Quarterly report
October to December 1999
January 2000
2
Executive summary
In the three months October-December 1999 NECA has:
¨ published an issues paper on the scope for integrating the energy market and network services. We have initiated a broad consultation process on the paper, including a forum in November and a follow-up series of workshops;
¨ to complement the review, convened a working group to develop a coordinated approach to a broader range of network/distributed resource issues;
¨ published, jointly with NEMMCO, an issues paper on the review of power system directions. We have also separately published our assessment of NEMMCO’s use so far of its powers of direction;
¨ established a reference group to take forward our planned initiative to pursue more vigorous demand-side participation;
¨ moved to establish jointly with NEMMCO a Code Participant Liaison Group, a senior representative group of Code participants, for in-depth discussion of market performance and design issues;
¨ launched our post-review evaluation programme with a combined evaluation of the closely-linked reviews of capacity mechanisms and VoLL;
¨ distributed a third tranche of amendments to the Code, including changes providing for the market participation of entrepreneurial interconnectors and replacing the customer benefits test for new regulated network investments with the new regulatory test promulgated by the ACCC;
¨ launched an information and updating service for subscribers to a new electronic version of the National Electricity Code (eCode); and
¨ moved to strengthen and enhance our market surveillance and monitoring capabilities by adding a new member to our surveillance and monitoring team, and by enhancing our IT systems.
Lindsay Threadgate, manager energy services for BHP Steel, was appointed to the Reliability Panel as a representative of industrial end-use customers. He replaces David Headberry, following David’s move from AMCOR to Voss Industries Ltd. We are currently looking at the scope also to appoint a representative of smaller, domestic end-use customers to the Panel.
The Code Change Panel forwarded three sets of draft Code changes to the ACCC. It also initiated consultation on draft changes put forward by NEMMCO to implement the recommendations set out in the report of its review of ancillary services.
In preparation for the Y2K transition, we had in July put forward a draft change to the Code to set a ceiling of $300/MWh, and a zero floor, on the spot price in order to help manage financial risks in the national electricity market over the three days beginning on 31 December. The change also provided scope to extend the arrangement, if necessary, for up to a further seven days in response to a Y2K event. The ACCC approved the change in October but required NECA to publish criteria for extending the arrangement beyond the initial three day period. We published those criteria on 13 December. In the event, the market made the transition smoothly and there was no need to extend the arrangement.
On 15 September, a Dispute Resolution Panel constituted under the alternative dispute resolution arrangements in chapter 8 of the Code issued a determination on a dispute over the appropriate loss factor under clause 3.6.3(e) of the Code.
This report has been prepared for Members in accordance with clause 7.6 of NECA’s Members’ Agreement. It includes an assessment of performance in the first half of the year against the critical success factors and key performance indicators set out in our 1999-2000 Statement of Corporate Intent. We are publishing separately a statistical digest setting out detailed information on, and analysis of, key market trends.
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Progress report
Review of the scope for integrating the energy market and network services
The review of the scope for integrating the energy market and network services aims to improve the efficiency and effectiveness of the market arrangements overall by addressing the most appropriate basis for the division of the market for spot market purposes, the options for improved risk management mechanisms and techniques, and improved or alternative ways of representing or calculating transmission and distribution loss factors. It incorporates other reviews required under the Code, including reviews of the adequacy and appropriateness of the existing criteria for the determination of regions (cl. 3.5.1(e)), and of the financial impact of distribution loss factors on market participants (cl. 3.6.3(h)).
We published an issues paper on 28 October as a basis for initial discussion and consultation on the review. The paper:
¨ briefly describes the criteria to be used for selecting between alternative options. It also frames the issues involved in deciding the value of, and the degree to which there should be, closer integration between the energy market and network services;
¨ discusses the scope for improvements to the existing national market arrangements, including the context for changing the pricing and risk management mechanisms from the perspective of the costs and benefits of encouraging efficient generation versus encouraging efficient network services;
¨ discusses the locational pricing options;
¨ discusses the risk management and firm access options;
¨ discusses the potential to bring these together and provide greater integration between the energy market and network pricing;
¨ addresses implementation and transitional issues;
¨ addresses transmission and distribution loss factors; and
¨ summarises the issues raised throughout the paper and on which we should particularly welcome comments and contributions during the course of consultation.
