The Outlook for Retail Electricity Prices

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Emmeline McKinney
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1 The Outlook for Retail Electricity Prices Presentation to Power Australia Conference 2011 Edwin O Young 27 September 2011

2 Australia s future retail electricity price environment Australian retail electricity prices have risen by over 35% in the past four years in real terms Many factors will continue to drive retail electricity prices to almost double in the next six years While many cost increases are unavoidable and should be properly reflected in consumer prices, we need to ensure they do not increase more than is necessary

3 Chinese Taipei United States Croatia (2007) Australia Switzerland Turkey Norway New Zealand France Finland Japan (2007) Singapore Poland Czech Republic Spain Slovak Republic Portugal Hungary United Kingdom Luxemburg (2007) Netherlands Austria Germany (2007) Ireland Italy Denmark Australian electricity prices have been relatively competitive compared with most OECD countries World residential electricity prices, 2008 Cents per kwh, 2008 dollars Source: ABARE, Energy in Australia 2010

4 Electricity prices in Australia have risen by over 35% over 4 years Estimated real electricity prices Cents per kwh, real 2011 dollars 26 Real increase of over 35% over 4 years, or ~8% per annum above inflation Melbourne Sydney Brisbane Australia Source: Australian Energy Regulator, ABS

5 Rising network costs have largely driven the increase in electricity prices to date Increase in residential electricity prices (NSW example) Cents per kwh Retail costs and margins Renewable costs (LRET & SRES) Network charges Wholesale electricity Increasing retail operating costs and customer acquisition costs Increasing cost of LRET ~0.2 c/kwh; Added cost of SRES ~0.6 c/kwh Rising peak demand Replacement of ageing assets Costs to meet increased standards (environmental, safety, reliability, etc) Lack of strong incentives for demand management Not significant driver of increasing electricity prices to date Source: IPART; PJPL analysis

6 Australia s future retail electricity price environment Australian retail electricity prices have risen by over 35% in the past four years in real terms Many factors will continue to drive retail electricity prices to almost double in the next six years While many cost increases are unavoidable and should be properly reflected in consumer prices, we need to ensure they do not increase more than is necessary

7 Many factors will continue to drive electricity prices to almost double in the next six years Increase in residential electricity prices Cents per kwh Retail costs and margins Renewable costs Increase 2011 to ~ % 12% Network charges 75% Wholesale electricity 100% Source: PJPL modelling

8 Many factors will continue to drive electricity prices to almost double in the next six years Increase in residential electricity prices Cents per kwh Retail costs and margins Renewable costs Increase 2011 to ~ % 12% Network charges 75% Wholesale electricity 100% Source: PJPL modelling

9 Wholesale electricity prices will potentially double over the medium-term Increasing coal prices as coal suppliers gain an export option and as coal contracts come up for renewal Increasing gas prices as the east coast gas market also gains export options Impact of a carbon price on coal and gas generation Capital construction costs will be higher than they have been in the past High price volatility with increasing intermittent generation and potential increase in market price cap to $16,000/MWh Wholesale electricity prices converging to long-run costs (currently below)

10 Coal will remain the predominant energy source for power generation in China Forecast of China s power generation TWh CAGR ( ) 6, , ,046 Total 5.5% Oil/other 6.2% Wind 25.2% Gas 10.8% Nuclear 13.5% Hydro 4.4% Growth of 60 mtpa in thermal coal 3, ,119 6,639 Coal 5.1% 2, Source: IEA World Energy Outlook, 2009; Reference case

11 Coal will similarly remain the predominant energy source for power generation in India Forecast of China s power generation TWh Forecast of India s power generation TWh CAGR ( ) CAGR ( ) 3, ,685 6, ,119 8, ,046 6,639 Total 5.5% Oil/other 6.2% Wind 25.2% Gas 10.8% Nuclear 13.5% Hydro 4.4% Growth of 60 mtpa in thermal coal Coal 5.1% , ,095 2, ,935 Total 5.8% Oil/other 2.9% Wind 8.1% Gas 8.3% Nuclear 6.8% Hydro 3.1% Coal 5.7% Source: IEA World Energy Outlook, 2009; Reference case

12 Planned increases in Australian port capacity will potentially lead to a significant increase in coal exports Newcastle coal port capacity Million tonnes Export volumes Estimated export capacities Doubling in coal export capacity FY Source: HVCCC Presentation, 2010

13 Coal costs will likely rise over time, potentially by up to $1.5/GJ Historical and long-term thermal coal contract prices 160 A$/t* A$/GJ Average annual thermal coal export price (nominal) Broker consensus forecast thermal coal export price Coal costs could increase by $1.5/GJ over time for some power stations Range of coal costs to black coal power stations in NEM * Assumed energy density of 27.0 GJ/t (ABARE) for export coal; energy density of coal used by NEM stations is ~23.4 GJ/t (ABARE) Source: Broker reports, ACIL Tasman, PJPL analysis

14 Gas costs will likely rise over time, potentially by at least $4/GJ Gas netback costs $/GJ ~$80/bbl ~$17.2/GJ 1.7 LNG discount 5.0 Indicative net back or export parity delivered cost could be double current gas costs in NEM Capital cost 2.5 LNG processing cost ~$8/GJ ~$ /GJ $/bbl Oil price $/GJ Net back delivered gas cost Range of gas costs for CCGT in NEM Source: PJPL modelling, Credit Suisse, Wilson HTM

15 Domestic gas costs are expected to rise to over $8/GJ Forecast Queensland domestic gas prices A$/GJ ($2011 real) Current market expectations and behaviour indicate the High scenario is likely to eventuate High Medium Low Source: 2011 Gas Market Review Queensland

