NDSC, SouthStephen van der Mye, Managing Director, NEMMCO

APEX 2000APEX 2000Australian Market UpdateAustralian Market Update

Achieving a World Class Market

Competitiveness Investment signals and outcomes so far

Reliability Managing supply shortfalls

Operational Highlights 1999-2000 Key Projects

NEMMCO’s performance and strategic focus

Challenges and Emerging Issues Connection of Queensland

Increase in VoLL

Retail Competition

Competitiveness

Substantive evidence exists that the NEM is operating to

design by providing economic signals to encourage efficient

resources allocation across the energy sector.

It is important to remember that prior to the industry’s

liberalisation, investment decisions were largely made within

vertically integrated, State owned monopolies. The costs of

poor investment decision were ultimately and often blindly

borne by customers.

Competitiveness Experience over the past 18 months points to significant

resource allocation toward the regions (States) in the NEM,

specifically Queensland and South Australia, where wholesale

electricity prices have been consistently higher.

Conversely in New South Wales, where prices have been low

and existing generation reserves are high, resources have

been committed and projects proposed which aim to provide

higher priced regions access to lower cost primary energy

sources through augmentation of the electricity transmission

network.

Competitiveness

A further potentially significant development is the proposed

under-sea interconnection of Tasmania and Victoria, known

as Basslink. If it proceeds, the Basslink project would

enable Tasmania to join the NEM and allow hydro-generated

electricity to be exported to the mainland at times of peak

demand. In off-peak periods, lower priced Victorian

electricity could be sent across the Bass Strait to Tasmania.

Reliability

The ability of the electricity supply industry to effectively

manage supply shortfalls impacts greatly on business and

consumer confidence in the sector.

February 2000 was the first time in seventeen years that

Victoria has faced a serious supply deficit and the first time

ever the new industry structures have had to manage the

impact of widespread customer interruptions.

Reliability

The February incident crystallised some serious issues that

need to be addressed in the future development of the

National Electricity Market:

Neither the operation of the NEM nor the respective roles

and responsibilities of its participants are well

understood outside the industry

Deliberate entry into a load shedding scenario is

unacceptable to public, commerce, industry etc

Hence situation is unacceptable to Governments

Reliability

Governments will intervene with some form of

restrictions

Restrictions significantly reduce demand and pool prices

and consequently impact on economic investment

signals

1999-2000 Key Projects

New Structure for Participant Fees

Previously 100% borne by retailers

From 1 July 2000 split between retailers and generators

Market and System Operations Insurance Advisory Committee

On 13 December 1999 NEMMCO’s immunity from liability

lapsed and following a Jurisdiction review liability caps were

introduced

Annual aggregate cap of $100 million, $2 million cap per

event, nominal $1 cap on Directors and officers of NEMMCO

1999-2000 Key Projects

Market and System Operator Review

Jurisdictional Governance and Liability Steering Committee

project managers report mid 1999 raised questions on

present allocation of MSO responsibilities within the Code.

NEMMCO & TNSPs agree that Code is ambiguous and that

there are omissions.

NEMMCO believes significant cost savings will be achieved

compared to existing TNSP agency agreements.

Final report is due at the end of October

1999-2000 Key Projects

Ancillary Services Review

Review to consider the development of market based

arrangements for the provisions of Ancillary Services

New regime implemented on a transitional basis from 1

January 2001

First steps:

Spot Market for Frequency Control Ancillary Service

No change for the procurement and dispatch of Network

Control and System Restart Ancillary Service

Causer pays approach to cost allocation

Operations - NEMMCO Performance

In the period following NEM commencement, NEMMCO’s focus

has been on bedding down systems and processes to ensure

smooth market operations:

the availability and reliability of the NEM system has

exceeded expectations;

metering and settlements on time with high accuracy; and

the successful assumption of Power System Security

functions in all regions.

Operations - NEMMCO Performance

While maintaining systems and process reliability, NEMMCO

has also undertaken a number of projects all designed to elicit

from our stakeholders what challenges they saw ahead for the

NEM and NEMMCO:

Strategic Thinking and Operational Planning workshop;

Key Performance Indicator Project;

Risk Management Project; and

Stakeholder Satisfaction Survey.

NEMMCO Strategic Focus

In summary, eight key challenges that have been identified from the

four specified projects:

the commercial and prudential aspects of the power Market

to be operated in a competent manner with data provision

that is accurate;

the power system to be operated in a pragmatic manner

ensuring minimum disruption to the community;

the NEM systems including communication links, to have a

high level of availability and reliability;

the financial and operational management of NEMMCO to be

carried-out in a demonstrably commercial manner;

NEMMCO Strategic Focus NEMMCO be structured in such a way that allows the full

intellectual capital of its employees to be utilised;

the day-to-day operations of NEMMCO to be conducted in

such a transparent manner so as to minimise the opportunity

for dispute;

the communications with all stakeholders of NEMMCO to be

undertaken with a view to projecting ourselves as

independent while seeking to deliver real value; and

the information provided to directors, on both a strategic and

operational basis, to leave no doubt as to the integrity of

NEMMCO employees.

NEMMCO Strategic Focus

In order to best meet these challenges a new organisational

structure was developed:

ExchangeOperationsMarket Development

MeteringSettlements

Settlement ResidueRegistrationPrudentials

Power Exchange

BiddingPASA

Optimisation (SPD)Communications

Real time monitoringMarket Administration

Systems

Market Systems

Board and ExecutiveCorporate ServicesBusiness Systems

Management and Support Services

ParticipantsJurisdictions End Users

Stakeholders

Power System OperationPower System DispatchPower System Planning

Ancillary ServicesReserve Trader

System Operations Services

Challenges and Emerging Issues

Interconnection of Queensland

The Queensland-New South Wales Interconnector (QNI)

is scheduled to be progressively placed in service in the

last quarter of 2000 with a commercial service capability

of at least 350MW in both directions by the end of 2000.

The nominal design capability of QNI is 500MW from New

South Wales to Queensland and 1000Mw from

Queensland to New South Wales.

Challenges and Emerging Issues

When Queensland is connected to the NEM, the resulting

transmission system will stretch some 4500 km from

North Queensland to South Australia.

An system of the length of the NEM presents significant

technical challenges both for the maintenance of power

system security and the operation of the network.

Challenges and Emerging Issues Increase in Value of Lost Load (VoLL)

As result of the Reliability Panel’s Review, the level of VoLL

will be increased to $10,000/MWh on 1 September 20001 and

then $20,000/MWh on 1 April 2002 from the current

$5,000/MWh.

The change allows for both increased investment incentives

and financial risk.

Incentive - peaking plant investment and demand side

response.

Risk - management of financial exposure and physical

availability.

Challenges and Emerging Issues

Retail Competition The next big ticket reform upon which the community will

judge the benefits of the restructured industry.

NEMMCO is actively working with industry and the

jurisdictions toward the next tranche of retail deregulation.

An important lesson learnt from the implementation of the

NEM is the need for an integrated industry project plan -

NEMMCO believes that it is critical that both national and

participant systems are in place before full retail

competition can be rolled out