Impact of renewable energy and carbon pricing policies on retail electricity prices (update)

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1 A.B.N Report () to retail electricity prices (update)

2 VERSION HISTORY Version History Revision Date Issued Prepared By Approved By Revision Type Jenny Riesz Richard Bean Ian Rose Report Jenny Riesz Richard Bean Jen Fung Ian Rose Revised Report Jenny Riesz Ian Rose Revised Report Jenny Riesz Ian Rose Revised Report Jenny Riesz Ian Rose Revised Report Jenny Riesz Ian Rose Revised Report Jenny Riesz Joel Gilmore Joel Gilmore Joel Gilmore Joel Gilmore Ben Vanderwaal Ben Vanderwaal Ben Vanderwaal Updated Report (revised solar multiplier, FiT scheme parameters, carbon price trajectory, wholesale electricity price forecast, LGC price forecast, REC Registry data and transmission charges) Updated Report (Revised savings due to FiTs calculation, SA FiT forecast) Updated report (Australia wide totals added to percentage tables) Updated report (Tables and figure for Australia wide retail bills) VERSION HISTORY

3 EXECUTIVE SUMMARY The Clean Energy Council engaged ROAM Consulting to provide a quantitative estimate of future retail electricity prices, particularly identifying the proportion of a residential consumer's electricity bill that is likely to be due to renewable schemes such as the Large-scale Renewable Energy Target (LRET), Small-scale Renewable Energy Scheme (SRES) and state-based Feed-in Tariffs (FiTs) from the present to Renewable schemes are found to contribute around 1-11% of average retail electricity bills, as listed in Table 1. Even in the most aggressive scenarios the combined renewable schemes are likely to contribute less than 10% of retail electricity tariffs by This includes all payments for the LRET, SRES and state-based FiT schemes from 2011 to 2020 (including the ACT large-scale FiT). Table 1 Percentage of retail bills due to renewable schemes (LRET, SRES and FiTs) (Medium projection, with possible range shown in brackets) ACT NSW NT QLD SA TAS VIC WA Australia total 11% 9% 8% 8% 8% 8% 8% 8% 8% (10-13%) (7-10%) (6-10%) (5-10%) (5-11%) (4-11%) (4-12%) (4-13%) (3-13%) 9% 6% 5% 5% 5% 5% 5% 4% 4% (8-10%) (5-7%) (4-6%) (4-6%) (3-6%) (3-6%) (3-6%) (3-6%) (2-5%) 6% 4% 3% 3% 3% 3% 3% 3% 3% (5-7%) (3-5%) (2-4%) (2-4%) (2-4%) (2-5%) (2-5%) (2-5%) (1-4%) 10% 7% 6% 5% 5% 5% 5% 5% 5% (7-12%) (5-10%) (4-8%) (3-8%) (3-8%) (3-8%) (3-8%) (3-7%) (2-7%) 9% 7% 6% 6% 6% 5% 5% 5% 4% (6-11%) (4-10%) (3-9%) (3-9%) (3-9%) (2-8%) (2-8%) (2-7%) (2-7%) 5% 4% 3% 3% 3% 3% 3% 3% 3% (4-6%) (3-4%) (2-4%) (2-4%) (2-4%) (2-4%) (2-4%) (2-5%) (1-4%) 7% 5% 5% 5% 5% 5% 5% 5% 5% (6-9%) (4-7%) (3-7%) (3-7%) (3-8%) (2-8%) (2-8%) (2-9%) (2-8%) 7% 5% 4% 4% 4% 4% 4% 4% 4% (6-9%) (3-7%) (3-6%) (2-6%) (2-6%) (2-6%) (2-6%) (2-6%) (2-5%) 8% 6% 5% 5% 5% 5% 5% 5% 4% (7-10%) (4-8%) (4-7%) (3-7%) (3-7%) (3-7%) (3-7%) (3-7%) (2-6%) The most significant contributor to renewable scheme costs is feed-in tariffs (FiTs), as illustrated in Table 2. By contrast, despite supplying the bulk of the 20% by 2020 renewable energy target, the LRET is a small contributor to retail bills, being responsible for only 2-3% of consumer electricity costs. The percentage of retail bills due to the LRET is listed in Table 3. The SRES contribution decreases significantly after 2012, and is shown in Table 4. EXECUTIVE SUMMARY Page I of VII

4 Table 2 Percentage of retail bills due to FiTs (Medium projection, with possible range shown in brackets) ACT NSW NT QLD SA TAS VIC WA Australia total 5% 5% 5% 5% 5% 5% 5% 5% 5% (5-5%) (4-6%) (4-6%) (3-6%) (3-7%) (3-7%) (2-8%) (2-9%) (2-9%) 3% 2% 2% 2% 2% 2% 1% 1% 1% (3-3%) (2-3%) (2-2%) (2-2%) (2-2%) (1-2%) (1-2%) (1-2%) (1-1%) 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.2% ( %) ( %) (0.2-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) 4% 3% 3% 3% 3% 2% 2% 2% 2% (2-5%) (2-5%) (2-4%) (1-4%) (1-4%) (1-3%) (1-3%) (1-3%) (1-3%) 3% 4% 3% 3% 3% 3% 2% 2% 2% (2-5%) (1-6%) (1-6%) (1-6%) (1-5%) (1-5%) (1-4%) (1-4%) (1-3%) 0.3% 0.3% 0.4% 0.4% 0.5% 0.5% 0.5% 0.5% 0.4% (0.2-0%) (0.2-1%) (0.2-1%) (0.2-1%) (0.2-1%) (0.2-1%) (0.1-1%) (0.1-1%) (0.1-1%) 2% 2% 2% 2% 2% 2% 2% 2% 2% (1-2%) (1-3%) (1-3%) (1-3%) (1-4%) (1-4%) (1-4%) (1-4%) (1-4%) 1% 1% 1% 1% 1% 1% 1% 1% 1% (0.4-2%) (0.3-2%) (0.3-2%) (0.3-2%) (0.3-2%) (0.2-2%) (0.2-1%) (0.2-1%) (0.2-1%) 2% 2% 2% 2% 2% 2% 2% 2% 2% (1.7-3%) (1.5-3%) (1.4-3%) (1.3-3%) (1.2-3%) (1.1-3%) (1-3%) (0.9-3%) (0.8-2%) Table 3 Percentage of retail bills due to LRET (Medium projection, with possible range shown in brackets) ACT NSW NT QLD SA Australia total 3% 3% 2% 2% 2% 3% 3% 3% 3% (2-3%) (2-3%) (2-3%) (1-3%) (2-3%) (2-3%) (2-4%) (2-4%) (1-4%) 3% 2% 2% 2% 2% 2% 3% 3% 2% (2-3%) (2-3%) (2-3%) (1-3%) (1-3%) (1-3%) (2-4%) (1-4%) (1-3%) 2% 2% 2% 2% 2% 2% 3% 3% 2% (2-3%) (2-3%) (2-3%) (1-3%) (1-3%) (1-3%) (1-4%) (1-4%) (1-3%) 3% 2% 2% 2% 2% 2% 3% 3% 2% (2-3%) (2-3%) (2-3%) (1-3%) (1-3%) (1-3%) (2-4%) (2-4%) (1-3%) 2% 2% 2% 2% 2% 2% 2% 2% 2% (2-3%) (2-3%) (2-2%) (1-2%) (1-3%) (1-3%) (1-3%) (1-3%) (1-3%) 2% 2% 2% 2% 2% 2% 2% 2% 2% (2-2%) (2-2%) (1-2%) (1-2%) (1-3%) (1-3%) (1-3%) (1-3%) (1-3%) EXECUTIVE SUMMARY Page II of VII

