Southern Hydro Pty Ltd

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					                                Southern Hydro Pty Ltd

                                                    ABN 89 088 976 327




12 November 2004


Manager – Energy Market Reform Team
National Energy Market Branch
Department of Industry, Tourism and Resources
GPO Box 9839
CANBERRA ACT 2601
By email: MCEMarketReform@industry.gov.au


Dear Sir/Madam


NATIONAL ELECTRICITY MARKET: REGIONAL STRUCTURE REVIEW
CONSULTATION PAPER

Southern Hydro is Australia’s largest privately owned renewable energy company with over
$600m in renewable plant on the ground and significant projects waiting to go ahead. It is the
owner and operator of fifteen hydro-electric power stations in Victoria and New South Wales
and is currently building a new hydro-electric power station in Victoria and a wind farm in
South Australia. A number of further renewable energy investments are under active
investigation. All of these investments are in regional areas remote from the major load
centres and most are located near major interconnectors and so the issue of regional
boundaries is of significant interest to Southern Hydro.
Southern Hydro has had the opportunity to participate in the preparation of both the National
Generator Forum (NGF) and the Renewable Energy Generators of Australia (REGA)
submissions’ to this consultation paper and supports the views expressed in those documents.
The current moratorium on regional boundary changes and the numerous reviews relating to
transmission property rights, congestion management etc are acting as an impediment to the
economically efficient development of new projects in the market. Developers like Southern
Hydro need to have certainty over the market structure that is likely to exist for the life of new
projects.
Southern Hydro believes that the proposals outlined in the CRA paper have the potential to
provide a degree of additional certainty that will encourage new investment to locate in the
most efficient locations. It also agrees with CRA that the proposal is a package that should be
adopted as a whole rather than having individual recommendations cherry picked from it.




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Registered Office
Level 22                            PO Box 300                           Suite 5, Level 12
600 Bourke Street                   Mount Beauty VIC 3699                37 Bligh Street
Melbourne VIC 3000                                                       Sydney NSW 2000
Phone +61 3 9252 2888               Phone +61 3 5754 3222                Phone +61 2 8233 9255
Fax     +61 3 9252 2889             Fax   +61 3 5754 3105                Fax      +61 2 8233 6199
To provide the required certainty, the result of this consultation should be to establish the high
level principles for intra regional constraint management and regional boundary review with
the AEMC being charged with developing the details of the application of these principles
through a process of open consultation with industry participants. Southern Hydro believes
this work should encompass the use of the CSP/CSC concept both as an method of
economically allocating the limited capacity of constrained networks and also as a network
support mechanism to reward investments that increase the capacity of the network. Any costs
of CSC in the latter case should be included in the regulated rate base of the NSP.
Attached is a summary of Southern Hydro’s response to the ten recommendations from the
CRA paper.
If you have any further questions on this please contact Mr Rob Jackson, Manager Market
Development and Regulation on (03) 9252 2875.




Yours sincerely




Simon Maher
Chief Executive Officer




                                                                                                  2/5
Registered Office
Level 22                            PO Box 300                         Suite 5, Level 12
600 Bourke Street                   Mount Beauty VIC 3699              37 Bligh Street
Melbourne VIC 3000                                                     Sydney NSW 2000
Phone +61 3 9252 2888               Phone +61 3 5754 3222              Phone +61 2 8233 9255
Fax     +61 3 9252 2889             Fax   +61 3 5754 3105              Fax      +61 2 8233 6199
Southern Hydro provides the following comments on the 10 recommendations made in the
consultation draft.

1. 	     On the basis that no change to the current economic objective of the five-minute spot
         market dispatch process is made, NEMMCO should apply the Direct Physical
         Representation (DPR, or “fully optimised”) form of constraints (Option 4/5) to all
         network constraints. The Code should be amended to confirm this.

Southern Hydro supports the application of the Direct Physical Representation (Option 4/5)
form of constraints to all network constraints.


2. 	     Following resolution of the form of constraint equation NEMMCO should review if it
         believes a full network model is necessary in order to meets its obligations for system
         security.

Southern Hydro supports the review of the advantages a full network model by NEMMCO and
notes that there may be costs and benefits to participants other than the potential
improvements to system security which should be considered in any recommendation from
that review.


3.	      Concerns about inappropriate bidding behaviour should be referred to the relevant
         authorities. If it is deemed necessary:

         3.1 	    NEMMCO should, after due account is taken of the impact on efficiency in the
                  short and long term, when the existing derogation to the Code expires in
                  December 2004, be instructed to continue to impose a simple constraint on
                  network transfers as a function of settlement residues in the short term in
                  preference to altering the form of network constraint; and

         3.2 	    If and when new network elements that will create major network loops emerge
                  or are planned a mechanism external to the operation of the dispatch process
                  should be investigated – intraregional pricing and contracting mechanisms
                  provide a ready mechanism for this.

As indicated above, Southern Hydro supports use of the Direct Physical Representation of
constraints to all network constraints and further supports the continued use of the simple
constraint on network limits to minimise negative residues. Further development of the
proposed CSP/CSC mechanism should be undertaken for use on persistent constraints or
where loop flows make the current regime unworkable.


