Finkel Review into the Future Securityof the National Electricity Market

1

Electricity prices

2* Based on Australian Energy Market Commission estimates

0 5 10 15 20 25 30 35 40 45 50

Green Schemes

Retail

Wholesale (generation)

Networks

Percentage

Australian Electricity Bill Cost Components (2016/17)*

8

14

31

47

• National average retail prices have doubled in the past ten years, driven by a range of factors

3

Where are we - prices

0

20

40

60

80

100

120

140

160

0

20

40

60

80

100

120

140

160

Perc

enta

ge in

crea

se

Nominal increase in average retail electricity prices since 2004

Network pricing

Carbon price repealed

Carbon price introduced

Generation

0

20

40

60

80

100

120

140

0

20

40

60

80

100

120

140

June 2010 June 2011 June 2012 June 2013 June 2014 June 2015 June 2016 March 2017

Vo

lum

e-W

eigh

ted

wh

ole

sale

ele

ctri

city

sp

ot

pri

ce

$A

U/M

Wh

(n

om

inal

)

SA price spikes

July 2016

$35/MWh

Carbon price introduced 1 July 2012

4

Wholesale prices at record levels

Tightening supplyand rising gas price

$58/MWh $56/MWh

$130/ MWh

Carbon price repealed 1 July 2014

How did we get here?

• Electricity supply has been tightening as existing, fully depreciated coal fired power stations close

• Policy uncertainty holding back new investment

• This has resulted in higher-cost, gas-fired generation setting the price more often

5

When will coal power stations close?

6

brown coal black coal

Source: Jacobs Modelling for Finkel Review 2017

-

5

10

15

20

25

2020 2025 2030 2035 2040 2045 2050C

oal

Cap

acit

y (G

W)

NEM coal capacity and closures

Power Stations close at 50 years from last unit

Liddell (NSW)Yallourn (Vic)Gladstone (Qld)

Loy Yang A (Vic)

Eraring (NSW)

Loy Yang B (Vic)Stanwell (Qld)

Vales Point (NSW)

Bayswater (NSW)Tarong (Qld)

Callide B (Qld) Mt Piper (NSW)

1,400

240

190

480 1,000

189

144 160

520

1,600

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2010 2011 2012 2013 2014 2015 2016 2017 2018

Emis

sio

ns

Inte

nsi

ty (

tCO

2-e

/MW

h)

Historic power station closures

Energy Brix

Redbank

Swanbank B

Collinsville

Hazelwood

Munmorah

Wallerawang

Playford B

NorthernAnglesea

When coal generators reach 50 years

7

GeneratorClosure Date by last

generating unitOwner State Capacity (MW)

Liddell 2022 AGL NSW 1,936

Vales Point 2028 Delta Electricity NSW 1,241

Gladstone 2032 Rio Tinto Queensland 1,579

Yallourn 2032 EnergyAustralia Victoria 1,362

Eraring 2034 Origin NSW 2,707

Tarong 2036 Stanwell Queensland 1,316

Loy Yang A 2036 AGL Victoria 2,088

Bayswater 2038 AGL NSW 2,593

Callide B 2039 CS Energy Queensland 658

Loy Yang B 2044 Engie Victoria 966

Mt Piper 2046 EnergyAustralia NSW 1,260

Stanwell 2046 Stanwell Queensland 1,372

Millmerran Does not close before 2050 Intergen NSW 788

Tarong North Does not close before 2050 Stanwell Queensland 416

Kogan Creek Does not close before 2050 CS Energy Queensland 699

Callide C Does not close before 2050 CS Energy Queensland 761

Source: Capacity figures from Jacobs Modelling for Finkel Review 2017

Gas is setting the electricity price more often

8

• In May 2017, across the NEM, gas set the electricity price 24 per cent of the time,compared to 9 per cent in May 2014

compared to 9 per cent in May 2014

0

20

40

60

80

100

120

100 200 300 400 500 600 700 800 900 1000

$/M

Wh

MW of capacity offered as supply every 5 minutes

Electricity generator offers into the wholesale electricity spot market

Gas

Black coal

Brown coal

Renewables

Clearing price

Gas prices are pushing up electricity prices• Every $1/gigajoule increase in gas prices leads to an increase of

around $10/MWh in the cost of gas fired electricity generation

9

0

2

4

6

8

10

12

$ p

er g

igaj

ou

le

Short Term Trading Markets and Victorian Declared Wholesale Gas Market Prices

Adelaide STTM Brisbane STTM Sydney STTM Victorian Declared Wholesale Gas Market

10

Where are wholesale electricity prices going?

