WA ELECTRICITY MARKET REFORMS VERSION 2 1 Wednesday

WA ELECTRICITY MARKET REFORMS VERSION 2. 1 Wednesday, 23 August 2017 Energy in WA Conference Richard Harris, Chair WA Independent Power Association

INTRODUCTION • Consultation is key • Competition brings benefits • Private investment is essential • Industry structure reform a precondition for competition • The wholesale market is flawed • Grid access is a problem • Two track timing – Pick low hanging fruit asap – But take time to do the main task right

CONSULTATION IS KEY Electricity reform is hard • Highly complex engineering reality, business and regulatory landscape • Large investments 2004 -2006 reforms: involved extensive genuine consultation • Willingness to listen, balance competing voices • Overall highly successful 2014 -16 reforms: extremely limited genuine consultation • Telling, not listening • No private market players on steering committee • Result: v Flawed reforms, at best very limited in impact v Stakeholder frustration and limited buy-in v Stakeholder fear opposition contributed to legislative failure 2017 reforms are a golden opportunity for new government to reset the process and genuinely engage the private sector

COMPETITION BRINGS BENEFITS • WAIPA believes that competition in the energy sector will bring multiple benefits: – Improved consumer choice in goods and services • Includes innovative services not currently imagined • E. g. telecommunications market over last 30 years – Lowest sustainable energy prices – Most efficient utilisation of society’s assets • WA retail gas market is a prime example – Lower retail prices, innovations in services – Benefits everyone, not just those who switch to the new retailers

PRIVATE INVESTMENT IS ESSENTIAL • If you want competition, you first need to attract competitors – Market must be stable and predictable – Rules cannot be static in this fast-evolving world, but reform process must be: • Robust • Transparent • Consultative – Rule change process must be all of these, plus independent – Need a viable, deep and liquid wholesale market (more in a moment) • Much investment will be needed over coming decades in generation and network support – Current “oversupply” is questionable, and in any event won’t last long – Private sector won’t invest unless it sees a path to earn a return – Without private capital, government will have to fund new plant

INDUSTRY STRUCTURE REFORM • Synergy dominates both wholesale and retail markets – Private retail competitors find it challenging to compete • This was a major gap in Barnett government’s EMR – The re-merger of Verve and Synergy was a bad idea – Phase 1 of the EMR identified the problem of Synergy’s market power and recommended a new structure – Phase 2 was silent • ERA has identified this problem: – In its 2015 and 2016 reviews and 2017 Discussion Paper • Market dominance is an issue per se

INDUSTRY STRUCTURE REFORM By definition, increased competition and private sector entry must involve decreased market share for the incumbent – A solution must be found to fit this reality into the State’s current fiscal circumstances • It should be possible for Synergy to shrink and the TAP to shrink with it – Synergy has a duty to act commercially and to seek a profit • It should be possible for Synergy to shrink and remain as, or more, profitable – If Synergy continues to seek to maintain or grow its market share, private entry will diminish • Miss out on benefits of competition, and • Government will have to fund new generation and network support – Synergy could be a profitable participant in the wholesale market long term

THE WHOLESALE MARKET IS FLAWED • • The WA retail gas market shows the success when barriers removed – Competition did not take off until roughly 2016 – What changed was the arrival of a sufficiently deep, liquid wholesale gas market – Gave new entrants confidence to invest in market entry Electricity wholesale market is flawed – Dominated by Synergy – “Standard Products” not working • ERA has recommended reforms, but recommendations not implemented – Volatile balancing market • Private retailers’ only source of hedging is Synergy, their main retail competitor Most private players struggle to compete outside the envelope of their selfgeneration Synergy’s renewable fund will make the problem worse – Private retailers will have further difficulty in sourcing wholesale energy

