TABLE OF CONTENTS. Western Power: EMR Submission. NETWORKS Page 2 16

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2 TABLE OF CONTENTS FOREWORD FROM THE CEO... 3 SECTION 1 BACKGROUND... 4 SECTION 2 ELECTRICITY MARKET REVIEW QUESTIONS... 9 SECTION 3 CONSIDERATIONS FOR THE FUTURE Note: All years noted in this document relate to Financial Years (Jul-Jun) not Calendar Years (Jan-Dec). NETWORKS Page 2 16

3 FOREWORD FROM THE CEO The South West Interconnected Network (SWIN) has played an integral role in Western Australia s growth story over the last 100 years. Throughout this time, Western Power s mission has been to deliver a reliable supply of electricity to the vast majority of Western Australians, over what is one of the more remote, diverse and challenging landscapes in the world. More than ever before, Australian living standards are dependent on the safe and reliable access to electricity. Western Power provides an essential service by ensuring the safe delivery of electricity to nearly 2.5 million people living in Western Australia. In recent years, Western Power has achieved significant improvements in creating a safe environment for our employees and delivering a reliable service for our customers at a relatively low cost per connection. The Electricity Market Review stated that Western Power is one of the lowest cost electricity networks in Australia. This is despite the geographic diversity and the State s relatively low population density compared to other states in Australia. Western Power remains committed to driving further efficiency across the organisation to support the affordability of electricity supply for all Western Australians. It is important to highlight that a healthy electricity network is required for the market to operate effectively and efficiently. This will remain the case independent of the future mix of generation or market structure. While many of the proposed electricity market reforms will challenge the status quo, embracing the opportunity provided by this government will help to reduce the cost of supplying electricity to all Western Australians. This document is intended as an assessment of opportunities to reform the electricity sector, particularly in relation to Western Power s current and future contribution to the long term efficiency and competitiveness of the supply chain. As the operator of such a critical driver of our State s economic growth and standard of living, we value the opportunity to submit this response to the Electricity Market Review. NETWORKS Page 3 16

4 SECTION 1 BACKGROUND WESTERN POWER OVERVIEW Western Power is a State Government Trading Enterprise (GTE) that builds, maintains and operates the electricity network throughout the majority of south Western Australia. It provides safe, reliable and affordable access to electricity to over one million connected customers including homes, businesses, schools and hospitals. OUR CUSTOMERS WESTERN POWER OUR CUSTOMERS GENERATION Generators make electricity at power plants using a variety of fuel sources. TRANSMISSION & DISTRIBUTION The network or grid consists of transmission (high voltage infrastructure such as large steel towers) and distribution assets (low voltage infrastructure such as suburban street power poles). RETAIL Retailers manage the interface between the network and consumers. Western Power ensures that there is sufficient short term generation capacity, system security and an appropriate system configuration in order to meet predicted electricity usage. System Management, a segregated business unit within Western Power, has responded to the Electricity Market Review s Discussion Paper in a separate, independent submission. THE SOUTH WEST INTERCONNECTED NETWORK (SWIN) The Western Power network forms the vast majority of the South West Interconnected Network (SWIN). The SWIN is an integrated transmission and distribution network, which together with the electricity generators comprises the South West Interconnected System (SWIS). Western Power has a uniquely large, remote and low density population catchment for a stand-alone network. Western Power s line length is approximately 98,000kms. With one million customer connections, the network is less dense than OECD 1 peers. This presents challenges for continuing to deliver a safe and reliable customer service as efficiently as possible. Western Power s commitment is to connect customers with the electricity today and in the future, in turn, continuing to support the economic development of the State. KALBARRI GERALDTON PERTH BUNBURY WESTERN POWER FACTS 98,967 km of circuit length 807,369 poles and towers 245,685 streetlights 1,033,912 customer connections 900,000 calls received 29,532 new connections Coverage ~255,064 km 2 ALBANY KALGOORLIE Figure 1: The SWIS 1 Organisation for Economic Co-operation and Development NETWORKS Page 4 16