$0

$20

$40

$60

$80

$100

$120

$140

2010 2015 2020 2025 2030

Load

-wei

ghte

d w

ho

lesa

le p

rice

($

/MW

h)

NEM average wholesale price

Historical Jacobs modelling - Finkel BAU scenario

System security and reliability: How did we get here?

• Renewables were pushed into the system without:• a focus on where they were

located• a plan to replace inertia and

frequency response lost as coal closed

• a plan to deal with intermittency

• Investment uncertainty outside of renewables

• Lack of planning and sufficient notice of major closures

11

Source: 2009-2016: Office Of the Chief Economist, Australian Energy Statistics, 2006-2008 and 2017: AEMO data through the NEMReview tool 2017Note: this includes large-scale and rooftop solar.

0%

10%

20%

30%

40%

50%

60% Percentage of annual generation from wind and solar by state 2006-2017

Solar

Wind

NSW VIC QLD SA Tas WA

12

Where are we - emissions

100

110

120

130

140

150

160

170

180

190

200

100

110

120

130

140

150

160

170

180

190

200

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Emis

sio

ns

(Mt

CO

2-e

)

Historic NEM Emissions (Mt CO2-e)

Source: Department of Environment and Energy – National Greenhouse Gas Inventory June 2016

Breakdown of emissions

13

56%

37%

6%

Black Coal

Brown Coal

Gas

Source: NGERs 2016

Percentage of NEM 2016 emissions by fuel type

NEM30%

Electricity (excluding

NEM)5%

On-site industrial energy

combustion

18%

Transport18%

Fugitive Emissions

8%

Direct manufacturing

emissions6%

Agriculture13%

Waste2%

Australia's emissions by sector 2015-16

Source: NGGI June 2016,National emissions

excluding LULUCF, unadjusted

• Finkel modelling shows emissions decline

14

Where are emissions going?

Source: Jacobs Modelling for the Finkel Review 2017

100

105

110

115

120

125

130

135

140

145

150

155

160

2020 2025 2030

An

nu

al E

mis

sio

ns

(Mt)

NEM BAU Emissions 2020-2030

127 Mt: 28 % below 2005 levels

140 Mt: 21 % below 2005 Levels

Finkel Review

• Commissioned on 7 October 2016, through the COAG Energy Council, after the state-wide blackout in South Australia

• 392 submissions

• 50 recommendations covering • Increased security

• Future reliability

• More affordable power

• Greater gas supply

• Stronger governance with new Energy Security Board

15

“Australia hasn’t a moment to lose now that we have a comprehensive, independent blueprint to restore the security, reliability and affordability of

our electricity system”Business Council of Australia

16

Stakeholder views

17

Stakeholder views

“This is not a plan to make our power sector cleaner or our climate safer.

It’s a short term political fix to deal with the fact that the people who are apparently responsible for running the country have an ideological

attachment to dirty fuels.” Australian Conservation Foundation and GetUp!

Finkel package – Increased security & reliability

• Generator Security Obligation • All new generators will be required to contribute fast frequency response and

system strength

• Generator Reliability Obligation• All new intermittent generator will be required to put in place storage and

backup, at a level to be determined by AEMO and AEMC.

• Three Years Notice• All major generators will be required to give three years notice of closure.

18

• Wind generates around 40% of the time and solar generates 20-30% of the time

• Finkel recommends mandatory storage and backup for new intermittent renewables

• This levels the playing field – renewables now required to pay for intermittency

19

* Illustrative: Storage costs are based on 4 hour storage at 25% capacity.

