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					Presentation to Energy Networks Association (ENA) –
            Canberra 18 November, 2009

         Cameron O’Reilly, Executive Director
                    ERAA Membership


• Total membership of 20 diverse retailers – 14 full members (board
  representation) and 6 associates
• National “gentailers” – Origin, AGL
• Regionally significant “gentailer” – TRU
• Regionally significant gas retailer - Alinta
• Government owned/stapled with regional significance – Aurora,
  Integral, Energy Australia, Country Energy
• Medium sized retailers – Simply Energy (IP), Victoria (Infratil)
• Niche – Momentum (Hydro), Red Energy (Snowy Hydro), ERM
  Retail, Jackgreen
• Stand-alone – Australian Power & Gas
• Single jurisdiction – ActewAGL, Ergon, Synergy, Horizon, NT Power
  & Water
      Eastern Australia’s Retail Markets
• Australia has some of the most competitive retail energy markets
  in the world
• Has large, medium and niche retailers
• Some are vertically integrated between generation and retail
• Connection between retail margin/competition
• Need to have competitive wholesale market and liquid contract
  market to support retail competition
• Despite progress on energy market reform regulation is a barrier
  to entry, especially retail price regulation
• Non-price regulation has a disproportionate impact on smaller
  retailers – National Energy Customer Framework (NECF) a test
  for Governments on regulatory burden
• There is continual growth in green regulation that impacts
  retailers – smaller retailers are impacted disproportionately
                            Retail Competition




Source: VaasaETT, 2008 World Retail Energy Market Rankings – 4th Edition
Small Monthly Transfers – State Comparison




Source: Australian Energy Market Operator
        ERAA priority issues - 2010


• Pass through of the cost of Carbon Pollution Reduction
  Scheme (CPRS) and Renewable Energy Target (RET) in an
  environment of continuing retail price regulation (risks to
  retailers identified by Farrier Swier Report)
• Progressing phase-out of retail price regulation
• NSW market reform – liquidity in generation
• Implementing National Energy Customer Framework (NECF)
• Prudentials and credit requirements
• Short Term Trading Market (STTM) for gas
• Smart meters – Victorian roll-out in particular
         ERAA – Farrier Swier Report


•   Report identified serious risks to retailers from
    climate change policy where price regulation exists
1. Carbon market immaturity
2. Changes in merit order
3. Wholesale volatility
4. Fuel costs – gas in particular – link to LNG
5. Risk of generator distress/failure – opens up
   counter party hedge failure
    Executive Director – Fulbright Scholarship
•    Based at University of Texas at Austin from February to June, 2009 –
     Center for International Energy & Environmental Policy
•    Project focused on US approach to reducing emissions from the
     stationary energy sector – common challenges with Australia
•    As State capital of Texas Austin allowed for discussions with Public
     Utilities Commission of Texas (PUCT), ERCOT, Austin Energy, retailer
     groups, and major generators
•    Also visited Houston (guest of NRG/Reliant/Apache) and Dallas (guest
     of Oncor – part of old TXU) – visited South Texas Nuclear Plant
•    Spent a week in California at Stanford University looking at energy
     efficiency and venture capital support for renewable energy and electric
     vehicles – hosted by Project Better Place
•    Made two visits to Washington and spoke to peak groups like Edison
     Electric Institute, American Gas Association, Electric Power Research
     Institute, Nuclear Energy Institute, US Chamber of Commerce and
     Federal Energy Regulatory Commission (FERC)
                       The US context
• First year of Obama Administration which is losing popularity –
  Republicans even more unpopular
• Economic downturn in US very serious as is budgetary situation –
  makes cap and trade difficult in 2009
• Healthcare reform will receive priority over climate change
• No doubt that Obama is serious about climate change – has used
  his own office to push legislation and made key appointments that
  reflect commitment – Steven Chu, Carol Browner, Todd Stern
• So called Waxman-Markey bill passed narrowly in the House 219-
  212 with 44 Democrats opposing
• Politics of US Senate even harder than the House. Boxer-Kerry
  “Clean Energy Jobs and American Power Act” will require 60 votes
  to stop filibuster
• While oil and gas industry is largely in the Gulf of Mexico (Texas in
  particular) coal states are dispersed and have many Democrats
                        Current initiatives
               Australia                                United States
•   Draft legislation before the           •   Waxman/Markey cap and trade
    Australian Parliament to establish a       legislation passed by House aims
    cap and trade emissions trading            for emission reductions of 17%
    system by 2011 (CPRS). Scheme              below 2005 levels by 2020
    coverage includes 75% of emission
    sources                                •   Ultimate aim of 83% reduction from
                                               2005 emission levels by 2050
•   Targeted reduction in emissions of
    5% below 2000 level emissions by       •   Waxman-Markey initially allows 85%
    2020, or up to 25% if a new global         of permits to go to affected
    agreement is reached. Ultimate aim         industries for free – 15% auctioned
    of 60% reduction in emissions by       •   Boxer-Kerry legislation released by
    2050                                       Senate aims for 20% reduction by
•   Some issuance of free permits to           2020 and 80% by 2050 – more pro
    EITE industries based on energy            nuclear than House
    intensity and to badly affected        •   Senate legislation only at committee
    generators                                 stage and will have to get through
•   National renewable energy target of        six committees prior to vote
    20% by 2020 to be legislated           •   Senate legislation unlikely to reach
•   Substantial government support for         vote prior to Copenhagen – needs
    carbon capture and solar                   60 votes to stop filibuster
     US coal States – based on production

