MIG and WEM Review Project Mgmt are experienced • Market ParAcipants have made valuable contribuAon • Time will tell if anything comes of it, but hope that momentum will pick up to crash through the merger cart
80.0 100.0 120.0 140.0 160.0 180.0 200.0 Sep-‐1992 Mar-‐1993 Sep-‐1993 Mar-‐1994 Sep-‐1994 Mar-‐1995 Sep-‐1995 Mar-‐1996 Sep-‐1996 Mar-‐1997 Sep-‐1997 Mar-‐1998 Sep-‐1998 Mar-‐1999 Sep-‐1999 Mar-‐2000 Sep-‐2000 Mar-‐2001 Sep-‐2001 Mar-‐2002 Sep-‐2002 Mar-‐2003 Sep-‐2003 Mar-‐2004 Sep-‐2004 Mar-‐2005 Sep-‐2005 Mar-‐2006 Sep-‐2006 Mar-‐2007 Sep-‐2007 Mar-‐2008 Sep-‐2008 Mar-‐2009 Sep-‐2009 Mar-‐2010 Sep-‐2010 Mar-‐2011 Sep-‐2011 Tariﬀ & Cost Indices SWIS Business Electricity Tariﬀs vs Cost InﬂaGon CPI All Group PPI Manuf Input L1/L3 R3 S1 T1 Electricity tariﬀs have risen to cover past cost inﬂaGon and impact of mining boom
CompeGGon has worked • SWIS contestable market $2-‐2.5 billion (60% of total value), 13k customers (>1% of total accounts) • Contestable customers pay 5-‐15% less than tariﬀs – $200 million savings per year, contribuAng $1 billion annually to WA GSP • CapAve customers pay full tariﬀ increases of >65% since WEM start • WEM has brought in $3 billion of private sector investment • SWIS has adequate capacity through a once in a generaAon mining boom
But there is room for improvement – Supply / demand in SWIS in 2013 SOO
• Excess capacity of 900MW is due to: – Over-‐forecast of demand (due to mining projects that did not take oﬀ & to subsidised entry of Solar) – Over-‐contracAng of base load capacity by Synergy – 700-‐800MW of poor reliability plants that have gone well past use-‐by dates – 500MW of DSM – Fall in Grid supplied consumpAon due to new techs • Excess capacity is not large once poor reliability plant & DSM are taken out of the supply bucket Excess capacity
WEM needs more eﬃcient pricing • Too many distorAonary policies and programs driving up cost of supply to consumers • STCs and STP – MRET is an eﬀecAve regime to lower emissions (2nd best to a full emissions market) – But early STCs and STP allow poliAcal intervenAon to cross from State to State to raise the costs excessively without accountability
Eﬃcient pricing of DSM • DSM is a 30-‐year old concept that is used today in an inappropriate manner – Once upon a Ame State owned monopoly uAliAes could only charge ﬂat tariﬀs – These tariﬀs could not aﬀord generators to supply peak energy and capacity – DSM was used to avoid peaking supply costs – Now we have Time-‐of-‐Use tariﬀs that can reﬂect the true cost of peak supply – If peak demand persists it means consumers value peak supply more than it costs or peak tariﬀs are not cost reﬂecAve – either way DSM is not the answer
Eﬃcient pricing of DSM • If using peak energy is a crime, DSM is like a paying criminals not to commit crime • If using peak energy is a consumer right, then the market’s prerogaAve is to charge cost reﬂecAve price and let consumers choose • Retailers – not IMO – should be the ones buying DSM products to saAsfy their capacity requirements and/or avoid extreme capacity costs if they trust the DSM product • DSM should not be procured by IMO as IMO does not face commercial pressure to impose a product on the market at a price the market does not want • Paying full RCP for DSM while not requiring DSM to be dispatched every day into balancing market (like generaAon capacity) is irraAonal; it’s forcing oﬀ-‐peak users to subsidise peak users
Eﬃcient pricing of RE back-‐up • Intermiient renewable energy requires fossil fuel generaAon back-‐up • On-‐site Solar systems require Grid back-‐up of energy and capacity • This stand-‐by supply infrastructure is not priced adequately in Synergy and Western Power tariﬀs, creaAng large unseen subsidies • These subsidies deter investment in R&D for more reliable renewable energy • They are retrograde income transfers from those who cannot aﬀord Solar to those who can • They result in stop-‐start Government policy in reacAon to poliAcal and budget condiAons
Eﬃcient pricing of new capacity • Current RCP methodology treats infrastructure investment like commodity supply, with severe annual price volaAlity raising the cost of capital • IMO should publish capacity requirement (RCR) and call for tender for any shorjall, bypassing the RCP process • The highest tendered capacity price (TCP) is paid to successful bidders up to RCR • This would avoid current situaAon of uncapped cerAﬁcaAon of capacity based on an administered price for a perceived opAmal peaking plant size • TCP should be paid for 5 years, with investors receiving a new TCP at end of term, this term matching the usual project ﬁnance debt tenor • ExisAng capacity should receive the ﬁrst 5-‐year TCP, calculated as average of RCP up to latest published RCP, from the year the capacity entered into service
Eﬃcient pricing, together with FRC, will meet WEM review objecGves and beneﬁt consumers • Eﬃcient pricing will eliminate Government subsidies, encourage private sector entry and provide best value price for any given supply product • This works best in a fully deregulated market where there is nowhere for any supplier to hide
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