the integration of electricity & environmental markets in ...€¦ · the integration of...

The Integration of Electricity & Environmental Markets in Australia

Hugh Outhred, Joint Director, Engineering, CEEMUNSW/TPRI Workshop, Taipei, 6-7 September 2005

2The integration of energy & environmental markets in Australia © CEEM 2005

Decision makers, markets & risks

transmissionnetwork

distributionnetwork

Interchange to other

wholesale market regions

WholesaleMarket region

distributionnetwork

distributionnetwork Retail

Market 3RetailMarket 1

Retail Market 2large consumer

• Wholesale & retail market designs should be compatible• Both should include network models

Primary energy markets

• Small consumers, embedded generators & storage should be supported by energy service advisers

risks to end-useenergy service

delivery

most consumers

large generators

embedded generators

3The integration of energy & environmental markets in Australia © CEEM 2005 Policy & regulatory context

Trading in electricity:- an abstraction from reality

Physical electricity industry(equipment; centralised; concrete)

Ancillaryservices;

Governance;Regulation(centralised)Engineering models

(equipment; centralised; abstract)

Commercial model: spot & derivative markets(humans; decentralised; abstract)

Economic models(humans; centralised; abstract)

Externalities


Managing supply-demand balance in the Australian National Electricity Market

Spot market forecast; derivative markets;regulatory & policy

decisions

Frequency controlancillary service spotmarkets for period t

Supply/demandprojections & FCASderivative markets

FCAS spot marketsfor period t+1

Spot marketfor period t

Spot marketfor period t+1

time

spotperiod t

spotperiod t+1

increasing uncertainty

Physical issues

Commercial issues


Basslink DC link MNSP (2006?)600MW short term rating (north)

Murraylink DC link, now regulated, formerly MNSP

Directlink DC link, currently MNSP

180

National Electricity Market market regions(Securing Australia’s Energy Future, 2004)


Electricity industry structure in SE Australia

Gen 1

Gen 2

Gen X

GenerationSector:-

largegenerators

Gen 3

TransmissionSector

NSWVictoria

South Aust.Queensland& possiblyTasmania

TransmissionSector

NSWVictoria

South Aust.Queensland& possiblyTasmania

Electricity

Financial instrument& REC (emission) trading

Distributor 1

Distributor 2

Distributor Y

Distributionsector

Electricity

Multi-regionNational

ElectricityMarket(NEM)

Intentionsoffers &

paymentsRetailer Z

Retailer 2

Retailer 1

Retailsector

Intentionsbids &

payments

Tx networkpricing

Tx networkpricing

Networkaccess End-use

Equipment&

DistributedresourcesElectricity

End-usesector

Contestableend-users

FranchiseEnd-users

RetailMarkets

Embeddedgenerators


Governance & institutions in Australia(Allens Arthur Robinson, 2003)

NationalElectricity

MarketManagement

Company


Weekly average spot price & demand, South Australia, January-March 2005 (NECA, 2005)


Half-hour spot price duration curve, South Australia, January-March 2005 (NECA, 2005)


Weekly average region reference spot prices (RRPs) since market inception (NECA, 2005)


Running weekly accumulation of (336) RRPs & cumulative price threshold (CPT) (NECA, 05Q1Stats, 2005)

S10,000/MWH price cap reduced if CPT is reached


Distribution of NEM spot prices & revenues(Federal Government: Securing Australia’s Energy Future, 2004)


Flat contract prices, January-March 2005(NECA, 2005)


D-cyhpaTrade exchange-traded call options for NSW peak period (www.d-cyphatrade.com.au)

0200400600800

100012001400160018002000

65 70 75 80 85 90Strike price $/MWH

05Q106Q107Q1


NEMMCO Statement of Opportunities, 2004


NSW does not need base load generation at present

0

2

4

6

8

10

12

14

NSW

Other renewableHydro (incl. Pump storaOtherOilGasCoal

IES “Optimal plant mix” for NSW (IES 2004 report to IPART)

Existing NSW plant mix is biased towards base-load generation

“Mr Yeadon said the NSW Statement of System Opportunities indicatedthat over the next 10 years there was scope for a whole range of supply and demand-side projects, including renewable projects (such as wind and solar) and gas-fired plants.” (NSW Govt. media release, 21/6/02)

(ESAA, 2004)

With present trends, in 10 years, 18% of gen capacity may only be used 1% of time

(NSW Energy Directions, Dec 04)


Methods to internalise environmental impactsEnvironmental taxes:– Determine cost to pollute

Tradeable environmental permits:– Only permit-holders can pollute– Caps amount of pollution & should find its highest value– Grandfathering permits may reduce scheme effectiveness