GRID ACCESS IS A PROBLEM • Western Power and AEMO System Management face a difficult task – Fundamental responsibility to manage a secure and reliable grid – Obligations to a diverse group of stakeholders: • Incumbent generators with sunk costs • Prospective new entrants, encompassing a range of technologies and project readiness • Consumers of all sizes – Currently proposed new project plant mix may not be what is needed for ideal system design • WAIPA supports a move to a constrained access model – The so-called “unconstrained” model of network development is a barrier to entry – Encourages a re-examination of the best way to implement this – Partially joining the NER may not be the best solution

GRID ACCESS IS A PROBLEM • WAIPA acknowledges that WP and SM were left stranded by the failure of the proposed legislative reforms • An interim solution is being developed but processes can be improved – Need genuine consultation on how it should operate – Work required on the interface with Reserve Capacity Mechanism – Needs involvement of AEMO Market Advisory Committee in the accompanying WEM Rule changes • WP has indicated that the GIA has limited longevity – Need work on what other measures will be available pending legislative reform – No current process

TWO TRACK TIMING TRACK 1: LOW HANGING FRUIT The following can be implemented in 6 -18 months: • Open up competition down to 20 MWh/a threshold urgently – Offers choice to a further 23, 000 consumers • Suspend the development of an RCM auction – This was a reform without any industry support – There are better ways to create the right RCM incentives • Reactivate the IMO’s previous market enhancement reforms – Shorter gate closure – Facility bidding – Ancillary services reforms

TRACK 1: LOW HANGING FRUIT The following can be implemented in 6 -18 months: • Measures to increase transparency and liquidity in wholesale market – Reform Standard Products so they become a successful instrument to enhance competition: • Reform terms and volumes, better risk allocation and pricing (including the bid-offer spread) • Reform the processes and documentation • Learn from other jurisdictions – WAIPA’s white paper will discuss Hydro Tasmania’s approach – Examine option of reverse auction for blocks of Synergy’s wholesale energy – Transparent and timely information about Synergy’s plant availability and profitability

TRACK 1: LOW HANGING FRUIT The following can be implemented in 6 -18 months: • Ensure network capacity associated with the 480 MW of retired plant is released to the market – Will partially alleviate the delay pending full constrained access • Synergy to go to market for its LGCs – Don’t proceed with the renewable fund – Why does the government need to build renewable plant at all? • Review and reduce the barriers to entry for new renewable projects – Lower marginal cost of energy helps retail tariffs – Government policy to enhance competition should dictate the way Synergy procures its LGCs – Avoids the need for government investment in generation • Progress work on the longer-term reforms with full genuine consultation

TRACK 2: TAKE TIME TO DO THE MAIN TASK RIGHT • Do something about Synergy’s market dominance – Two or more gentailers with unbalanced portfolios – Maybe back to the future - recreate Verve and Synergy • Build a viable constrained access model – integrate it with the Reserve Capacity Mechanism – compensation mechanism for incumbent private generators, if actual loss • Continue to reform AEMO’s systems and rules – Struggling already, barrier to reforms and innovation – NEMDE is a proven engine – Can be implemented here without necessarily joining NER

TRACK 2: TAKE TIME TO DO THE MAIN TASK RIGHT • Do the reforms with full, genuine, open, transparent consultation – Private sector involvement in the 2004 -2006 reforms ensured high quality reforms which stood the test of time • Don’t rush the big reforms – Pressure from some to rush through the Barnett government’s stalled reforms – Please don’t be tempted: they lack industry support – WAIPA understands why the Minister renewed his rule-making power, but urges full consultation before it is used – There is time – no new thermal generation needed for a while

CONCLUSION: CONSULTATION IS THE KEY • Consultation is key – the process matters almost as much as the outcome – Reforms on which participants have genuinely been heard, have legitimacy and support even if not exactly what they wanted – WAIPA and its members stand ready to devote substantial resources and time to the reform consultation process – Early consultation is essential, while ideas are still evolving and before detailed design has been concluded • Get the process right, but don’t miss the chance!

THANK YOU