5 Table 3 Percentage of retail bills due to LRET (Medium projection, with possible range shown in brackets) VIC WA Australia total 2% 2% 2% 2% 2% 2% 3% 3% 2% (2-3%) (2-3%) (2-3%) (1-3%) (1-3%) (1-3%) (2-3%) (2-4%) (1-3%) 3% 2% 2% 2% 2% 3% 3% 3% 3% (2-3%) (2-3%) (2-3%) (1-3%) (1-3%) (2-3%) (2-4%) (2-4%) (1-4%) 2% 2% 2% 2% 2% 2% 3% 3% 2% (2-3%) (2-3%) (2-3%) (1-3%) (1-3%) (1-3%) (2-3%) (1-4%) (1-3%) Table 4 Percentage of retail bills due to SRES (Medium projection, with possible range shown in brackets) ACT NSW NT QLD SA TAS VIC WA Australia total 4% 1% 1% 0.8% 0.7% 0.6% 0.5% 0.5% 0.5% (3-4%) (1-2%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) 4% 1% 1% 0.7% 0.6% 0.6% 0.5% 0.5% 0.5% (3-4%) (1-2%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) 3% 1% 1% 0.7% 0.6% 0.5% 0.5% 0.5% 0.5% (3-4%) (1-2%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) 3% 1% 1% 0.7% 0.6% 0.6% 0.5% 0.5% 0.5% (3-4%) (1-2%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) 3% 1% 1% 0.6% 0.6% 0.5% 0.4% 0.4% 0.4% (3-4%) (1-2%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) 3% 1% 1% 0.6% 0.5% 0.5% 0.4% 0.4% 0.4% (2-3%) (1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) 3% 1% 1% 0.7% 0.6% 0.6% 0.5% 0.5% 0.5% (3-4%) (1-2%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) 3% 1% 1% 0.7% 0.6% 0.6% 0.5% 0.5% 0.5% (3-4%) (1-2%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) 3% 1% 1% 0.7% 0.6% 0.6% 0.5% 0.5% 0.5% (3-4%) (1-2%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) (0.1-1%) It should be noted that this analysis does not include consideration of the Merit Order Effect (MOE) of rooftop solar. Wind farms and other large-scale renewable generators entering under the LRET were modelled explicitly in the dispatch, and the MOE that they cause is therefore included in reduced wholesale electricity prices. However, rooftop solar photovoltaics were not EXECUTIVE SUMMARY Page III of VII

6 modelled explicitly, and are likely to reduce wholesale prices further. Other modelling 1 suggests that the MOE from rooftop solar at the quantities considered here could be significant, and may be sufficient to offset the costs of FiTs on consumers. ROAM suggests that this be explored in a future study. Wholesale electricity prices are found to constitute around 20-30% of residential electricity bills 2. Wholesale electricity prices are likely to increase when the carbon price enters, in proportion to the size of the carbon price. Carbon pricing impacts are included in the wholesale electricity price (generators are expected to pass on their higher costs through the wholesale pool). Even under a significant carbon price (such as a -15% by 2020 trajectory) wholesale electricity prices are only likely to contribute up to 35% of a residential electricity bill. Although wholesale electricity prices increase by a relatively large amount when carbon pricing is introduced, wholesale electricity costs constitute a relatively small proportion of total retail costs. Therefore the percentage increase in total retail costs due to carbon pricing is relatively small. Network costs are the single largest contributor to retail electricity prices, accounting for 40-50% of the cost of electricity to a household. A large proportion of the recent increase in retail tariffs is found to be attributable to rapidly increasing network costs. It is likely that network costs will continue to increase over time and in some scenarios by 2020 may constitute up to 55% of an average household electricity bill. Other costs are also found to constitute a large proportion of consumer electricity bills (30-40%). These other costs include a variety of components, including: The cost of forward hedging contracts and Power Purchase Agreements to avoid wholesale market risk, Regional components such as the Queensland Gas Scheme and the New South Wales Greenhouse Gas Abatement scheme, Possible deviation of volume weighted wholesale electricity prices for residential customers from that calculated based upon the total regional load, Operating costs of retail businesses (such as IT systems, billing, marketing, and call centres), and Retailer margins, which typically constitute 4-7% of retail tariffs 3. 1 D. J. McConnell, The Melbourne Energy Institute, Retrospective modelling of the merit-order effect on wholesale electricity prices from distributed photovoltaic generation in the Australian National Electricity Market. Submitted to Energy Policy, Similar results have been observed in ROAM s modelling. 2 Wholesale electricity prices projections have been calculated using a half hourly dispatch model. Spot prices for the wholesale pool were calculated on a regional basis using volume weighting against the regional demand in each half hour. Residential loads may have a higher proportion of load at peak times (compared with the total regional load), which may increase the volume weighted prices for residential customers. 3 P.135, Independent Pricing and Regulatory Tribunal (IPART), "Review of regulated retail tariffs and charges for electricity ". Electricity - Final Report, March EXECUTIVE SUMMARY Page IV of VII

7 Annual retail cost of electricity to a typical residential consumer ($ pa) Report to: These other costs are not expected to change substantially over time, and have been assumed to remain constant for this analysis. Total retail electricity costs Figure 1 illustrates the components of a retail electricity bill for a typical household in New South Wales (assuming average consumption of 7300 kwh pa), in a scenario with a moderate carbon price, and with medium growth in PV installations and network costs. In all years network costs dominate. The three renewable schemes (LRET, SRES and FiTs) contribute minimally to the total cost. Similar trends are observed for other scenarios and other regions, as illustrated in section (11) of this report. Figure 1 Retail prices - NSW -5% Carbon Price Trajectory, Medium growth in PV installations and network costs (Real 2012 $) $2,500 Scenario: CPT 5, M $2,000 NSW $1,500 $1,000 Other costs LRET FiT SRES Network charges Wholesale electricity $500 $ Table 5 lists a summary of projected average residential consumer electricity bills in the year 2020, by region. The contribution of each component is shown. %20Review%20of%20regulated%20retail%20tariffs%20and%20charges%20for%20electricity%202010%20to %202013%20-%20March% PDF EXECUTIVE SUMMARY Page V of VII