Hybrid tax & tradeable permit:– Permit price cap limits the cost burden on the polluter

Pollution baseline & credit:– Polluter earns credit if pollution below agreed baseline– Baseline hard to set in objective manner


Hybrid industry development schemesNon-polluting technologies can be granted credits– For example, renewable energy technologies

Such schemes are hybrid schemes:– Pollution reduction

eg climate change emissions from electricity generation

– Industry development:Promotes the development of “clean” technologies

– Cost is likely to be higher than pollution reduction alone however, industry development adds additional value

Australia was an early adopter of a renewable energy credit scheme


Mandatory Renewable Energy Target


Mandatory Renewable Energy Target –a ‘designer’ market

non-zero baseline ifpre-1997

9.5 millionRECS/yr2010-20

One REC for each1 MWH of “new

renewable energy”

REC trading

RECProviders

createone RECfor each

qualifyingMWH

LiableParties

surrenderRECs

Accordingto target &

market share

Scheme administratorcertifies REC creation

monitors liable party compliancemaintains REC register


MRET performance to dateNow operating for three yearsRamping target easily met to dateChallenges:– Public opposition to some activities deemed to be eligible– Inadequate target, in terms of reducing emissions & developing a

viable renewable energy industry– Market information poor:

Can register RECs any time => information asymmetryAnnual acquittal too infrequent => poor price discovery

Non-zero baselines for pre-existing generators:– No single correct value for a non-zero baseline– Large hydro particularly problematic:

Annual output of some hydro scheme is set by demand not inflowHydro with multi-year storage can vary annual output to create RECs


Choice of baseline for Tasmanian hydro with multi-year storage & output set by (growing) demand

7500

8000

8500

9000

9500

10000

10500

1994 1995 1996 1997 1998 1999 2000 LTA

GWH

Note: Estimates only; actual baseline is confidentialData: ESAA Annual Reports

Discretionin choice of

baseline:~1200GWH


Hydro with multi-year storage can vary annual output to produce more RECs

020406080

100120140160

GWH per year

Year1 Year 2 Year 3 Year 4

Baseline GWHActual GWHRECs awarded

Rewards those generators with above-zero baseline & high annual variability(here 80,000 RECs over 4 years although ave. output = baseline)

RECs awarded above baseline but not “clawed back” below it


RECs by year and type (BCSE, MRET Report, 2004)


Prediction of REC Prices (A$/MWH) (ORER, 2003)

0

510

15

2025

30

3540

45

5055

60

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Year

RE

C p

rice

average price


REC requirement to 2020 is almost metThe Federal Govt. has rejected key review finding of a higher target to 2020BCSE estimates only approx. 700-800MW of new (post Jan04) projects required to meet existing target, and……project commitments > 500MW in 2004 leaves < 300MW new projects reqd


NSW Greenhouse Abatement SchemePolicy intent– “reduce greenhouse gas emissions associated with the

production and use of electricity...” (Overview to the Electricity Supply Amendment Bill, 2002)

Implementation:– Electricity Retailers required to surrender NSW

Greenhouse Abatement Certificates (NGACs)– NGACs can be created:

By any generator with an emission coefficient below a baselineBy a demand-side abatement activityBy sequestration of carbon (eg forestry)


Important design abstractions between physical emissions & NGACs

The large design abstractions mean that emissions from electricity generation in NSW may continue to rise even if the declining State per-capita NGAS target is met

Imputed linkage

Green-house policy intent

Imputed linkage

NGAS Legislated objectives Imputed

linkage

Liable party

require-ments

Imputed linkage

‘Baseline and

Credit’ rules

Actual

abatement activities


Summary of key issues for markets in Environmental Instruments (EI)

Relationship of the EI to the physical phenomenon– The EI is an abstraction from reality

Design of efficient trading arrangements:– Need markets in both the EI & its derivatives

Effectiveness of the regulatory mechanism:– Measure by attributable changes in physical outcomes– Some important issues:

Eligibility of each particular activityAbstraction errors (eg baselines; overlap with other policies)Market efficiency & effectivenessCompliance with eligibility requirements


Conclusions from the Australian experienceSuccessful electricity restructuring requires:– Care in developing & maintaining consensus– A high level of professionalism in key roles– Extensive peer-review, auditing & testing of market design

A coherent decision-making framework requires:– A mix of engineering & commercial techniques,

recognising strengths & weaknesses of each– Must work successfully with a weak network, weather-

sensitive demand, wind energy & contingenciesMarkets in environmental instruments:– Require very careful design to be successful


Many of our publications are available at www.ceem.unsw.edu.au

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