We have initiated a broad consultation process on the paper. We have invited written comments on the series of questions raised in the issues paper, by 28 January. We shall publish those comments on our website.
All interested parties are represented on a reference group. The reference group has established a working group on distribution loss factors, amongst other things in order to undertake appropriate modelling. Another working group, on risk management tools, will be formed in the New Year.
We held a forum, linked to the issues paper, in Sydney on 22 November to:
¨ identify and discuss the relevant issues for the review;
¨ assess the existing national electricity market arrangements and the scope for improvements; and
¨ consider relevant experience in overseas markets.
We have also conducted a series of workshops with each sector of the industry, jurisdictions, jurisdictional regulators, cogenerators and end-use customers. We have committed ourselves to another round of similarly extensive consultation on the basis of our draft report.
Network issues
To complement the review of the scope for integrating the energy market and network services, we have launched a coordinated programme of broader network/distributed resources developments. The programme began with a forum in September. We have since then convened a working group that has pulled together a package of proposals spanning:
¨ clearer, more discrete and more accountable rôles for network service providers, NEMMCO, the Inter-Regional Planning Committee and the regulator in the appraisal and approval of new regulated network investment projects;
¨ streamlined and more effective arrangements for determining the relative beneficiaries of those projects;
¨ a requirement on distribution NSPs to publish annual Statements of Network Utilisation, looking probably five years ahead. These statements would identify pinchpoints in the networks and therefore the opportunities for investment. They would complement NEMMCO’s Statement of Opportunities and the annual planning reviews conducted by transmission NSPs, to which distribution NSPs already contribute;
¨ strengthened obligations to ensure genuine consideration of demand-side and local generation alternatives to new network investment, and meaningful consultation with affected customers;
¨ a review by the Reliability Panel of the network performance requirements in schedule 5.1 of the Code;
¨ resolution of the terms of the access undertaking to be provided by market network service providers; and
¨ extension of the safe harbour for entrepreneurial interconnectors, in the first instance to encompass hybrid links.
The next step, probably around Easter, will be to publish draft Code changes as the basis for consultation on the package.
Review of power system directions
We published on 4 November, jointly with NEMMCO, an issues paper as the basis for consultation and comment on this review. The paper floats, and seeks comments on, eight proposed criteria for market directions. It develops a set of possible principles for consolidating the current disparate arrangements for security, ancillary services and reliability directions. The principles address:
¨ when and how directions should be given;
¨ the impact on market price;
¨ payments to directed and third parties; and
¨ the funding of those payments.
As background to the review, we have separately published our assessment of NEMMCO’s use so far of its powers of direction. This assessment is required under clause 4.8.9(e) of the Code. The assessment concludes that lack of clarity in the Code contributed to some inconsistency in NEMMCO’s application of its powers to direct. It recommends that reports of directions should in future provide information on the authority for the direction and, where appropriate, the alternatives considered or exercised before a direction is issued. Reports should also justify the duration for which a direction remained in force.
Demand-side participation
We have taken the first step to launch an initiative to facilitate and encourage more proactive demand-side participation in the national electricity market. Our 1999-2000 Statement of Corporate Intent foreshadowed this initiative and pointed to the value demand-side participation can add to the broader electricity market through one or more of:
¨ the energy market, either through direct participation as a demand-side bid, independent customer price responsiveness as a wholesale market participant or under a retail tariff arrangement;
¨ provision of ancillary services, for example, for frequency or voltage control, under contract to NEMMCO or through competitive bidding under the likely revised ancillary service arrangements; and
¨ network services, for example, for localised voltage contract and peak or contingency load management.