8 Table 5 Projection of average residential consumer electricity bills ($ pa) in 2020 Assumes average household usage of 7300 kwh pa. Real Jan 2011 $. Wholesale electricity Network charges FiT LRET SRES Other costs Total 4 Central $613 $970 $43 $54 $11 $550 $2,242 QLD High $789 $1,030 $65 $70 $23 $605 $2,478 Low $491 $912 $23 $31 $1 $495 $2,052 Central $582 $1,187 $30 $54 $11 $448 $2,312 NSW High $774 $1,319 $33 $70 $23 $493 $2,621 Low $450 $1,064 $26 $31 $1 $403 $2,065 Central $540 $821 $56 $54 $11 $806 $2,290 VIC High $733 $888 $109 $70 $23 $887 $2,566 Low $409 $756 $17 $31 $1 $726 $2,063 Central $519 $1,480 $74 $54 $11 $569 $2,707 SA High $708 $1,658 $168 $70 $23 $626 $3,069 Low $388 $1,307 $21 $31 $1 $512 $2,361 Central $434 $1,339 $13 $54 $11 $777 $2,629 TAS High $624 $1,588 $27 $70 $23 $855 $3,061 Low $303 $1,103 $3 $31 $1 $700 $2,259 A summary of the key observed aspects applying specifically to each region is as follows: Queensland o FiT costs may become very high unless a scheme cap is introduced; a 450 MW cap was assumed in this modelling. This cap was reached in o In the absence of a carbon price, wholesale pool prices increase over time (in real terms) due to large load growth in Queensland. New South Wales o The FiT scheme cap of 300 MW has now been reached, limiting FiT costs to NSW consumers. o In the absence of a carbon price, wholesale pool prices increase slightly over time (in real terms), being relatively robust to the entry of large quantities of wind generation (which acts to depress the pool price). 4 The total may not equal the sum of the values along the row. Totals have been calculated individually for each scenario (carbon price trajectory, high/medium/low projections of each components, etc). A high projection for one component may be associated with a low projection of another component, meaning that the high or low projection for the total may not be equal to the sum of the highest and lowest projections of each component. EXECUTIVE SUMMARY Page VI of VII

9 Australian Capital Territory o The large-scale FiT could be a significant contributor to costs for consumers in the ACT. If the 210 MW large-scale FiT cap is met, ACT consumers could be paying more than $200 pa per household towards FiTs by Victoria o The Premium FiT has now reached the scheme cap, and the Transitional FiT is expected to reach the cap soon. However, new connections will continue to be possible under the Standard FiT, with FiT payments at the retail rate. Despite the lower rate, the retail rate is significantly higher than the wholesale electricity cost that energy from rooftop PV displaces. Therefore, if high levels of rooftop solar PV installations continue this could become a significant cost for Victorian consumers. South Australia o Very high levels of rooftop PV uptake have been observed in South Australia recently. If these levels of installation continue, and the 11.2c/kWh FiT offered from September 2013 to June 2014 is projected forward (as was assumed here), the FiT could become a significant cost for South Australian consumers. Western Australia o FiT costs remain low, limited by the 150 MW scheme cap (which has now been reached). EXECUTIVE SUMMARY Page VII of VII

10 TABLE OF CONTENTS 1) BACKGROUND ) SCOPE AND METHODOLOGY ) RETAIL ELECTRICITY PRICES ) COMPONENTS OF RETAIL TARIFFS ) HISTORICAL RETAIL TARIFFS ) WHOLESALE ELECTRICITY PRICES ) HISTORICAL WHOLESALE PRICES ) PROJECTED WHOLESALE PRICES... 6 Impacts of Renewable Energy on wholesale electricity price... 6 Impact of carbon pricing on wholesale electricity price... 7 Cost of wholesale electricity to consumers ) NETWORK CHARGES ) PUBLISHED PROJECTIONS OF FUTURE NETWORK CHARGES ) PROJECTION OF FUTURE NETWORK CHARGES IN ROAM'S MODEL ) LARGE-SCALE RENEWABLE ENERGY TARGET (LRET) Calculation of the Large-scale Generation Certificate (LGC) price Renewable Power Percentage ) GROWTH IN INSTALLATION OF SOLAR PHOTOVOLTAIC TECHNOLOGIES ) HISTORICAL GROWTH RATES ) PROJECTED GROWTH RATES Solar Photovoltaics (rooftop) Solar Water Heating (SWH) ) SMALL-SCALE RENEWABLE ENERGY SCHEME (SRES) ) FEED-IN TARIFF SCHEMES ) OVERVIEW OF STATE-BASED SCHEMES ) PROJECTION OF COSTS OF FIT SCHEMES TO CONSUMERS Methodology Net vs Gross schemes Projection of FiT costs Australian Capital Territory New South Wales Northern Territory and Tasmania Queensland South Australia Victoria Western Australia ) OTHER COSTS ) SUMMARY ) CONCLUSIONS TABLES OF CONTENTS Page i of iv

