Ky Cao, Perth Energy - SWIS market restructure and impact on consumers

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Information about Ky Cao, Perth Energy - SWIS market restructure and impact on consumers
News & Politics

Published on March 12, 2014

Author: informaoz



Ky Cao, Managing Director, Perth Energy delivered this presentation at the 8th Annual WA Power & Gas Conference 2014.

The conference represents a timely meeting for the industry to hear about the current changes affecting the WA energy and electricity market.

For more information, visit

  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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