1.   Wyoming - 39% of output
2.   West Virginia – 13.4%
3.   Kentucky – 10%
4.   Pennsylvania *
5.   Montana
6.   Texas
7.   Colorado*
8.   Indiana *
9.   Illinois *
10. North Dakota
15. Ohio*

Source – Energy Information Administration (DOE)
United States national greenhouse gas
          emission sources
 Tg CO2 Eq.




   Source: Inventory of US Greenhouse Gas Emissions and Sinks: 1990-2006, US EPA
Australia’s national greenhouse gas
          emission sources
     Electricity Generation Sources




                              Black Coal                         Brown Coal




Source: Australian Bureau of Agricultural and Resource Economics (ABARE) & US Department Of Energy, EIA
The Greenhouse gas situation in Australia
             and the US

• Both countries have generally had domestic energy security (oil an
  exception since 1970 in the US)
• Both countries depend heavily on fossil fuels – EU only gets 30% of
  electricity from fossil fuels (source: esaa)
• Stationary energy contributes more to Australian emissions than it
  does to US emissions – Australia less diversified electricity sector
• The transport sector contributes more to US emissions – far larger
  vehicle fleet
• Industrial processes contribute more to US emissions
• Agriculture still a relatively large emitter in both countries compared
  to its share of Gross Domestic Product (GDP)
• Both countries are Federations – policies aimed at reducing
  emissions involve three levels of government
Factors mitigating against US climate bill


• State of the economy
• Climate change not as big an issue with US voters
• Almost universal opposition from Republicans
• Need for 60 votes to stop a “filibuster” means every Democrat
  Senator must support legislation
• Democrat Senators from coal states and manufacturing states
  will be nervous
• Democrat Senator from Louisiana, Mary Landrieu, led
  opposition to earlier Liberman-Warner bill
• US will want to see developing nations as part of global deal –
  seems difficult to achieve
         Factors in favour of climate bill


• President prepared to use his authority to support legislation on
  climate change
• General concern about dependence on imported fossil fuels has
  seen right wing individuals support renewables e.g. “The Pickens
  Plan”
• Wind power likely to grow in Republican States
• US likes to take leadership role on major issues
• US has nuclear power industry that can be ramped up
• Support for CCS can win over coal state Democrats
• Some major US companies want legislation to resolve uncertainty
  (USCAP)
• The US Government is virtually in control of the car industry which is
  a major source of emissions
What a carbon price would mean for Texas


• Texas is the highest greenhouse gas emitter in the US (11.5% of US
  emissions)
• Texas, if a nation, would be the 7th largest emitter in the world
• Texans consume 60% more energy than the average American
• Texas is the largest US producer of oil
• Texas is the largest refiner of oil in the US
• Texas is the largest user of coal
• Texas is the major US producer of natural gas
• Texas is the base for a large amount of energy intensive industry
• Texas has 25% of the US cattle herd
    What you may not know about Texas


• Texas emissions have a lot to do with industries that export to the
  rest of the US
• Texas energy generation is less dependent on coal than the rest of
  the country
• Texas is now the largest producer of wind power in the USA (in top
  6 in the world)
• Texas was the second State to introduce a renewable portfolio
  standard – 1999 when the Governor was George W. Bush
• Texas has been using CO2 for enhanced oil recovery for many
  years
• Texas is leading the country in the roll-out of advanced metering
  infrastructure
     Texas Installed Generation Capacity 2009