11 Wholesale electricity prices Network costs Renewable schemes Other costs APPENDIX A) GLOSSARY... I LIST OF TABLES TABLE 1 PERCENTAGE OF RETAIL BILLS DUE TO RENEWABLE SCHEMES (LRET, SRES AND FITS) (MEDIUM PROJECTION, WITH POSSIBLE RANGE SHOWN IN BRACKETS)... I TABLE 2 PERCENTAGE OF RETAIL BILLS DUE TO FITS (MEDIUM PROJECTION, WITH POSSIBLE RANGE SHOWN IN BRACKETS)... II TABLE 3 PERCENTAGE OF RETAIL BILLS DUE TO LRET (MEDIUM PROJECTION, WITH POSSIBLE RANGE SHOWN IN BRACKETS).. II TABLE 4 PERCENTAGE OF RETAIL BILLS DUE TO SRES (MEDIUM PROJECTION, WITH POSSIBLE RANGE SHOWN IN BRACKETS). III TABLE 5 PROJECTION OF AVERAGE RESIDENTIAL CONSUMER ELECTRICITY BILLS ($ PA) IN 2020 ASSUMES AVERAGE HOUSEHOLD USAGE OF 7300 KWH PA. REAL JAN 2011 $.... VI TABLE 3.1 ELECTRICITY TARIFFS (C/KWH) (NOMINAL, INC GST)... 3 TABLE 4.1 FORECAST WHOLESALE ELECTRICITY PRICES - VOLUME WEIGHTED ANNUAL AVERAGE BY REGION $/MWH, REAL 2012 $, MEDIUM ENERGY GROWTH... 9 TABLE 4.2 FORECAST ANNUAL COST OF WHOLESALE ELECTRICITY FOR AN AVERAGE RESIDENTIAL CONSUMER (ASSUMED AVERAGE USE OF 7300 KWH PA) (REAL 2012 $) TABLE 5.1 COMPONENT OF RETAIL ELECTRICITY TARIFFS DUE TO NETWORK CHARGES (C/KWH) (VALUES IN BRACKETS INDICATE THE % OF TOTAL RETAIL TARIFFS DUE TO NETWORK CHARGES) (INC GST, NOMINAL) TABLE 5.2 PERCENTAGE PER ANNUM REAL INCREASE IN RETAIL COSTS DUE TO INCREASE IN DISTRIBUTION NETWORK CHARGES TABLE 5.3 NETWORK COSTS ON AN AVERAGE CONSUMER RETAIL ELECTRICITY BILL ($ PA) (ASSUMES AVERAGE USAGE OF 7300 KWH PA) (REAL JAN 2011 $) TABLE 6.1 FORECAST PRICE OF LGCS ($/MWH) TABLE 6.2 FORECAST COST OF LRET TO CONSUMERS (C/KWH) VALUES IN BRACKETS INDICATE ALTERNATIVE VALUES APPLYING WITHOUT EITE EXEMPTIONS (ALL LOADS EQUALLY LIABLE FOR LRET) TABLE 6.3 FORECAST COST OF LRET ON AN AVERAGE RESIDENTIAL CONSUMER ANNUAL ELECTRICITY BILL ($) (ASSUMES USAGE OF 7300 KWH PA) VALUES IN BRACKETS INDICATE ALTERNATIVE VALUES APPLYING WITHOUT EITE EXEMPTIONS (ALL LOADS EQUALLY LIABLE FOR LRET) TABLE 8.1 COST OF SRES ON ELECTRICITY CONSUMER BILLS VALUES IN BRACKETS INDICATE ALTERNATIVE VALUES APPLYING WITHOUT EITE EXEMPTIONS (ALL LOADS EQUALLY LIABLE FOR SRES) TABLE 9.1 FEED-IN TARIFF SCHEMES APPLYING TO RESIDENTIAL CONSUMERS TABLE 9.2 COST OF FIT ON AVERAGE RESIDENTIAL CONSUMER ELECTRICITY BILLS ($ PA) (QLD CAPPED AT 450 MW) ASSUMES AVERAGE HOUSEHOLD USAGE OF 7300 KWH PA TABLE 10.1 ESTIMATE OF OTHER COSTS ($ PA) ON ANNUAL ELECTRICITY ASSUMES AVERAGE HOUSEHOLD USAGE OF 7300 KWH PA TABLE 11.1 RETAIL PRICES AUSTRALIAN AVERAGE (REAL 2012 $) -5% CARBON PRICE TRAJECTORY, MEDIUM GROWTH IN PV INSTALLATIONS AND NETWORK COSTS ASSUMES AVERAGE HOUSEHOLD USAGE OF 7300 KWH PA TABLE 11.2 RETAIL PRICES AUSTRALIAN AVERAGE (REAL 2012 $) -15% CARBON PRICE TRAJECTORY, MEDIUM GROWTH IN PV INSTALLATIONS AND NETWORK COSTS ASSUMES AVERAGE HOUSEHOLD USAGE OF 7300 KWH PA TABLE 11.3 RETAIL PRICES AUSTRALIAN AVERAGE (REAL 2012 $) NO CARBON PRICE, MEDIUM GROWTH IN PV INSTALLATIONS AND NETWORK COSTS ASSUMES AVERAGE HOUSEHOLD USAGE OF 7300 KWH PA TABLES OF CONTENTS Page ii of iv

12 TABLE 12.1 PERCENTAGE OF RETAIL BILLS DUE TO RENEWABLE SCHEMES (LRET, SRES AND FITS) (MEDIUM PROJECTION, WITH POSSIBLE RANGE SHOWN IN BRACKETS) TABLE 12.2 PERCENTAGE OF RETAIL BILLS DUE TO FITS (MEDIUM PROJECTION, WITH POSSIBLE RANGE SHOWN IN BRACKETS) TABLE 12.3 PERCENTAGE OF RETAIL BILLS DUE TO LRET (MEDIUM PROJECTION, WITH POSSIBLE RANGE SHOWN IN BRACKETS) TABLE 12.4 PERCENTAGE OF RETAIL BILLS DUE TO SRES (MEDIUM PROJECTION, WITH POSSIBLE RANGE SHOWN IN BRACKETS) LIST OF FIGURES FIGURE 1 RETAIL PRICES - NSW -5% CARBON PRICE TRAJECTORY, MEDIUM GROWTH IN PV INSTALLATIONS AND NETWORK COSTS (REAL 2012 $)... V FIGURE 3.1 AVERAGE RESIDENTIAL CONSUMER ANNUAL ELECTRICITY BILL (ASSUMES USAGE OF 7300 KWH PA) (NOMINAL, INC GST)... 4 FIGURE 3.2 TYPICAL HOUSEHOLD ANNUAL ELECTRICITY COSTS (ASSUMES USAGE OF 7300 KWH PA) (REAL DEC 2010 DOLLARS, INCLUDES GST FROM THE YEAR 2000)... 5 FIGURE 4.1 HISTORICAL WHOLESALE ELECTRICITY PRICES (POOL PRICES) (NOMINAL)... 6 FIGURE 4.2 WHOLESALE ELECTRICITY PRICE FORECAST - TIME WEIGHTED, NO CARBON PRICE (REAL 2012 $)... 7 FIGURE 4.3 WHOLESALE ELECTRICITY PRICE FORECAST - TIME WEIGHTED, CPT -5% (REAL 2012 $)... 8 FIGURE 4.4 WHOLESALE ELECTRICITY PRICE FORECAST - TIME WEIGHTED, CPT -15% (REAL 2012 $)... 8 FIGURE 5.1 NETWORK CHARGES IN QLD AND NSW COMPARED WITH TOTAL ELECTRICITY TARIFF (NOMINAL, INC GST) FIGURE 5.2 AVERAGE PROJECTED INCREASE IN RETAIL NETWORK COSTS (% INCREASE PA, REAL) FIGURE 7.1 INSTALLATION OF SOLAR PHOTOVOLTAIC TECHNOLOGIES UNDER SOLAR HOMES AND COMMUNITIES PLAN (REBATE) FIGURE 7.2 INSTALLATION OF SOLAR PHOTOVOLTAIC TECHNOLOGIES UNDER RENEWABLE ENERGY TARGET (LRET AND SRES) FIGURE 7.3 PROJECTED INSTALLATION RATE FOR SOLAR PV (HIGH, MEDIUM, LOW) FIGURE 7.4 STCS CREATED BY SWH (HIGH, MEDIUM, LOW) FIGURE 11.1 RETAIL PRICES - NSW (REAL 2012 $) -5% CARBON PRICE TRAJECTORY, MEDIUM GROWTH IN PV INSTALLATIONS AND NETWORK COSTS FIGURE 11.2 RETAIL PRICES - NSW (REAL 2012 $) -5% CARBON PRICE TRAJECTORY, HIGH GROWTH IN PV INSTALLATIONS AND NETWORK COSTS FIGURE 11.3 RETAIL PRICES - NSW (REAL 2012 $) -5% CARBON PRICE TRAJECTORY, LOW GROWTH IN PV INSTALLATIONS AND NETWORK COSTS FIGURE 11.4 RETAIL PRICES - NSW (REAL 2012 $) NO CARBON PRICE, MEDIUM GROWTH IN PV INSTALLATIONS AND NETWORK COSTS FIGURE 11.5 RETAIL PRICES - NSW (REAL 2012 $) -15% CARBON PRICE TRAJECTORY, MEDIUM GROWTH IN PV INSTALLATIONS AND NETWORK COSTS FIGURE 11.6 RETAIL PRICES - ACT (REAL 2012 $) -5% CARBON PRICE TRAJECTORY, MEDIUM GROWTH IN PV INSTALLATIONS AND NETWORK COSTS FIGURE 11.7 RETAIL PRICES - QLD (REAL 2012 $) -5% CARBON PRICE TRAJECTORY, MEDIUM GROWTH IN PV INSTALLATIONS AND NETWORK COSTS FIGURE 11.8 RETAIL PRICES - SA (REAL 2012 $) -5% CARBON PRICE TRAJECTORY, MEDIUM GROWTH IN PV INSTALLATIONS AND NETWORK COSTS FIGURE 11.9 RETAIL PRICES - TAS (REAL 2012 $) -5% CARBON PRICE TRAJECTORY, MEDIUM GROWTH IN PV INSTALLATIONS AND NETWORK COSTS TABLES OF CONTENTS Page iii of iv