16 Increases in fuel costs could lead to generation costs rising by up to 45% Increase in coal generation costs $/MWh Increase in gas generation costs $/MWh Potential increase in coal costs by $1.5/GJ 62 Potential increase in gas costs by $4/GJ Current LRMC Potential LRMC Current LRMC Potential LRMC * Assuming Coal cost increase of $1.5/GJ, coal heat rate of ~9.5 GJ/MWh, coal emissions at 0.95t/MWh; Gas cost increase of $4/GJ, gas heat rate of ~7GJ/MWh, gas emissions at 0.5t/MWh Source: PJPL modelling

17 Increases in fuel costs and the impact of a carbon price could lead to a 100%+ increase in generation costs Increase in coal generation costs $/MWh Increase in gas generation costs $/MWh Potential carbon Potential increase in coal costs by $1.5/GJ Potential carbon Increase from today 62 Potential increase in gas costs by $4/GJ Increase from today Increase over current coal Current LRMC Potential LRMC Current LRMC Potential LRMC * Assuming carbon price of $27.4/t CO 2 -e ($20/t CO 2 -e escalating at 4% real over 5 years) Coal cost increase of $1.5/GJ, coal heat rate of ~9.5 GJ/MWh, coal emissions at 0.95t/MWh; Gas cost increase of $4/GJ, gas heat rate of ~7GJ/MWh, gas emissions at 0.5t/MWh Source: PJPL modelling

18 Many factors will continue to drive electricity prices to almost double in the next six years Increase in residential electricity prices Cents per kwh Retail costs and margins Renewable costs Increase 2011 to ~ % 12% Network charges 75% Wholesale electricity 100% Source: PJPL modelling

19 Recent regulatory determinations have approved significant increases in distribution network costs Distribution network annual revenues in NSW, Queensland and Victoria $ Millions, financial years Total Citipower Jemena United SP AusNet Powercor Ergon Energex 5-yr growth* +61% +28% +31% +30% +54% +35% +50% +60% Essential (Country) Endeavour (Integral) Ausgrid (EA) +87% +57% +88% * 5-year growth over each jurisdiction s respective regulatory period ( for NSW, for Qld, for Vic). Overall growth over 6 year period assumed to be 85% Source: Australian Energy Regulator

20 Many factors will continue to drive electricity prices to almost double in the next six years Increase in residential electricity prices Cents per kwh Retail costs and margins Renewable costs Increase 2011 to ~ % 12% Network charges 75% Wholesale electricity 100% Source: PJPL modelling

21 LGC prices are likely to increase significantly in the medium-term as the target increases rapidly LRET target Million LGCs Beyond around 2015, LGC prices will likely increase: Target increases rapidly to 41,000 GWh Projects not being developed with current low REC price REC price may remain low to ~2015 with current large REC surplus RECs created (large-scale and small-scale) with surplus of ~33m at Demand based on LRET (original target) Demand based on LRET (adjusted target for SRES) MRET RET LRET Source: PJPL modelling; REC Quarterly Review, Aug 2010; ROAM, Mar 2010; MMA, May 2010

22 There will likely be a shortfall in meeting the LRET target Pipeline of proven technologies to meet the LRET TWh generation per annum Wind Hydro Biomass Even though the publicised pipeline of wind projects is sufficient to meet the LRET, there are many reasons why it will be difficult to meet the target? 38.5 Shortfall in project developments? Biomass pipeline 0.2 Hydro pipeline Wind pipeline LRET 2020 target Currently operating renewables Total pipeline of commercially proven technologies Actual project developments Source: CEC Aug 2010; MMA; Discussions with industry experts

23 Many factors will make it difficult to meet the large LRET target Approval timeframes (environmental, land, etc) Addressing community concerns (noise, visual pollution) Transmission limitations (particularly for remote renewables) Impact of increasing intermittent generation Shortage of development skills and resources Revenue uncertainties (low REC price and difficulty in securing PPAs from major offtakers) Funding constraints given investment levels required

24 Many factors will continue to drive electricity prices to almost double in the next six years Increase in residential electricity prices Cents per kwh Retail costs and margins Renewable costs Increase 2011 to ~ % 12% Network charges 75% Wholesale electricity 100% Source: PJPL modelling

25 The retail industry remains relatively competitive with small margins Electricity and gas retail market shares Millions of customers Others Alinta Ergon 14.3m 19% 4% 5% TRUenergy 20% AGL 22% Origin 30% Australia NSW Vic Qld WA SA Source: UBS, Australian utilities structure 2009

26 Australia s future retail electricity price environment Australian retail electricity prices have risen by over 35% in the past four years in real terms Many factors will continue to drive retail electricity prices to almost double in the next six years While many cost increases are unavoidable and should be properly reflected in consumer prices, we need to ensure they do not increase more than is necessary

27 Ensure retail electricity prices do not increase more than is necessary Stem future increases in network costs: Review energy market frameworks, e.g.: Burden of proof to reject or amend network spend proposals Unbalanced appeals process Ensure standards for network reliability align with customers willingness to pay But current network regulatory determinations are in place until 2014 in NSW and 2015 in other major states Demand side management opportunities: Smart meters, in-home real-time information for consumers, time-of-use pricing or dynamic pricing, etc Driven by either distributors or retailers Ensure proper cost-benefit analyses Arm customers with information and tools

28 Australia s future retail electricity price environment Australian retail electricity prices have risen by over 35% in the past four years in real terms, largely driven by network costs Electricity prices will continue to increase, potentially doubling from 2011 to 2017: Network costs with determinations through to 2014 and 2015 Energy costs with increasing coal costs, gas costs and carbon costs Increased costs should be properly reflected in consumer prices While many increases unavoidable, need to ensure they do not increase more than is necessary

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