5 WESTERN POWER ASSETS The network has undergone significant growth since disaggregation in 2006, primarily in capacity (to meet an increase in peak load) but also in reach to accommodate new suburbs. Many of the assets supporting the electricity network are more than 30 years old, with an effective working life of between 30 and 50 years. Western Power publishes a State of the Infrastructure Report 2 annually, detailing the health of the network, as the performance of these assets has an impact on Western Power s ability to deliver a safe, reliable and affordable electricity supply to customers. A healthy network is required for the market to operate effectively and efficiently. Western Power has a comprehensive asset management program to ensure that the highest risk assets are addressed as a priority. However, due to the large number and geographic dispersion of these assets, the asset replacement program will occur over an extended period of time. Western Power has been operating in the State with the 800 highest economic growth, by 600 GDP and population, since 400 disaggregation. There was a large emphasis on extending the 200 network to enable this State - growth. Since 2012, Western Power has shifted its focus to asset replacement which is reflected in the increase in nongrowth capital expenditure as shown in Figure 2. $ million 1,200 1,000 Total Non-Growth Total Growth Figure 2: Capital Expenditure Over the past two years government funding has allowed for an unprecedented level of asset replacement including: A record 91,352 wood poles replaced or reinforced Elimination of over 5,000 km of streetlight switch-wire Upgrade of 68,224 overhead customer service connections. 2 Additional information regarding the state of network is available in the State of the Infrastructure Report, 2013, NETWORKS Page 5 16

6 CUSTOMER EXPECTATIONS The Western Power strategy involves a focus on its customers, recognising that delivering safe, reliable and affordable electricity is essential to the economic development and living standards of the Western Australian community. Customers have increasing expectations regarding the reliability of electricity supply and expect the lights to come on every time. mins per year Planned interruptions Major event day / Force majeure Unplanned interruptions - Distribution network Unplanned interruptions - Transmission network Over the last four years, Western Power achieved an average of per cent of supply availability in Perth CBD, 99.9 per cent in the remaining Perth metropolitan area and 99.6 per cent in rural areas (measured by the average percentage of time customer premises are supplied). The average number of interruptions (interruptions greater than 60 seconds) per customer on the SWIN has reduced since disaggregation. interruptions per year Average reliability performance for the first two years of AA3 (2013 and 2014) was better than the reliability targets set by the Economic Regulation Authority (ERA) Western Power also successfully Planned interruptions Major event day / Force majeure Unplanned interruptions - Distribution network Unplanned interruptions - Transmission network achieved 16 of the 17 service standard benchmarks approved by Figure 4: Number of Interruptions the ERA in Interruptions in rural areas were below the service standard benchmark due to pole top fires, fauna and inclement weather. These high levels of performance achieved by Western Power have created an environment where our customers will continue to demand the level of reliability of supply and power quality that they currently enjoy. A SUSTAINABLE WESTERN POWER Figure 3: Supply Unavailability Western Power has played an important role in the development of Western Australia through the provision of safe and reliable electricity to the community. A sustainable business model for Western Power is critical to utilise the investment the community has made in the network for future generations. NETWORKS Page 6 16

7 NETWORK IMPACT ON WESTERN AUSTRALIA ELECTRICITY PRICES Network costs contribute to approximately one third of overall residential electricity costs. The Western Power network is relatively efficient when compared to its national peers, especially considering the challenging geography and low population density that is a feature of the SWIS. When compared nationally, Western Power ranks the third lowest network cost per customer 3 (see Figure 5). Gold plating is a common term used to describe investing in network assets that are of higher cost than needed. Independent observers have identified that gold plating has occurred in some East Coast networks. While this may have occurred in the East, it has not occurred on the Western Power network. Western Australia has a different regulatory model to the East Coast; one that penalises capital expenditure deemed inefficient. The ERA, after receiving advice from its independent experts, reviews the efficiency of Western Power s proposed capital expenditure in determining the access arrangement. However, unlike the Eastern States regulation, there is also a post investment review conducted by the ERA. Asset write-downs, without limitation, can occur if investment is deemed to be inefficient. Annual Cost per Customer $ Vic NSW Western Power Vic Vic NSW Figure 5: Benchmark network tariff per residential customer as at Jan 2014 Vic SA QLD NSW Vic Tas QLD The ERA is reasonably confident that Western Power s capital base is not gold plated. ERA, Submission on the Senate Inquiry on Electricity Prices, September NSW 3 Based on network tariffs and average annual customer consumption as at 1 January2014 NETWORKS Page 7 16