13 FIGURE RETAIL PRICES - VIC (REAL 2012 $) -5% CARBON PRICE TRAJECTORY, MEDIUM GROWTH IN PV INSTALLATIONS AND NETWORK COSTS FIGURE RETAIL PRICES AUSTRALIAN AVERAGE (REAL 2012 $) -5% CARBON PRICE TRAJECTORY, MEDIUM GROWTH IN PV INSTALLATIONS AND NETWORK COSTS TABLES OF CONTENTS Page iv of iv

14 1) BACKGROUND There has recently been considerable media attention stating that electricity prices will rise significantly in the near future. The causes of this price rise are often attributed solely to policies designed to encourage investment in renewable energy. Although renewable energy schemes will act to increase consumer electricity bills there are a variety of contributing factors, many of which may be having more significant impacts upon retail electricity prices. 2) SCOPE AND METHODOLOGY ROAM has been engaged by the Clean Energy Council to provide a study quantifying the components of a typical retail electricity bill. The following approach has been taken: Retail tariffs 1. Determine the retail tariffs applying in each region at present, and historically; 2. Determine whether price rises have occurred in the past, and if so, why they occurred; 3. Provide a projection of the cost of significant components of retail tariffs in the future, including wholesale electricity prices, network costs and retailer margins. Cost of renewable schemes 1. Identify the various renewable schemes applying in each region, including the Large-scale Renewable Energy Target (LRET), the Small-scale Renewable Energy Scheme (SRES) and regional Feed-in Tariffs (FiTs), as listed in Table Identify which of these schemes will act to increase retail consumer electricity bills, and the details of each scheme that will determine their impact (gross vs. net FiTs, etc); 3. Determine current investment levels in small-scale renewable generators eligible under these schemes (including rooftop solar photovoltaics) in each region, utilising data from the Office of the Renewable Energy Regulator (ORER) RECs registry and other sources; 4. Provide a variety of possible projections of investment in renewable technologies under these schemes (high, medium and low) from the present to 2020; 5. Calculate an estimate of the cost to consumers of each of the schemes in each region, under each investment projection to ) RETAIL ELECTRICITY PRICES 3.1) COMPONENTS OF RETAIL TARIFFS The retail price of electricity is composed of many elements, including: Wholesale price - Wholesale price of electricity (pool price, possibly increased by some margin to account for retailer contracting risk); Transmission network - Transmission use of system charges (TUoS) and Transmission Marginal Loss Factors; Page 1 of 50

15 Distribution network - Distribution use of system charges (DUoS) and Distribution Loss Factors; Retailer margin - to account for retailer risk in purchases of wholesale electricity and certificates for renewables schemes; Large-scale renewable energy under Large-scale Renewable Energy Target (LRET); Small-scale renewable energy under Small-scale Renewable Energy Scheme (SRES); Feed-in-Tariffs (FiTs) Other state-based factors - including the Queensland Gas Scheme (liability for Gas Electricity Certificates), and the New South Wales Greenhouse Gas Reduction Scheme 5. The most significant of these elements will be addressed in the following sections of this report. Wholesale prices are discussed in section 4) Network (distribution and transmission) charges are discussed in section 5) The Large-scale Renewable Energy Target (LRET) is discussed in section 6) The Small-scale Renewable Energy Scheme (SRES) is discussed in section 8) Feed-in Tariffs are discussed in section 9) Retailer margins and other costs are discussed in section 10) Section 11) provides a compilation of all costs contributing to a typical retail consumer electricity bill. 3.2) HISTORICAL RETAIL TARIFFS The retail electricity tariffs applying to residential consumers in regions around Australia are summarised in Table 3.1. Many tariffs have various marginal rates; these have been combined into a weighted average assuming average residential household usage of 7300 kwh pa. 5 These other state-based factors are not explored explicitly in this study, but are included in the region's retailer margins, as discussed in section 10). Page 2 of 50

16 Table 3.1 Electricity tariffs (c/kwh) (nominal, inc GST) VIC (Average of AGL, Origin, TRUenergy) NSW (Energy Australia) QLD (Gazetted tariff) TAS (Aurora) SA (AGL) WA (Gazetted tariff) The total electricity charges applying to an average residential consumer have been calculated based upon these tariffs and other published fees and charges (such as daily charges), and are illustrated in Figure 3.1. These figures assume a constant average household electricity usage of 7300 kwh pa. The rise in electricity prices over time from 2009 to the present is clearly apparent. Page 3 of 50

17 Figure 3.1 Average residential consumer annual electricity bill (assumes usage of 7300 kwh pa) (nominal, inc GST) This price increase is mostly due to increases in network charges, driven by increases in the cost of labour and materials, as discussed further in section 5). Figure 3.2 illustrates an estimate of typical household annual electricity costs from 1980 to the present, in real 2010 dollars. Retail prices remained relatively constant in the decade from 1990 to 2000 in nominal terms, which translates to a decreasing price in real terms. The increase in prices from 2008 to the present in real terms is apparent in all regions. Page 4 of 50