Source: Electric Reliability Council of Texas (ERCOT) - ERCOT Quick Facts May 2009
Texas electricity – Energy produced 2008 –
              source ERCOT

•Coal 37%
•Gas 43%
•Nuclear 13%
•Wind 5% *
•Other 2%

Texas is the largest electricity market in the USA
 (10% of US electricity use), the highest user of
  coal for electricity generation and the biggest
                   wind producer
       Energy market structure in Texas

• Real time wholesale electricity market covering 85% of State’s load
  and vast majority of population
• Texas based market/grid operator - ERCOT
• Competition in generation between independent power producers
• Five major distribution companies – Centerpoint (Houston), Oncor
  (Dallas-Fort Worth), Texas New Mexico Power Company, AEP
  North, AEP Central
• Some regional municipal monopolies – e.g. Austin Energy
• Competition in retail outside monopoly areas – 80 retailer licenses –
  deregulated prices since 2007
• Texas in top ten retail markets for customer churn – unique in USA
• Rest of US more interconnected and therefore subject to Federal
  regulation (FERC) of transmission and market operation
         The Texas and Australian grids

         Australia’s NEM                Texas ERCOT Grid

• 18 million people              • 21 million people
• 47,000 megawatts of            • 81,000 megawatts of
  generation
                                   generation
• Peak of 34,500 megawatts –
  July, 2008                     • Peak of 62,000 megawatts – 4
                                   August, 2008
• 260 generation units
                                 • 560 generation units
• 25,000 miles of transmission
  lines                          • 38,000 miles of transmission
• $11.5 billion in electricity     lines
  traded                         • $31.5 billion in electricity
                                   traded
          Recent Retail History in Texas


• Retail price regulation “price to beat” ended January, 2007
• By June 2008 2.9 million Texans had switched provider – including
  2.4 million residential (not all Texas customers are contestable)
• Spike in wholesale gas prices in first half of 2008 saw major retail
  price increases
• Even without price caps four retailers failed in mid 2008 – triggering
  ROLR – Regulator reviewing ROLR scheme
• Even large retailer – Reliant Energy – got into trouble
• Reliant now purchased by NRG so vertical integration increasing –
  TXU largest retailer also has generator arm
• With wholesale gas prices declining retail outlook has improved
• Recession likely to keep gas prices low for some time
                          Texas & Wind
•   Texas in 2007 surpassed California in wind generation
•   Growth started with portfolio standard in 1999 (2,000 megawatts for
    renewables – wind dominated)
•   2015 portfolio standard increased to 5,000 megawatts (500 megawatts
    to be non-wind)
•   Current wind installed far exceeds target and is nearing 9,000
    megawatts (20% of Australia’s total generation)
•   Regulator (PUCT) and market operator (Ercot) have committed to $5
    billion investment in four competitive renewable energy zones (CREZ)
    in West Texas – could provide for 15 gigawatts of new renewable
    power
•   Location of wind zones away from major population centres reduces
    community issues – communities are supportive
•   Wind is now supported by conservative rural communities
•   Wind in West Texas leading to significant periods of negative prices
    (mainly at night) and beginning to impact thermal generators
•   ERCOT moving to nodal market in 2010 to try and deal with congestion
 Some lessons for Australia out of Texas


• Gas based retail markets subject to significant volatility – also
  witness UK – sometimes makes it difficult to defend competition
• Gas market design critical for the future in Australia
• Texas competitive wholesale market has seen highest growth in
  renewables – competitive markets good for renewables
• However those intermittent renewables now creating problem for
  other generators and market operator
• Price caps have allowed majority of retailers to manage risk of high
  prices but not all – ROLR still important
• Significant constituencies still argue against competition and
  deregulation in the most pro-business, small government US State
• Competitive producers now got together in Washington to argue for
  the benefits of competition – facing off against monopoly municipal
  providers
Texas versus UK – relevance to Australia


TEXAS                                UNITED KINGDOM
• An electricity market with large   • A market in which gas use
  amounts of gas fired                 exceeds electricity
  generation
                                     • A cool climate with significant
• A hot climate with significant       winter peaks
  summer peaks
                                     • Industry dominated by 6
• Large number of stand alone          vertically integrated utilities -
  retailers and independent            small retailers virtually
  power producers                      disappeared from market
• Housing stock usually              • Housing stock usually attached
  detached                             /high density - small land mass
• Large area with significant        • However social policy much
  transmission challenges              more like Australia
eraa.com.au

				
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