8 Increases in network investment have a relatively low impact on retail electricity prices. Figure 6 4 shows the impact on retail electricity prices for changes in weighted average cost of capital (WACC) and capital expenditure. A 30 per cent increase in Western Power s WACC would increase retail electricity prices by 1.6c/kWh. A 30 per cent increase or approximately $2 billion in Western Power s capital expenditure program would result in approximately a 0.4c/kWh increase in retail electricity prices in the next regulatory period. WACC Capex Western Power s network has expanded significantly to underpin State growth over the period , where the State s population grew by 23 per cent and peak load increased by 27 per cent. Western Power is committed to providing an affordable network service and will continue to drive efficiency across the organisation. As a result of the implementation of efficiency measures across the business, Western Power s regulatory operating expenditure in 2013/14 of $488 million is $41 million lower than expenditure in 2011/12. Adjusting for the growth in the installed network capacity, transmission and distribution expenditure per MVA 5 installed decreased by 14 per cent and 9 per cent respectively. ` % Change +30% Change c/kwh Figure 6: Sensitivity of network tariffs to changes in drivers of network costs Western Power has achieved the ERA s operating expenditure efficiency target in the first two years of AA3. 4 Network average price changes are based on extrapolating the current expenditure profile endorsed under the access arrangement into the next regulatory period and modelling the impact on revenue of changes to WACC or Capex. 5 Mega Volt Ampere (MVA) is a measure of the capacity of the network which has been calculated in accordance with the Australian Energy Regulator (AER) benchmarking process. NETWORKS Page 8 16

9 SECTION 2 ELECTRICITY MARKET REVIEW QUESTIONS This section outlines Western Power s response to specific questions raised in the EMR discussion paper. CONSTRAINED ACCESS Question 29: Would it be more efficient, and cheaper for new entrants, to move to an access code based on constrained connection for all parties connected, similar to that applying in the NEM? Western Power supports the introduction of a constrained network model for the Wholesale Electricity Market (WEM). The particular operational model selected should be subject to a cost benefit analysis, and appropriate legislative and regulatory reform will be required to mitigate associated risks. While not formally codified in any legislation, there is a generally accepted design principle that generators connected to the Western Power Network are unconstrained. The Electricity Network Access Code 2004 does not require unconstrained access; however the network is planned, designed and built to allow unconstrained natural load growth. An unconstrained network is developed to allow all generators to supply electricity onto the network without limitation. A fully constrained network is typically built to accommodate load growth and therefore generators must compete for network access. Western Power s network is currently a hybrid quasi-constrained network where some generators have chosen to connect on a constrained basis. Moving to a constrained network will involve a range of risks requiring mitigation including: Potential reliability issues relating to the size and islanded nature of the network Risk that sufficient generation capacity will not be installed in future years (due to incentives inherent in a different market design including perhaps removal of generation availability payments) Contractual liability of Western Power to existing generators whose firm access rights may be removed Liability of generators to retailers in being potentially unable to meet obligations within bilateral purchasing agreements Risks to government with respect to sovereign risk. The general requirements for such a transition may include: Existing access contracts being overturned or grandfathered Existing Technical Rules for transmission being modified or removed if National Electricity Rules (NER) are adopted WEM design changes for dispatch or adopting the NER Changes to dispatch process and systems to incorporate network constraints, or adopting the NER Removal or modification of WEM reserve capacity credit mechanism as the current mechanism provides capacity to the level of unconstrained access to the network, and would therefore be redundant. NETWORKS Page 9 16