4        Within the regulatory framework for transmission established for the NEM, on
         balance, an evolutionary region structure, reviewed at relatively lengthy intervals in
         parallel with a flexible congestion contracting/pricing regime is recommended.
                                                                                                  3/5
Registered Office
Level 22                             PO Box 300                        Suite 5, Level 12
600 Bourke Street                    Mount Beauty VIC 3699             37 Bligh Street
Melbourne VIC 3000                                                     Sydney NSW 2000
Phone +61 3 9252 2888                Phone +61 3 5754 3222             Phone +61 2 8233 9255
Fax     +61 3 9252 2889              Fax   +61 3 5754 3105             Fax      +61 2 8233 6199
Southern Hydro supports the evolutionary development of regions and believes the five year
review cycle for regional boundary changes proposed provides a degree of certainty needed.
This time frame will allow developers to build in the best locations with some certainty on
regional structure and the three year delay before the commencement of the regions provides
sufficient time for participants to adjust hedge contract positions.

5	       At each review a transmission connection point should be become part of region where
         it can be demonstrated that compared to the next best alternative there is expected to
         be:

         •	 An increase in economic efficiency of dispatch (including as a result of the
            treatment of inter-regional loss factors) within the NEM determined in accordance
            with an endorsed methodology, less demonstrable costs, exceeding $1Mp.a; or
         •	 A change in locational price indicators sustained over the review cycle in excess of
            levels to be published annually that would provide indicative investments in
            generation plant an increase in annual revenue of 25% of reasonable new entrant
            cost for each

         Provided that:

         • No region shall have a maximum demand of less than 200MW;

         and

         •	 A separate region shall not be created where in the reasonable opinion of the
            relevant authority there is little prospect of market based investment within the
            review period.

Southern Hydro supports the proposition that new regions should only be formed where there
is true lasting economic benefit. The approach of establishing an economic threshold for the
establishment of regions is preferable to the current time based approach.

6	       NEM boundaries should be established for a 5 year period commencing no earlier
         than 3 years after the date of the final determination.

As indicated above, Southern Hydro supports this recommendation.

7. 	     Improved information available for potential investors concerning:

         7.1 	    The likely evolution of congestion as part of information available to intending
                  participants;
         7.2 	    Broad indications of possible network augmentations that would pass the
                  regulatory test or that will be required to meet reliability or security standards;
                  and
         7.3 	    Routine reporting of shadow prices at relevant nodes to inform the market of
                  emerging constraints;



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Registered Office
Level 22                              PO Box 300                          Suite 5, Level 12
600 Bourke Street                     Mount Beauty VIC 3699               37 Bligh Street
Melbourne VIC 3000                                                        Sydney NSW 2000
Phone +61 3 9252 2888                 Phone +61 3 5754 3222               Phone +61 2 8233 9255
Fax     +61 3 9252 2889               Fax   +61 3 5754 3105               Fax      +61 2 8233 6199
Southern Hydro supports the recommendation of improved information provision to potential
investors. Southern Hydro further believes that it would be appropriate for this to be
integrated into the ANTS process and that the information should be consistent with the work
being undertaken by the ACCC on TNSP performance measures.

8. 	     To ensure consistency between the application of the regulatory test and NEM
         boundary reviews, these processes should be augmented as follows:

         8.1	     In assessing the benefits of network investment, the regulatory test should
                  consider whether boundary change or specific contracting/pricing of
                  congestion would bring benefits either to dispatch or to alleviation of
                  congestion; and similarly

         8.2 	    At each review of region boundaries the potential for new network not already
                  declared as part of the planning process should be explored as part of
                  consultation on a proposed boundary change.

Southern Hydro supports the need for consistency in the assessment of new regulated network
investment, boundary reviews and application of a constraint management regime.

However Southern Hydro believes that the ANTS process should have already identified the
need for new network investment and as such the regional boundary review need not explore
further regulated investments.

9. 	     Subject to a development of details for implementation within the market, inter-
         regional pricing/contracting should be adopted as part of the package for a Stable
         Boundary approach.

Southern Hydro supports the process outlined in figure 3 of the report. Such a package of
steps is likely to lead to the most economic management of constraints as they develop in the
market while providing sufficient certainty to provide confidence to investors. Without such
an integrated package there is a great likelihood of inappropriate and uneconomic investment.
However it is recognised that more work is required to fill in the details of the proposal.

10.	     The MCE should request market authorities to develop proposals for implementation
         of intra-regional contracting/pricing mechanisms. The broad design of CSP/CSC
         regime presented in this report should be used as the basis for this development.

Southern Hydro sees the introduction of intra-regional contracting/pricing mechanisms as an
essential part of the whole process and supports in principle the further development of the
CSP/CSC regime outlined in the CRA paper.
This further development work would need to cover such issues as the timing reviews the may
lead to the introduction of CSP/CSC, the triggers for CSP/CSC implementation, the method of
initial allocation of the CSC and the period of such allocation.



                                                                                                    5/5
Registered Office
Level 22                              PO Box 300                         Suite 5, Level 12
600 Bourke Street                     Mount Beauty VIC 3699              37 Bligh Street
Melbourne VIC 3000                                                       Sydney NSW 2000
Phone +61 3 9252 2888                 Phone +61 3 5754 3222              Phone +61 2 8233 9255
Fax     +61 3 9252 2889               Fax   +61 3 5754 3105              Fax      +61 2 8233 6199

				
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