TOWARDS A TRULY NATIONAL AND EFFICIENT …

1 TOWARDS ATRULY NATIONALAND EFFICIENTENERGY MARKET TOWARDS a TRULY NATIONAL and EFFICIENT energy market2 Commonwealth of Australia 2002 ISBN 0 642 72289 7 ITR 2002/159 This work is copyright. It may be reproduced in whole or in part subject to the inclusion of an acknowledgmentof the source and no commercial usage or sale. Reproduction for purposes other than those indicated above,require the written permission from the Commonwealth available through AusInfo. Requests and inquiriesshould be addressed to: The Manager Legislative Services, AusInfo GPO Box 1920 Canberra ACT 2601 Design: Big Island Graphics, CanberraPrint: Elect PrintingFront cover map: courtesy of Electricity Supply Association of Australiatowards a TRULY NATIONAL and EFFICIENT energy market3towards a TRULY NATIONAL and EFFICIENT energy market4 CONTENTSE xecutive summary.

2 7 List of recommendations .. 47 Chapter 1:Introduction and context .. 59 Energy in the Australian context .. 59 Creation of competitive markets .. 62 Framework for future energy market reform .. 64 Context for the future directions .. 65 Deficiencies in Australia s energy markets .. 67 Chapter 2:Governance and regulatory arrangements .. 69 Context .. 69 Key findings .. 74 Proposed solutions .. 83 Recommendations .. 96 Chapter 3:Electricity market mechanism and structure .. 99 Context .. 99 Key findings .. 102 Proposed solutions .. 117 Recommendations .. 119 Chapter 4:Electricity transmission .. 121 Context.

3 121 Key findings .. 124 Proposed solutions .. 133 Other comments .. 150 Recommendations .. 151 Chapter 5:Electricity financial market development .. 155 Context .. 155 Key findings .. 163 Proposed solutions .. 168 Recommendations .. 171towards a TRULY NATIONAL and EFFICIENT energy market5 Chapter 6:Demand side participation and full retail contestability in electricity .. 173 Context .. 173 Key findings .. 174 Proposed solutions .. 178 Recommendations .. 183 Chapter 7:Increasing the wider penetration of gas .. 185 Context .. 185 Key findings .. 189 Proposed solutions .. 209 Recommendations .. 220 Chapter 8:Options to reduce greenhouse gas emissions.

4 223 Context .. 223 Key findings .. 229 Proposed solutions .. 233 Recommendations .. 242 Chapter 9:Rural and regional issues .. 243 Context .. 243 Key findings .. 245 Proposed solutions .. 248 Chapter 10: Estimating the benefits .. 251 Attachment AEnergy technologies .. 257 Appendix 1 Panel members .. 263 Appendix 2 Secretariat .. 265 Appendix 3 Terms of reference .. 267 Appendix 4 Responses to Issues Paper .. 269 Appendix 5 Responses to Draft Report .. 275 Appendix 6 References and consultancies .. 281 Appendix 7 Acronyms and abbreviations .. 287towards a TRULY NATIONAL and EFFICIENT energy market6 EXECUTIVE SUMMARYA ssessing the energy industry s report card The importance of the energy sectorAustralia is endowed with significant, diverse and high quality energy resources.

5 Australia hasapproximately 800 years supply of easily accessible brown coal and 290 years supply of black has large natural gas resources in the North West, in Bass Strait and in the Cooper-EromangaBasin, new fields coming on stream in the Otway Basin, and promising coal bed methanedeposits. Australia also has good wind, hydro and solar resources, and the potential forgeothermal surprisingly, Australia s electricity and gas prices are close to the lowest in the developedworld. International studies show this to be the case for both major industrial and is, therefore, a very significant strategic policy matter for the Australian economy.

6 Itunderpins the competitiveness of our exported goods sector, is a vital ingredient for domesticindustry, and it is a very important item in the monthly household expenditure need for reviewThe competition reforms of the 1990s transformed Australia s electricity and gas sectors. Theyincluded the separation of the previously vertically integrated supply chain, introducedcompetition between generators and between retailers, brought the network element under accessand price regulation and saw the creation of a NATIONAL Electricity Market. In gas, laws limitinginterstate trade were repealed and third party access to pipelines was reforms have, however, been subject to criticism.

7 In part this is due to the far reachingnature of the changes. In part it is due to the fact that some areas (such as South Australia) saw thereforms lead to what were considered to be unwarranted energy price rises because of generatormarket power, and because of the large increase that occurred in many network asset values whichsignificantly increased network its meeting of 8 June 2001 the Council of Australian Governments (COAG) endorsed theneed for a NATIONAL energy policy and agreed to commission an independent review of thestrategic direction for stationary energy market reform in Australia. The review has received over250 submissions, met interested groups and people in all states and mainland territories, gainedfirst hand knowledge of energy reform in key overseas markets, initiated targeted analysis, andreviewed the available research both here and overseas.

8 In conducting the review the Panel wasvery much aware of community and hence government sensitivity to issues of supply reliabilityand the competitive price of reform has brought benefitsMuch has been achieved since COAG agreed to establish a NATIONAL energy market. Competitivepressures have seen increased generator efficiency and availability, additional generationinvestment has occurred that seems market related (that is, new EFFICIENT base load plants in SouthAustralia and Queensland, and new peaking plant in Victoria), there have been new gas fieldsdiscovered and utilised, and new pipelines have been constructed to transport gas , Australia can be proud of its reforms so far.

9 Energy reform is new all around the worldand, while there have been problems, Australia has not experienced them on the scale that hasoccurred in many other places. Further, the reforms have a clear and appropriate bias to efficientoutcomes, which reflects the importance of energy to Australia s fact, Australia s energy reforms seem to have a larger market orientated dimension than many ofthe reforms overseas. This can and should lead to better outcomes. It does, however, require care interms of ensuring that the conditions for success are in place on a continuing report finding serious deficiencies remainJust as the energy reforms have brought benefits, it seems clear that there are serious deficiencies insome of the reform areas.

10 These deficiencies are either areas that still need to be addressed or theyhave emerged as unintended consequences of the recent reforms. It is clear that important stepsneed to be taken to achieve a TRULY NATIONAL and EFFICIENT energy deficiencies are summarised in Exhibit a TRULY NATIONAL and EFFICIENT energy market8 The review sought only to focus on the strategic deficiencies. It did not seek to comment on allissues, or to systematically address every issue raised in the submissions deficiencies are quite wide ranging, and have serious consequences. They need to be quicklyaddressed if we are to achieve a genuinely NATIONAL and EFFICIENT market.