Historical regulatory and statutory arrangements continue to influence the overall environment heavily and inhibit, or at least influence, the development of market-wide standards and approaches. Many earlier initiatives, such as peak and off-peak tariffs, were developed primarily for asset management and are not suitable for short-term price responsive schemes.
As set out in our SCI, we intend that the initiative should examine, amongst other things, the impediments in current market arrangements to the development of a vigorous and competitive demand-side response, and ways in which the market framework could facilitate customers gaining the full value of their demand-side response. This will include:
¨ the regulatory framework;
¨ commercial incentives;
¨ technical coordination;
¨ market information and communication; and
¨ transaction costs.
As a crucial first step, we intend to undertake a questionnaire survey of retailers and end-use customers to assess the existing extent of, and attitudes towards, demand-side participation. Our objectives for the survey are to:
¨ establish a database recording the status and scale of retail demand-side programmes and initiatives, and customer involvement in the national market;
¨ determine the likely trends for future involvement of the demand-side in the national market;
¨ develop, monitor and report on appropriate indicators of demand-side participation; and
¨ discover customer attitudes to the market, particularly their understanding of the market design, level of interest in proactive demand-side participation, threshold issues and appropriate incentives for more pro-active participation, expectations of the market and market intermediaries, and their support for existing and appetite for new or additional retail demand-side products.
We have commissioned a consultant to help us with the development of appropriate indicators of demand-side participation and with the development of a survey questionnaire targeting registered market customers and a sample of major energy users from the industrial, commercial and domestic market segments. We plan to conduct the survey in February and publish a report of the survey findings by April 2000. We anticipate the survey findings will assist materially in shaping further initiatives to overcome any structural or Code-based barriers to greater participation by the demand-side.
Establishment of Code Participant Liaison Group
NECA has moved to establish, jointly with NEMMCO, a Code Participant Liaison Group. The group will be made up of senior representatives of Code participants. The group will:
¨ be an important communication forum between Code participants and NEMMCO and NECA;
¨ comment on NECA and NEMMCO Statements of Corporate Intent, quarterly reports and performance measures;
¨ seek to resolve urgent market operational issues;
¨ provide feedback and recommendations to NEMMCO and NECA concerning market systems and processes;
¨ monitor system performance of market systems and processes;
¨ comment on major software release plans and project milestones; and
¨ discuss the handling of current and emerging major issues within the national market.
It will complement the Government Liaison Panel and the end-use customer Market Liaison Panel.
Post-review evaluations
NECA has launched its post-review evaluation programme with a combined evaluation of the closely-linked reviews of capacity mechanisms and VoLL. The initiative progresses a commitment in our SCI to obtain feedback about stakeholders’ perceptions of the conduct and outcomes of major reviews. Our aim is to improve the efficiency and effectiveness of the conduct of future reviews, with particular emphasis on the effectiveness of our communication and consultation with stakeholders. We have written to those who provided written comments during the reviews, and to a broader range of stakeholders, inviting feedback. Responses can be provided in writing or via an interactive facility on our website.
eCode
We have launched an information and updating service for subscribers to our new electronic version of the National Electricity Code (eCode). Subscribers will be notified of, and have access to, amendments to the National Electricity Law and regulations as well as the Code itself, within a week of gazettal of amendments.
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Market surveillance and monitoring
Market trends
Prices in all regions so far since the launch of the national electricity market have continued to converge and are on a downward trend. Much of the initial volatility in prices has also dampened down, although prices in South Australia were skewed by two VOLL events on 23October and 2 December. Volume weighted spot prices averaged $19/MWh in New South Wales, Snowy and Victoria, $77/MWh in South Australia and $28/MWh in Queensland for the three months October-December. This compares with averages of $25/MWh, $55/MWh and $52/MWh respectively for the previous nine months; and overall averages of $24/MWh, $59/MWh and $45/MWh since market start.