18 Figure 3.2 Typical household annual electricity costs (assumes usage of 7300 kwh pa) (Real Dec 2010 dollars, includes GST from the year 2000) 6 4) WHOLESALE ELECTRICITY PRICES 4.1) HISTORICAL WHOLESALE PRICES Historical wholesale electricity prices are illustrated in Figure 4.1. Pool prices spiked in 2007 due to drought conditions causing the temporary closure of several large generating units. This caused a temporary deficit in supply, creating high pool prices. Pool prices have since decreased to close to levels prior to Source: Electricity index, adjusted by CPI to convert to real 2010 dollars. Scaled by calculated household electricity costs in 2010, based on published tariffs. Governments and councils occasionally impose levies on customers for utility services as a means of raising money for some, possible unrelated, service. As these levies are considered an inescapable cost of obtaining the original service they are counted as a part of the cost of electricity in this figure in the shape of trends, but not in the absolute value of the data (which was calculated based on published electricity tariffs in 2010). Page 5 of 50

19 Figure 4.1 Historical wholesale electricity prices (pool prices) (nominal) 7 4.2) PROJECTED WHOLESALE PRICES ROAM's half-hourly dispatch model (2-4-C) was used to model the National Electricity Market on a half-hourly basis from 2011 to Wholesale electricity prices for each region were extracted from this modelling. Three applied carbon price trajectories were explored (a 5% reduction from 2000 levels, a 15% reduction from 2000 levels, and no applied carbon price). The carbon price was applied from July 2012 onwards, on a rising trajectory. Impacts of Renewable Energy on wholesale electricity price Figure 4.2 illustrates these wholesale pool price simulation outcomes (in $/MWh) for a scenario with no carbon price. In this scenario some pool prices trend downwards over time, in real terms. This is due to the increasing penetration of renewable energy under the Large-scale Renewable Energy Target (LRET). Renewable energy has very low short-run marginal costs and therefore is expected to bid low prices into the market in order to maximise dispatch. This puts downwards pressure on pool prices in regions with substantial quantities of renewable generation installed. This effect is illustrated in Figure 4.2, showing how pool prices decrease in all regions as larger quantities of wind generation are connected. This has been termed the Merit Order Effect (MOE). The MOE captured here is due only to large-scale renewable energy sources modelled explicitly in 2-4-C; this includes wind farms, but does not include rooftop solar installations 7 For reference, 1 $/MWh = 1 c/kwh. Page 6 of 50

20 Wholesale Electricity Price ($/MWh) Report to: assumed in some scenarios. Modelling suggests that rooftop solar installations at the levels projected in some scenarios could cause a significant MOE, reducing wholesale prices sufficiently to offset FiT and SRES costs 8, at least in the short term. Importantly, this effect of rooftop solar has not been included in this analysis, and should be explored in more detail in future studies. Figure 4.2 Wholesale Electricity Price Forecast - Time weighted, No carbon price (Real 2012 $) $70 CPT0 $60 $50 $40 $30 NSW QLD SA TAS VIC $20 $10 $ Impact of carbon pricing on wholesale electricity price Scenarios featuring a -5% and -15% carbon price trajectory are illustrated in Figure 4.3 and Figure 4.4. In these scenarios pool prices increase in line with the gradual increase in the carbon price. 8 D. J. McConnel et al, Melbourne Energy Institute, Retrospective modelling of the merit-order effect on wholesale electricity prices from distributed photovoltaic generation in the Australian National Electricity Market. Submitted to Energy Policy, Similar results have also been observed in ROAM s modelling. Page 7 of 50

21 Wholesale Electricity Price ($/MWh) Wholesale Electricity Price ($/MWh) Report to: Figure 4.3 Wholesale Electricity Price Forecast - Time weighted, CPT -5% (Real 2012 $) $100 $90 CPT -5% $80 $70 $60 $50 $40 NSW QLD SA TAS VIC $30 $20 $10 $ Figure 4.4 Wholesale Electricity Price Forecast - Time weighted, CPT -15% (Real 2012 $) $120 CPT -15% $100 $80 $60 $40 NSW QLD SA TAS VIC $20 $ Page 8 of 50

22 Cost of wholesale electricity to consumers The wholesale electricity prices illustrated above are calculated based upon a time weighted average. This means that the price in each trading period is weighted equally in the calculation of the average. However, retailers will need to purchase a larger volume of electricity at peak demand times (when the price is likely to be high). This means that the cost to retailers of purchasing wholesale electricity will be higher than the average pool price on a time weighted basis. To capture this effect, ROAM calculated volume weighted pool prices (based upon the demand and price in each region in each half hour). These volume weighted wholesale pool prices are listed in Table 4.1. Table 4.1 Forecast Wholesale Electricity Prices - Volume weighted annual average by region $/MWh, real 2012 $, Medium energy growth 9 CPT 0 Scenario (no applied carbon price) NSW $43.13 $34.25 $36.31 $38.44 $38.64 $39.43 $44.23 $49.84 $55.01 $61.59 QLD $39.95 $35.07 $38.86 $48.32 $54.62 $52.43 $56.09 $56.39 $62.46 $67.30 SA $42.91 $37.41 $41.83 $38.18 $37.12 $35.76 $42.11 $49.94 $48.88 $53.22 TAS $30.28 $30.90 $31.38 $31.75 $30.17 $29.30 $32.96 $36.81 $37.71 $41.56 VIC $33.48 $32.47 $38.60 $36.68 $35.12 $33.86 $37.93 $45.40 $47.53 $56.05 CPT -5% Scenario (low carbon price) NSW $42.94 $46.09 $59.39 $61.75 $63.31 $65.62 $70.78 $76.46 $82.51 $89.61 QLD $39.65 $46.39 $60.96 $70.58 $77.85 $76.90 $80.72 $81.29 $87.89 $93.17 SA $42.74 $48.56 $64.24 $60.91 $61.25 $61.85 $68.95 $76.91 $76.08 $80.78 TAS $30.09 $44.26 $53.45 $54.20 $54.00 $54.76 $58.97 $63.20 $64.74 $69.11 VIC $33.20 $42.01 $61.71 $60.25 $60.18 $60.71 $65.16 $72.36 $74.89 $ Medium energy growth projections published by AEMO in the Electricity Statement of Opportunities were used. Both the 10% (M10) and 50% (M50) probability of exceedence peak demand scenarios were modelled. Resulting wholesale pool prices were then weighted with 30% of the M10 and 70% of the M50 to produce the "likely" pool price projection listed here. Page 9 of 50

