1. Experiences of the Australian Electricity Market under power disturbances and financial stress Dr Brian Spalding Chief Operating officer
WELCOME to NEMMCO’s Overview of the NEM.
My name is Kathy Calokerinos, and I will be facilitating the workshop today.
PARTICIPANT LAISION OFFICER for NEMMCO This role involves meeting and liaising with participant organizations, improving relations between NEMMCO and other players in the NEM.
I have a background is in Economics and Finance and have worked in the electricity supply industry for the past 20 years in corporate roles with both Macquarie Generation, Pacific Power and Electricity Council of NSW.
Since joining NEMMCO in Feb 1998, I have been responsible for:
the co-ordination of the bi-monthly NEMMCO NEM Forum
establishing various communication channels in NEMMCO managing the design and development of NEMMCO's education program based on the outcomes of an education needs analysis.
Will spend next few minutes going over
General HOUSEKEEPING
Course content and structure

2. Overview Overview of Australia’s National Electricity Market (NEM)
Recent major events in the NEM
Power System
Financial
Recent Trends in Reform

3. Australia’s National Electricity Market
covers the Eastern and Southern interconnected electricity system
The Australian electricity industry is one of the most important sectors of the Australian economy underpinning growth and investment by providing cheap and reliable energy to businesses and households.
With over $74 billion in assets
30,000 employees and
annual investment of over $2.4 billion,
Serves 7.7 million customers
it directly contributes an estimated 1.33 percent gross domestic product (source ABS 2001/02).
Australian electricity has been supplied to industry at prices well below that of most other OECD countries, supporting the development of a range of internationally competitive, energy intensive industries.(1 SthAfr, 2 Aust, 3 Can, 4USA, 5 UK,6 Japn
Scale
1,000km

4. NEMMCO – Market and System Operator
NEMMCO is the Market and System Operator for the Eastern and Southern Australia (92% by energy)
NEMMCO
Operate the Market, determines prices and settles the physical spot market
Operate the Power System, responsible for power system integrity
Co-ordinates inter-regional transmission planning
Facilitates the operation of the retail market

5. NEM – The Electricity Market
Gross pool (Compulsory)
Generator production levels and prices are set each 5 minutes by NEMMCO on the basis of offer prices from Generators within a constrained optimisation
30 minute trading interval (Spot) price in each of 6 regions
No physical delivery contracts as financial instruments (over the counter CFDs or hedging contracts, futures contracts) between participants manage the physical spot price risk
NEMMCO settles the cash spot market but does not settle the financial instruments
Annual spot market settlement transactions in 2006/2007 of about AU$11B (US$9.6B)
Settlement is weekly, 4 weeks in arrears (about 33 days accumulation)

6. Wholesale versus Financial Market
NEM - Cash Overview
(hedging contracts)
Financial Market
Generators
Retailers
Settlement for 100% of energy Consumed
Settlement for 100% of energy Generated
Wholesale versus Financial Market
Prudential Risk
The value of pool transactions is around $7 billion per year
Pool settlements take place every week
Sustained high prices can quickly threaten companies liquidity if they are inadequately hedged (eg, $10,000/MWh*1 hour*2000MW = $20m in a hour)
Bank letters of credit, margin calls, retailer of last resort
Financial Risk
High volatility, variable volumes of demand and load
Market Participants use the financial market to hedge risks arising from the physical market
Pool price affects cash settlements from financial transactions
Spot Settlement
(NEMMCO)
Physical (Spot) Market

7. NEM - Market Pricing
The NEM is a constrained real time (5 minutes ex-ante) priced spot market
During disturbances prices will be volatile
Real time pricing generally aligns with dispatch of generation
Some aspects of NEM design have been developed to drive long term investment but in an emergency can break the linkage of pricing and dispatch
When load is shed and cannot be all restored the Market Rules have the price being set to the Value of Lost Load ($10,000/MWh)
There are few reasons to direct generators that are not responding to Power System needs but when generation is directed – the market is priced as if the direction had not been given

8. NEM Regions QLD NSW SA S Vic Tas 6 Price Regions
Generators Paid Regional Price
Customers Pay Regional Price
NSW SA S
Vic
Tas

9. Recent NEM Events
NEM performance has been sound over last 9 years.
Investment forthcoming
Competitive wholesale prices
Fierce retail competition
The IEA reported that the NEM is a competitive competitive and effective electricity market
Survived two significant events this year – but not without opportunities for improvement
16 January 2007 – 2,200 MW of customer load interrupted following bushfire transmission line faults
June 2007 – major increase in prices leading to the suspension of a retailer and the invocation of the Retailer of Last Resort process