10 WEIGHTED AVERAGE COST OF CAPITAL (WACC) Question 30: Higher WACC would encourage network investment but could lead to an increase in network tariffs. Is this is a necessary trade-off to achieve a reliable network? A healthy and reliable network requires a consistent regulatory environment and reasonable returns to encourage network investment and attract private equity for future network investments. A higher WACC is necessary to encourage investment but will not impact network tariffs substantially under current tariff structures. A 30 per cent increase in Western Power s WACC would increase the network component of retail electricity prices by only 1.6c/kWh. REDUCING SUBSIDIES THROUGH NETWORK TARIFF REFORM Question 37: What industry changes need to be made to reduce subsidies? Network tariffs are set by the Access Code framework which seeks to simulate a competitive market. The primary objective is to promote economically efficient investment, operation and use of networks in order to promote competition in markets upstream and downstream of these networks. Current subsidies are a result of retail prices that are not cost reflective. Western Power supports moving towards more cost reflective and transparent tariffs as a means of reducing inefficiency in the market. Clear price signals are an aid to achieving market efficiency. Efficiency in the electricity network is improved when network services are priced to reflect the costs of supplying those services. A more efficient use of the network will lead to improved affordability outcomes for customers, by reducing the need for further network investment. Network costs are primarily driven by two physical characteristics: Amount of peak consumption capacity required (how wide are the pipes) Distance between electricity consumers and electricity producers (how long are the pipes). Western Australia experiences a peakier demand than other states, based predominantly on the climate (and subsequent air-conditioning usage) and the relatively lower levels of industrial customers (reducing the need for consistently high levels of electricity). The average load factor in Western Australia is around 56 per cent compared to the NEM states, where the average is >68 per cent. Between 2009/10 and 2013/14, demand was greater than 90 per cent of peak demand for only 0.5 per cent to 0.7 per cent of the year. Essentially, the system operated at less than 90 per cent of its capacity for more than 361 days of every year. The costs of building a network to accommodate such an infrequent peak are disproportionate to the corresponding value of electricity during this peak. Incentivising customers to reduce electricity usage during peak times provides a more economical and equitable solution to this problem. Digital meters are an enabler for structural change to the industry and the only effective way to implement peak pricing in network tariffs. They also support more innovative tariffs and improve the information available to customers, retailers and network providers to manage energy use and costs. Western Power is considering changes to the current network tariff structure to resolve some of the issues highlighted above. Western Power will invite further consideration from stakeholders prior to including any changes to the structure of network tariffs in its submission for the Fourth Access Arrangement starting on 1 July Western Power believes Full Retail Contestability (FRC) will have positive benefits for Western Australian customers. Introduction of FRC in the Eastern States has seen the elimination of subsidies NETWORKS Page 10 16

11 over time. FRC, coupled with new retail and network tariffs and digital meters, would facilitate improved price signals to end users and more efficient use of the network at peak times. Ultimately, this would minimise the need for future network augmentations and provide downward pressure on prices. There are many differences between the options available to implement FRC. Initial indicative estimates for Western Power s costs range between $12-$28 million based on experience from the NEM. However further analysis will be required to address issues specific to Western Australia. TARIFF EQUALISATION CONTRIBUTION (TEC) Question 41a: In moving to a market that can accommodate FRC, how should the Tariff Adjustment Payment (TAP) and TEC be handled? The TAP is a State Government subsidy covering some of the cost to supply electricity to residential customers in the SWIS. Currently, the TAP is paid to Synergy as the monopoly retail service provider to residential customers in the SWIS. In the event of FRC where the residential customer base may be divided amongst several electricity retailers, an alternative mechanism for providing the TAP would be required to ensure that equitable allocation to all residential customers is maintained. As Western Power would remain a monopoly distribution service provider to residential customers in the SWIS, there may be a means to allocate TAP as part of the determination of residential network tariffs. The TEC is a retail equalisation mechanism to ensure consistency in retail tariffs between electricity consumers in the SWIS and electricity consumers in remote and regional centres serviced by Horizon Power. The TEC is not a network cost. It is a retail price equalisation policy of the Government, designed to ensure consistent electricity tariffs for all electricity consumers, no matter where they live in Western Australia. Question 41c: Should the TEC continue to be funded from the SWIS distribution tariffs, or instead be funded from consolidated revenue? Western Power notes that the TEC is a matter of government policy. METERING Question 42a: Should the network operator be subject to competition in the provision of metering and other services? The majority of metering services are currently obtained through competitive tendering processes. Metering services represent a relatively small portion of Western Power s total costs which form part of the network tariff. In the event that metering becomes a contestable service, Western Power would expect to be able to fully participate in the provision of metering services. It is important to ensure there are no obstacles imposed on customers switching retailers to achieve lower electricity costs through the introduction of contestability in metering service. NETWORKS Page 11 16