23 Table 4.1 Forecast Wholesale Electricity Prices - Volume weighted annual average by region $/MWh, real 2012 $, Medium energy growth 9 CPT -15% Scenario (high carbon price) NSW $42.90 $46.09 $59.39 $61.75 $70.73 $80.30 $85.67 $91.52 $98.34 $ QLD $39.55 $46.39 $60.96 $70.58 $84.81 $90.67 $94.60 $95.29 $ $ SA $42.70 $48.56 $64.24 $60.91 $68.18 $76.08 $83.81 $92.14 $91.82 $97.01 TAS $30.03 $44.26 $53.45 $54.20 $61.28 $69.31 $73.82 $78.39 $80.59 $85.47 VIC $32.01 $42.01 $61.71 $60.25 $67.85 $76.01 $80.70 $88.04 $91.21 $ These volume weighted wholesale electricity prices are listed below in Table 4.2 as the cost of wholesale electricity to supply an average residential consumer (using 7300 kwh pa). These quantities form only a proportion of the total electricity bill, with network costs and other factors being significant (as outlined in other sections of this report). It should be noted that retailers will often enter into contracts for the supply of electricity. These contracts typically inflate the cost of electricity above the average wholesale price to account for risk. The prices listed here therefore represent the minimum level that a retailer could be expected to attribute to wholesale electricity costs. Table 4.2 Forecast annual cost of wholesale electricity for an average residential consumer (Assumed average use of 7300 kwh pa) (Real 2012 $) CPT 0 Scenario (no applied carbon price) NSW $284 $234 $248 $260 $261 $264 $292 $324 $350 $392 QLD $255 $237 $262 $316 $354 $343 $369 $374 $413 $446 SA $273 $239 $257 $244 $235 $228 $269 $315 $313 $344 TAS $213 $219 $224 $226 $214 $207 $232 $259 $265 $292 VIC $214 $231 $249 $241 $230 $222 $251 $296 $308 $356 Page 10 of 50

24 Table 4.2 Forecast annual cost of wholesale electricity for an average residential consumer (Assumed average use of 7300 kwh pa) (Real 2012 $) CPT -5% Scenario (low carbon price), from NSW $284 $320 $418 $432 $443 $456 $488 $520 $553 $599 QLD $255 $318 $424 $480 $526 $524 $552 $559 $602 $639 SA $273 $321 $421 $411 $413 $421 $467 $514 $513 $547 TAS $213 $316 $386 $391 $389 $395 $424 $454 $464 $495 VIC $214 $300 $420 $415 $415 $421 $452 $496 $510 $560 CPT -15% Scenario (high carbon price), from NSW $284 $320 $418 $432 $497 $564 $597 $631 $669 $719 QLD $255 $318 $424 $480 $576 $625 $654 $663 $709 $749 SA $273 $321 $421 $411 $464 $525 $577 $626 $628 $665 TAS $213 $316 $386 $391 $443 $501 $533 $565 $581 $616 VIC $214 $371 $420 $415 $472 $533 $567 $612 $631 $684 5) NETWORK CHARGES Network charges (particularly for the distribution network) typically form a substantial part of a retail consumer s bill. As stated by the Australian Energy Regulator (AER) 10 : Distribution charges represent on average around 40 per cent of the cost of supplying electricity to residential customers, although this may differ between states. Typically these customers do not see distribution charges in their electricity bills. Instead, the charges are included in retails tariffs charged by electricity retailers, such as AGL and Origin. The proportions of retail tariffs due to network charges in each region are listed in Table 5.1. It is clearly evident that network costs form a substantial component of retail electricity charges. It is also apparent that these network charges have been increasing over time in recent years (in NSW and QLD, and similar trends are expected in other regions). 10 Page 11 of 50

25 Table 5.1 Component of retail electricity tariffs due to network charges (c/kwh) (values in brackets indicate the % of total retail tariffs due to network charges) (inc GST, nominal) VIC (AGL, Origin, TRUenergy) NSW (Energy Australia) QLD (Gazetted tariff) TAS (Aurora) SA (AGL) WA 2013 (48%) 2012 (52%) (38%) (52%) (51%) (52%) (52%) 6.55 (29%) (49%) (49%) (47%) (46%) 2007 (47%) 2006 (43%) These rising network costs are largely attributable to an increase in the cost of labour and materials. In their price review 11 SPAusNet outlines very significant escalation of the cost of aluminium (15.9%), steel (20%) and crude oil (29%) in Labour costs are also listed as having risen in 2010 (2.6%). These price escalations are expected to continue beyond 2010 (albeit at a slightly more moderate rate). Figure 5.1 illustrates the increase in network charges in Queensland and New South Wales in recent years, compared with total retail electricity costs. It is evident that a large proportion of the increase in retail electricity costs can be attributed to increasing network charges &fn=SP%20AusNet%20regulatory%20proposal.pdf Page 12 of 50

26 Figure 5.1 Network charges in QLD and NSW compared with total electricity tariff (nominal, inc GST) 5.1) PUBLISHED PROJECTIONS OF FUTURE NETWORK CHARGES Network charges are expected to continue increase in the future. As stated by the Australian Energy Regulator regarding Queensland retail electricity prices 12 : A price rise of 9% in will result from higher network charges. In the remaining four years of the regulatory control period ( to ), retail prices are expected to rise by around 2.3% pa (due to increasing network charges). Energex and Ergon (distribution network providers in Queensland) have been granted maximum allowable revenues increasing 9.6% per year and 7.5% per year respectively from to 12 nsla Page 13 of 50

27 Similarly, Powerlink (the transmission network provider in Queensland) has been granted a maximum allowable revenue increasing 11% year on year 14. The anticipated impact of the projected revenue increases in each region on retail consumer network costs are summarised in Table 5.2. Decisions by the Australian Energy Regulator (AER) are often far below the proposals made by network providers. Table 5.2 Percentage per annum real increase in retail costs due to increase in distribution network charges 15 Region DNSP Type QLD Ergon Energex Proposal % 1.30% 1.30% 1.30% 1.30% AER Decision % 0.80% 0.80% 0.80% 0.80% Proposal % 1.90% 1.90% 1.90% 1.90% AER Decision % 1.70% 1.70% 1.70% 1.70% Average (AER Decision) % 1.25% 1.25% 1.25% 1.25% NSW Country Energy Energy Australia Integral Energy Proposal 9.85% 4.31% 4.53% 4.74% 4.96% - AER Decision 5.36% 5.77% 5.54% 5.88% 0.00% - Proposal 15.72% 6.88% 7.36% 7.83% 8.30% - AER Decision 7.15% 5.28% 5.62% 5.96% 4.20% - Proposal 7.80% 3.08% 3.20% 3.31% 3.43% - AER Decision 5.03% 3.00% 3.12% 0.92% 0.00% - Average (AER Decision) 5.85% 4.68% 4.76% 4.25% 1.40% presentation.pdf 14 %20approval%20letter%20(July%202008).pdf 15 Data sourced from Australian Energy Regulator (AER) final decision distribution determinations for each region: 0&fn=Queensla, &fn=nsw%20dnsps%20final%20decision.pdf, 53&fn=ActewAGL%20final%20decision.pdf 7&fn=Victorian%20distribution%20determination%20final%20decision%202011%20-% pdf 3&fn=South%20Australian%20decision.pdf Page 14 of 50