10. 16 January 2007 – Bushfire Event
Bushfires in Victoria for the previous 40 days
Maximum demand for year in Victoria – about 9,200 MW
All interconnectors were at maximum flow into Victoria
Generation reserves adequate
Power System operated to cover for any single contingency
Two single circuit 330kV lines (same easement) from NSW/Snowy to Victoria tripped and locked out of service
Six other transmission lines tripped out of service
System separated into three island systems
Victorian “island” had a major generation deficit
Automatic under-frequency relays interrupted 2,200MW of customer load in Victoria and averted a major disturbance

11. Before the event QLD S/NSW SA 1690MW Vic 300MW 484MW Tas $190/MWh

12. After the event QLD S/NSW SA 400MW Vic 200MW Tas $90/MWh $12/MWh
2200MW shed
$8,500/MWh
200MW
Tas
$60/MWh

13. 16 January 2007 – Outcomes – System
All transmission line protections operated as designed
The automatic under-frequency load shedding effectively controlled the Victorian low frequency and averted major Victorian collapse
Most power stations maintained capability and contributed to system management
There were no issues with the control of transmission voltages in Victoria during the stabilisation period
South Australia reconnected to Victoria in 40 minutes and all island systems were reconnected in 3 hours (delays as the fire authorities would not give clearance for lines to be restored for fire fighting and safety reasons)
All load restored in 4.5 hours

14. 16 January 2007 – Outcomes - Frequency

15. 16 January 2007 – Outcomes - Operation
Review the process to determine when to operate the Power System to withstand a multiple contingency event
ie when to cover for the loss of two separate 330kV lines
Man machine interface – Challenge to provide Operators with rapid view
8 lines tripped across a wide geographic area
3 islands
Took some minutes to be clear on system state
Need to control multiple separate frequency control areas
Looking to more flexible systems
Market System flexibility
Need to continue to function and dispatch appropriate generation in an islanded environment
Simulate these events for further training

16. 16 January 2007 – Outcomes - Market
Real Time Pricing in emergencies
Simplify Rules in an emergency – do not require power system operators to be considering market impacts during disturbances as they are focused on Power System security
Ensure incentives on generators align with Power System need. By artificially setting a price to the Value of Lost Load regardless of the generator offers can create complex incentives and market outcomes.

17. The power system responded well and the event was contained
16 January 2007 – Outcomes
The power system responded well and the event was contained
Some processes can be improved
Some Market design issues need to be reconsidered

18. Financial Event – Drought
Drought conditions had been worsening over the last 12 months
Some thermal generators put on standby to conserve cooling water
Most hydro generators with limited water
Greater gas fired generation
Spot and contract prices up by 80% since January 2007
High volume in futures contract trading
High wholesale prices made it difficult to source supply at reasonable cost
Retailer stress due to regulated retail tariffs
NEMMCO commences publishing projected energy assessments in addition to routine capacity (Supply/Demand) assessments

19. Financial Event – June 2007
June 2007 (Winter) was cold in South and East Australia
Some record electricity demands but within capability of supply
Large Generator (13% of NEM, 35% of NSW region) bidding behaviour
Pricing a substantial portion of its capacity at near VoLL just for the peak period of the day
June 2007 prices in New South Wales
$230/MWh for month (Jun 2006 was $31.47/MWh)
42 half hours greater than $5,000/MWh

20. NEM Market Outstandings

21. Futures Contract Prices

22. June 2007 Event Consequences Opportunities
Small retailer suspended from trading as it could not honour its customer contracts
Two other retailers in obvious financial stress
Retailer of Last Resort (RoLR) enacted transferring 6,000 customers to a new retailer following suspension
Suspended retailer was co-operative
Smooth processes experienced
Opportunities
More efficient cash and settlement processes
Review length of Settlement cycle
Review effectiveness of netting spot and contract settlement
Test RoLR for very large customers numbers

23. Trends in Operation and Reform
Renewable Generation
Increasing wind generation – greater need for increased wind generation forecasting, more complex reliability assessment, and network management complexities
Increasing gas generation
Integration of Gas and Electricity
Fuel balance implications under periods of heavy gas fired electricity generation
Emergency management of both gas and electricity incidents
Many Retailers involved with both fuels
Trend to National market in both fuels
Australian Energy Market Operator (AEMO) to be formed from July 2009 to combine NEMMCO and Gas Markets

24. Trends in Operation and Reform
National Approach to Transmission Planning
State planners have clear state reliability obligations
No clear obligations to benefit National trading
AEMO as a National Transmission Planner
Very large increases in data movement between the industry
Interval meter role out
Retail customer churn – 25-30% in Victoria and South Australia
B2B transactions

25. Overview Overview of Australia’s National Electricity Market (NEM)
Real time constrained gross market
Recent major events of the NEM
Tested process and showed opportunities for improvement
Recent Trends in Reform
Closer linkages between electricity and gas