Future of Renewables in Victoria Dr Jeff Washusen Marsden Jacob Associates VPELA 30 April 2012

2 Points for discussion Comment on the past and future electricity price trajectories and some of the things that are, and will, impact this. Very brief and high level comparison of the long run costs of current and prospective fossil fuel technologies. Personal views on past and future directions for “demand side” participation in energy markets and energy production and use. Most material comes from an Expert Witness statement prepared for the EPA in the Dual Gas VCAT appeal.

3 Electricity price trajectories Energy production & consumption Key Observations: AEMO continued to forecast increased production (until 2012) – even though consumer load has been flat or falling since late Change in rate of load growth is unprecedented in my life time.

4 Electricity price trajectories Maximum summer demand Key Observations: AEMO continues to forecast increase in maximum summer demand. MSD is increasing in volatility due to combination of increasing penetration of AC and variability in extreme summer temperature ON WORKING WEEK DAYS. The volatility in demand will also be impacted by proliferating Solar PV – although Solar PV seems unlikely to reduce extreme MSD (which typically occurs in late afternoon).

5 Electricity price trajectories NEM VIC Region demand and energy Key Observations: Rate of increase in energy production and consumption peaked in late Both production and consumption have been falling since Even maximum demand growth appears to be stalling – although “spread” is still increasing. These changes most probably reflect the impact of increasingly demanding mandatory energy efficient measures reinforced by rapidly rising retail electricity price.

6 Electricity price trajectories NEM VIC Region demand and energy Key Observations: “True” base load has remained flat for the last decade. This has a major impact on the type of new generation capacity that will be needed in the NEM. What these plots DO NOT show is that supply capacity has become increasingly flexible. Even brown coal plant now gains commercial benefit from flexible operation. New capacity will capture value by being both reliable and flexible.

7 Electricity price trajectories NEM VIC Region spot price Key Observations: Spot price is extremely volatile, with annual average changes in excess of 100% - both up and down. Since the mid-1990s, annual average spot price has only been close to (estimated) long-run marginal cost for new base load thermal plant in 2 years. No irrational investors exist in the market. The extreme volatility and (low) range in annual average spot price is a challenge for any new entrant investor – “old fuel” or renewable.

8 Electricity price trajectories NEM VIC Region futures contract price Key Observations: Futures contract prices are (almost) as volatile as annual average spot price. Futures prices are impacted by forecast conditions – such as shortage of water during the prolonged drought. Futures prices also appear to be impacted by spot market “sentiment”. Impact of carbon price was impossible to gauge in late 2011 – and is likely to remain so until after next Federal election.

9 Comparison of fossil fuel costs Key Assumptions: Gas $5.00/GJ Coal $4.20/t Carbon price $23/t Public domain unit capex costs for OCGT, CCGT and IGCC. Indicative Dual Gas unit capex for IDGCC. $150M Government subsidy for IGCC & IDGCC. 30 year analysis. 10% Discount rate Key Observation: It is easy to see why rational investors will build OCGT – and then think about CCGT.

10 Electricity price trajectories Residential retail price Key Observations: Largest increase is retail variable energy, up 50% since 2006 – even though both spot prices and Futures prices remained weak. Recently ~$110/MWh, compared to ~30/MWh spot price and $40- $50/MWh Futures price. Unclear if this is due to risk presented by increasingly volatile load profiles of increasingly prolific & Solar – or the impact of another retail oligarchy. Fixed network cost increase due to Government mandated “Smart Meter Rollout”.

11 Summary points The electricity market is an extremely volatile and highly risky place to invest in long life capital assets. The risk is compounded by uncertainty about both existing and proposed renewable policy – and the “alarmingly” frequent refinement of renewable policy settings. Potential investors in both fossil fuelled and (large scale) renewable generation are behaving in a logical and rational way. They will not invest unless they can mitigate investment risk through oligarchic relationships or other long-term hedge arrangements. The investment challenges presented by volatility and uncertainty will be compounded by rapidly falling Solar PV costs and poor policy choices of Government. Continued proliferation of Solar PV, which appears inevitable, will also present real challenges for current retail and network pricing policies in the very near future.  Even without subsidies, Solar PV users will reduce their annual electricity costs under current tariff policies.  But current network technology cannot cope with rapidly changing 2-way flow of energy in the low voltage networks. Substantial investment in networks will be required to monitor (and possibly control) varying load; and to allow network operation to accommodate highly variable 2-way energy flow. But who then pays for supply volatility risk and network services?  AC using households have benefited from archaic (network and retail) tariff policies for decades.  Solar PV using households are benefitting from the same archaic tariff policies.