12 WESTERN AUSTRALIAN ELECTRICITY MARKET (WEM) OR NATIONAL ELECTRICITY MARKET (NEM) Question 42b: Should the WEM adopt the NEM access regime? Western Power operates a sparse and isolated network within a market structure unique in Australia. Therefore, transition to the national framework would require careful consideration of appropriate derogations to take account of unique local conditions. In addition to issues of scale and the potential reduction in security posed by uncertain generation investment from an energy-only market, adopting the NEM would require resolution of the issues mentioned in response to Question 50a in order to transition to a fully constrained network. As such, appropriate derogations would be needed to take account of unique conditions, which as an interim initial step, could include transfer the Access Code to the Australian Energy Regulator s (AER) jurisdiction. Adopting the NEM framework requires transition to a fully constrained electricity market whereas the current market design implies an unconstrained network. Adopting the NEM framework may require Western Power to invest to remove constraints when the net benefits to the market exceed costs. However, moving to a fully constrained model should result in a more efficient network in the longterm. Regardless of the outcome, it is important that the access regime aligns with the market design adopted. The administrative costs borne by Western Power in relation to the management of the economic regulatory process are not likely to be materially different under the NEM. Further to the market arrangements, Western Power values the certainty and consistency inherent in the national regulatory framework. Furthermore, a level playing field is required to attract future capital investment in Western Power s network. Recent decisions by the ERA (for example, deferral of revenue, WACC) could be perceived as creating an environment of regulatory and investment uncertainty. This environment has the potential to be a barrier to new capital investment in Western Australian infrastructure. Question 50a: What do you consider the most important matters to be managed in a transition to the NEM? The more important matters to be managed in a transition to the NEM from a network s perspective are: Addressing the risks relating to existing network access contracts based on firm access and system security Maintenance of system security Sufficient time and access to sufficient expertise to prepare the access arrangement submission Treatment of export charges for generators which are explicitly disallowed in the NEM Treatment of the sub-transmission network Alignment with NEM standards for Business to Business (B2B) interfaces. NETWORKS Page 12 16

13 Question 50b: Are there any matters that you would see as the subject of Western Australian derogations to the National Rules? There are likely to be many areas requiring derogations to the National Rules, which will require further analysis, particularly in relation to the Technical Rules. NETWORKS Page 13 16

14 SECTION 3 CONSIDERATIONS FOR THE FUTURE In December 2013, CSIRO s Future Grid Forum released Change and Choice: the Future Grid Forum s analysis of Australia s potential electricity pathways to This report analysed a number of mega-shifts in Australia s electricity system over the coming decades. A key finding from this analysis was that the network will continue to be highly competitive in providing an efficient, reliable and safe supply of electricity to customers. Western Power believes the Western Australian Electricity Market will face a changing mix of generation, storage and consumption. These changes will impact on the cost of production and supply of electricity; a key objective of the Electricity Market Review. A SHIFTING PARADIGM FOR THE ELECTRICITY SECTOR The purpose of the electricity network is to connect producers, consumers and storers of electricity, to enable sharing of capacity. The traditional model of the electricity sector consisted of a set of centralised generation assets, with consumption enabled by long, inter-connected transmission and distribution assets. The network allows all members of the system to benefit from a reliable supply of electricity via sharing capacity.. This is an enduring value proposition regardless of the form of generation; centralised or distributed PV and Storage HYDRO Electric vehicles SOLAR FOSSIL Mobile storage? Utility scale storage? Back-up WIND GEO THERMAL WAVE Distribution management services This model was driven by scale economies of conventional electricity generation. Large scale fossil fuel plants were much more efficient than smaller local generators, which had not been widely used except in remote locations. Even including the cost of large scale interconnected transmission and distribution, centralised generation was more affordable for the majority of the population than many smaller scale localised generators. Electricity storage has not been an economically viable alternative to date. NETWORKS Page 14 16

