The Outlook for Retail Electricity Prices

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

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

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 50 47 45 40 37 35 30 25 20 15 10 11 13 13 15 18 19 19 19 20 20 22 23 23 23 26 26 26 26 27 28 28 31 31 32 5 0 Source: ABARE, Energy in Australia 2010

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 24 22 20 18 16 14 12 10 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Melbourne Sydney Brisbane Australia Source: Australian Energy Regulator, ABS 6401.0

Rising network costs have largely driven the increase in electricity prices to date Increase in residential electricity prices (NSW example) Cents per kwh 16.0 1.3 0.1 7.5 20.4 2.5 0.8 9.7 7.1 7.4 2007 2011 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

Many factors will continue to drive electricity prices to almost double in the next six years Increase in residential electricity prices Cents per kwh 36.3 3.6 0.9 Retail costs and margins Renewable costs Increase 2011 to ~2017 45% 12% 20.4 16.9 Network charges 75% 16.0 2.5 0.8 1.3 7.5 9.7 7.1 7.4 14.9 Wholesale electricity 100% 2007 2011 2017 Source: PJPL modelling

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)

Coal will remain the predominant energy source for power generation in China Forecast of China s power generation TWh CAGR (2007-2020) 6,692 322 848 8,847 487 1,046 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 3,318 62 485 5,119 6,639 Coal 5.1% 2,685 2007 2020 2030 Source: IEA World Energy Outlook, 2009; Reference case

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 (2007-2020) CAGR (2007-2020) 3,318 62 485 2,685 6,692 322 848 5,119 8,847 487 1,046 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% 794 66 124 537 1,649 189 188 1,095 2,737 299 251 1,935 Total 5.8% Oil/other 2.9% Wind 8.1% Gas 8.3% Nuclear 6.8% Hydro 3.1% Coal 5.7% 2007 2020 2030 2007 2020 2030 Source: IEA World Energy Outlook, 2009; Reference case

Planned increases in Australian port capacity will potentially lead to a significant increase in coal exports Newcastle coal port capacity Million tonnes 250 200 Export volumes Estimated export capacities Doubling in coal export capacity 150 100 50 0 FY00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Source: HVCCC Presentation, 2010

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 140 120 100 80 60 40 20 5.0 4.0 3.0 2.0 1.0 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 0 0.0 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 * 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

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 ~$3.5-4.0/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

Domestic gas costs are expected to rise to over $8/GJ Forecast Queensland domestic gas prices A$/GJ ($2011 real) 9.0 8.0 Current market expectations and behaviour indicate the High scenario is likely to eventuate High 7.0 6.0 5.0 4.0 Medium Low 3.0 2.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: 2011 Gas Market Review Queensland

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 90 64 28 14 50 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

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 104 90 14 26 40 28 Potential carbon cost @$27/t 42 54 50 14 Potential increase in coal costs by $1.5/GJ Potential carbon cost @$27/t 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

Recent regulatory determinations have approved significant increases in distribution network costs Distribution network annual revenues in NSW, Queensland and Victoria $ Millions, financial years 12.0 10.0 8.0 6.0 Total Citipower Jemena United SP AusNet Powercor Ergon Energex 5-yr growth* +61% +28% +31% +30% +54% +35% +50% +60% 4.0 2.0 0.0 2009 2010 2011 2012 2013 2014 2015 Essential (Country) Endeavour (Integral) Ausgrid (EA) +87% +57% +88% * 5-year growth over each jurisdiction s respective regulatory period (2009-2014 for NSW, 2010-2015 for Qld, 2011-2015 for Vic). Overall growth over 6 year period assumed to be 85% Source: Australian Energy Regulator

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 45 40 35 30 25 20 15 10 5 REC price may remain low to ~2015 with current large REC surplus RECs created (large-scale and small-scale) with surplus of ~33m at 2010 0 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 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

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 41.0 49.7 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? 7.4 4.8 3.6 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

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

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% 4.6 1.7 4.3 0.9 TRUenergy 20% AGL 22% Origin 30% Australia 1.0 1.1 2.2 1.2 0.7 1.5 1.2 0.5 1.8 0.9 0.2 1.2 0.5 1.0 0.6 0.4 NSW Vic Qld WA SA Source: UBS, Australian utilities structure 2009

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

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