Finkel package – Generator reliability obligation

$91

$107

$92

$108

$-

$20

$40

$60

$80

$100

$120

$140

$160

Solar PV Solar PV withstorage*

Wind Wind with storage*

Range

Average

Finkel package - Three year notice period

• The last five closures were Hazelwood, Northern, Anglesea, Redbank and Energy Brix. They provided an average of five months notice before closing

• Finkel recommends all large generators (coal, gas, wind, solar, hydro) be required to provide three years notice ahead of closure, which could be written into the National Electricity Rules as part of their licence to operate.

20

Clean Energy Target - First proposed by John Howard

• Howard Government proposed a Clean Energy Target in the 2007 election campaign:

• required 30,000 GWh each year from low emissions sources by 2020

• low emission sources were technologies emitting less than 200kg CO2e/MWh i.e. renewables and fossil fuels with carbon capture and storage

• intended to replace existing and proposed state and territory schemes with a single national scheme

21

Finkel package - Clean Energy Target

• Why Finkel concludes an investment mechanism needed?

• Investment freeze outside of renewables as energy market is operating with a risk premium for policy uncertainty

• Market needs certainty to invest in fossil fuel generation (existing and new)

• Investment uncertainty is affecting system reliability and security and causing higher prices

• Current mechanism (RET) is not technology neutral

22

Finkel package - Clean Energy Target

• Generators that produce power below a baseline of CO2-e/MWhwould create a certificate

• Finkel leaves setting the baseline to government

• The size of the certificate would be proportionate to the amount their emissions are below the baseline

• Retailers would need to buy certificates from generators and the price would be determined by the market

23

Difference between CET and an EIS• A CET only has incentives, no penalties on existing coal. No prohibitions or penalties on new coal being built

• Unlike CET, an EIS penalises new and existing coal

24

Clean Energy Target lowers prices

25

20

23

26

29

32

35

2020 2022 2024 2026 2028 2030

Residential Retail Price (c/kWh)

BAU Clean Energy Target

Clean Energy Target10% below BAU in 2030

5

7

9

11

13

15

2020 2022 2024 2026 2028 2030

Industrial Retail Price (c/kWh)

BAU Clean Energy Target

Clean Energy Target16% below BAU in 2030

Source: Jacobs Modelling for the Finkel Review 2017

-

5

10

15

20

25

2020 2025 2030 2035 2040 2045 2050

Co

al C

apac

ity

(GW

)

NEM coal capacity and potential closures

Reliability and Clean Energy Mechanism Power station closes at 50 years from last unit

Liddell (NSW)

Yallourn (Vic)

Loy Yang A (Vic)

Eraring (NSW)

Loy Yang B (Vic)Stanwell (Qld)

Gladstone (Qld)

Callide B (Qld)

Vales Point (NSW)

Gladstone (Qld)

Bayswater (NSW)Tarong (Qld)

Callide B (Qld)

Yallourn (Vic)

Mt Piper (NSW)

Vales Point (NSW)

26

Clean Energy Target helps keep baseload in the system

Source: Jacobs Modelling for Finkel Review 2017

Clean Energy Target

Clean Energy Target

27Source: Jacobs Modelling for the Finkel Review 2017

69%coal

57% 53%

9%

5%

17%24%

8% 9%

9% 9%

0%

20%

40%

60%

80%

100%

BAU in 2030 Clean Energy Target in 2030

NEM Generation mix

Coal Gas Large scale wind and solar Hydro and Biomass Roof top PV

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Australian Electricity Bill Cost Components

Green Schemes Retail Wholesale (generation) Networks

28

Limited Merits Review reforms to limit the ability of network owners to appeal AER revenue decisions

ACCC inquiry into retail price drivers and wholesale issues

Market reforms to increase gas supply, enhance market transparency and make it easier to access gas pipelines, and introduction of export controls

Lowering electricity prices

Labor’s alternative

•No future for coal and fast tracking closure

•45 per cent emission reduction target

•50 per cent RET

• Emissions Intensity Scheme (EIS)

•No energy security plan

29