15 NEW TECHNOLOGY OPPORTUNITIES The way in which electricity is both produced and consumed is changing in terms of location, size and timing. Three types of distributed energy resources (DER) are emerging and contributing to the paradigm shift; energy sources, energy storage and energy applications 6 : Energy sources: technologies that produce energy on-site, where it is needed e.g. rooftop PV solar Energy storage: technologies that allow for the storage of electricity, e.g. batteries Energy applications: technologies that affect demand for energy, from energy efficiency or enabling demand management. Instances of distributed generation are already seeing the location of electricity production move from remote locations connected to the network by transmission lines, to small units on local distribution networks close to the point of consumption. Advances in DER technology are increasing their competitiveness, compared to the rising costs of centralised generation, which will drive change in the shape of the SWIN over the medium to long term. It is considered likely that electricity networks will slowly evolve from a vast interconnected hub-andspoke model of centralised generation with long transmission and distribution lines, towards a series of interconnected smaller networks ( micro grids ); connecting local consumption with a diverse portfolio of localised generation types and local storage. New network pathways between electricity producers and consumers will be required, some old pathways may become redundant, and capacity requirements by route will change. Western Power is confident that the network will be required for the long term. The evolution will likely develop through distinct phases as the relative economics evolve: NUMBER OF GRIDS Single large primary networks Key decision is whether to extend the network (and how far) as opposed to remote generation solutions. More smaller networks Edge of grid economics favour distributed generation solutions. Edge of inter-connected grid contracts back towards geographic centre of population and generation, in favour of rural micro-grids. Many smaller networks Large metropolitan networks may fragment into multiple smaller grids. Self-sufficient premises? Widespread disconnection from any form of networks. Not envisaged this century. TIME Interconnected hub and spoke Interconnected grid contracts Fragmentation into smaller networks Off-grid prosumers Figure 7: Localisation of the network 6 BCG Distributed Energy: A Disruptive Force (2014) (BCG use the term extractors meaning energy application = usage) NETWORKS Page 15 16

16 Interconnected Grid Contracts: Historically the interconnected grid has been extending, but edge of grid economics have always existed; essentially the cost-benefit trade-off between extending transmission and building local generation has traditionally fallen on the local generation side of the trade-off. Improving relative economics of distributed generation and storage will shift the frontier. This means that increasingly, the cost-efficient edge-of-grid solution will be local generation in preference to long-line transmission and distribution. The interconnected network would continue to be hub-and-spoke, served by centralised generation, but distributed generation would emerge across the network. Smaller networks: As distributed technology improves and energy storage costs fall, smaller more localised networks may become more viable. The efficient shape and scale of the interconnected grid may begin to fragment into multiple local grids with local generation and lower levels of inter-connective capacity. This may eventually see separation of multiple micro-grids. Off-grid production and consumption: Technology may eventually see fully off-grid production and consumption become viable; however it is unlikely that a large number of premises will become fully self-sufficient for many decades. Digital meters will be a key enabler for all market participants in adapting to future scenarios. IMPLICATIONS FOR WESTERN POWER If emerging trends continue to manifest themselves as experienced to date, the traditional paradigm will need to evolve to meet the changes in consumption patterns, technological efficiency and change in market structures. These trends present opportunities to drive greater efficiency in the provision of electricity, ultimately benefitting both electricity customers and the State. Although functionally the network may look and operate differently to its traditional form, its core value proposition will endure; ensuring reliability through shared capacity. Western Power embraces this opportunity and will continue to work with industry stakeholders, and make decisions that support and harness the shifting electricity paradigm. NETWORKS Page 16 16