28 Table 5.2 Percentage per annum real increase in retail costs due to increase in distribution network charges 15 Region DNSP Type ACT ActewAGL AER Decision 4.15% 1.36% 1.36% 1.36% 1.36% - VIC Citipower Powercor Jemena SP AusNet United Energy Proposal % 1.56% 1.53% 1.51% 1.49% AER Decision % 1.85% 1.81% 1.78% 1.75% Proposal % 0.37% 0.37% 0.37% 0.37% AER Decision % 1.35% 1.33% 1.31% 1.30% Proposal % 1.13% 1.11% 1.10% 1.09% AER Decision % 1.18% 1.16% 1.15% 1.14% Proposal % 0.69% 0.68% 0.68% 0.68% AER Decision % 1.73% 1.70% 1.67% 1.65% Proposal % 1.50% 1.48% 1.46% 1.43% AER Decision % 1.50% 1.48% 1.45% 1.43% Average (AER Decision) % 1.52% 1.50% 1.47% 1.45% SA ETSA Utilities Proposal % 2.40% 4.20% 4.20% 4.20% AER Decision % 2.30% 2.30% 2.30% 2.30% The projected average percentage increase in retail network costs in each region is illustrated in Figure 5.2. Continuing network cost increases in real terms are projected in all regions. Page 15 of 50

29 Figure 5.2 Average projected increase in retail network costs (% increase pa, real) Transmission network costs constitute a far smaller proportion of retail costs than distribution costs (around 8% of retail costs 16, compared with 40% for distribution costs). Transmission costs were projected to grow at similar rates to distribution network costs, since they are affected by similar drivers (e.g., costs of aluminium, steel, etc). 5.2) PROJECTION OF FUTURE NETWORK CHARGES IN ROAM'S MODEL To provide a comparison against other retail electricity costs, ROAM has calculated anticipated network costs on residential consumer annual bills (assuming average usage of 7300 kwh pa). Three scenarios were considered (high, medium and low growth in network costs). In all cases network costs were projected to increase at the AER decision rates (listed in Table 5.2) in the years where they apply. Beyond the AER revenue projection period, the following growth rates were applied: Central projection - Growth rates from the last year of the AER decision period were projected to continue. High projection - Growth rates from the last year of the AER decision period were inflated by 50% for the following years. Low projection - Growth rates from the last year of the AER decision period were reduced by 50% for the following years. 16 Australian Energy Regulator, Decision, Powerlink Queensland transmission network revenue cap to , 14 June Page 16 of 50

30 The resulting charges on a typical residential electricity bill in 2020 are listed in Table 5.3. Table 5.3 Network costs on an average consumer retail electricity bill ($ pa) (assumes average usage of 7300 kwh pa) (real Jan 2011 $) High Central Low ACT $753 $1,072 $982 $910 NSW $753 $1,319 $1,177 $1,064 NT $715 $1,243 $1,038 $863 QLD $743 $1,030 $969 $912 SA $873 $1,658 $1,475 $1,307 TAS $914 $1,588 $1,326 $1,103 VIC $576 $888 $820 $756 WA $432 $751 $627 $521 6) LARGE-SCALE RENEWABLE ENERGY TARGET (LRET) The LRET scheme mandates a target for large-scale renewable generation (in MWh) each year. Eligible renewable generators create certificates for each MWh they generate, and retailers are required to purchase a percentage of their electricity in certificates (creating a demand). The price of certificates is set by the supply-demand balance in the market. To calculate the cost of the LRET to consumers a forecast of the price of LGCs must be made. To achieve this ROAM has used the dispatch modelling results described in section 4.2) and calculated the expected LGC price as outlined below. Calculation of the Large-scale Generation Certificate (LGC) price The LGC price required by a renewable generator in order to be cost effective will be closely related to the difference between the average price obtained from the spot electricity market (or contract market depending upon its contract position), and the generator s long run marginal cost (LRMC). More specifically, the value should be the difference between a new entrant s LRMC and its expected average price received through the pool. Due to the large volume of announced wind projects and expected small contribution (relative to wind) of other technologies, the LGC price is likely to be set by the price required by wind generators. To estimate the LGC price, ROAM has used the portfolio of wind generators in the Page 17 of 50

31 modelling to assess the shadow price of LGCs required by renewables to break even. The LGC price was determined as follows 17 : LGC shadow) price Total wind cost Total wind pool revenue Total wind genera on All wind generators in the NEM were used to calculate the LGC price. This is assumed to capture the majority of LGCs in the market. The LRET features a shortfall charge of $65 /MWh. Purchases of LGCs are eligible for tax exemption, whereas payment of the shortfall charge is not. This means that the $65 /MWh shortfall charge is equivalent to a $92 /MWh effective "cap" on the price of LGCs (at LGC prices higher than this, retailers are expected to prefer to pay the shortfall charge). Importantly, the shortfall charge is defined in nominal terms. This means that in real terms it reduces over time due to inflation. The effective cap on the price of LGCs is therefore likely to reduce from $92 /MWh in 2011 to $73 /MWh in ROAM has included this effective cap reducing over time in this modelling. ROAM's LGC prices forecast via this methodology are listed in Table 6.1. Higher carbon prices generally result in lower LGC prices, since renewable generators can source a larger proportion of their revenue from inflated pool prices. Similarly, depressed pool prices (perhaps due to significant entry of renewable generation) generally lead to increased LGC prices, to compensate for the reduction in revenue through the wholesale pool. Table 6.1 Forecast price of LGCs ($/MWh) Carbon Price Trajectory CPT -5% CPT -15% CPT 0 (no carbon price) 18 Shortfall charge remains at $65 /MWh (nominal) Shortfall charge increased This shadow price approximation treats all wind farms as being owned by a single entity, such that revenue and costs can be shared between all wind farms. 18 In the scenario without a carbon price an increase of the shortfall charge is likely to be necessary. In the absence of a carbon price wholesale electricity prices remain low and the shortfall charge reduces over time in real terms more rapidly than the long run marginal cost of wind farms is likely to decrease. This means that LGC prices reach the price cap and remain at the cap for the duration of the LRET. In this situation large-scale renewable generators cannot recover sufficient revenue to meet their long run marginal costs. The LRET scheme does include a provision for the revision of the level of the shortfall charge. Page 18 of 50

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