Priority Target Performance measure Ensure a reliable

ENERGY Energy policy The NSW Government s priorities for energy as identified in the State Plan are to ensure a reliable electricity supply, and develop a clean energy future. The table below identifies the targets and measures for each priority. 498 Priority Target Performance measure Ensure a reliable Achieve average electricity reliability for NSW of 99.98% by 2016 Proportion of normalised customer minutes subject to unplanned electricity outages each year electricity supply Develop a clean energy future Achieve 20% renewable energy consumption by 2020 Proportion of electricity consumed in NSW generated from renewable sources Implement 4,000GWh of annual electricity consumption savings through NSW energy efficiency programs by 2014 Total electricity consumption savings through NSW energy efficiency programs The achievement of the goal to ensure a reliable electricity supply is intended to be by: The NSW Government introducing laws to protect vital electricity supply cables TransGrid and the distribution companies investing $18 billion in electricity network infrastructure over the 2009/10 to 2013/14 period, including some $800 million in the CityGrid project The NSW Government working with the private sector to back-up power systems in Central Sydney. 499 The achievement of the goal to develop a clean energy future is intended to be by: Developing renewable energy sources by introducing a Solar Bonus Scheme, creating six wind energy precincts, and working to secure a large solar power plant for NSW under the Australian Government s Solar Flagships program Improving energy efficiency through the $150 million Energy Efficiency Strategy, and implementing the Energy Savings Scheme, setting mandatory targets for energy retailers to deliver energy savings for customers by reducing demand Facilitating smart power distribution grids through supporting bids for large-scale pilots of smart grid technology that allow whole suburbs to reduce electricity costs and demand under the Australian Government s Smart Grid Smart City program Facilitating the introduction of Lower Carbon Transition Fuels by supporting distributed cogeneration and tri-generation, supporting natural gas supply and pipeline projects across NSW, and investing $100 million to support development of carbon capture and storage and other technologies to reduce emissions from coal-fired power generation. 500 NSW s energy sector is governed by a combination of State and national organisations. The key ones are: Australian Energy Market Commission (AEMC). The AEMC became responsible for rulemaking, market development and policy advice on the National Electricity Market (NEM) and natural gas pipelines services and elements of the broader natural gas markets from 1 July 2009. 135

Energy Australian Energy Regulator (AER). The AER has responsibility for the enforcement of and compliance with the National Electricity Rules, as well as responsibility for the economic regulation of electricity transmission and distribution. The AER issues infringement notices for certain breaches of the National Electricity Law and Rules, and is the body responsible for bringing court proceedings in respect of breaches. 501 The AER is also the economic regulator for National Gas Law covering natural gas transmission and distribution pipelines in all States and Territories and enforces the National Gas Law and National Gas Rules. The AER took responsibility for economic regulation of the gas distribution networks from 1 July 2008. 502 The AER is part of the Australian Competition and Consumer Commission (ACCC). Australian Energy Market Operator (AEMO). The AEMO operates the National Electricity Market (NEM) as well as the retail and wholesale gas markets of south-eastern Australia from 1 July 2009. Independent Pricing and Regulatory Tribunal (IPART). IPART is responsible for administering licensing within the energy industry and monitoring compliance with licence requirements. IPART's roles and functions in relation to electricity and gas are set out in the National Electricity (New South Wales) Act 1997, the Electricity Supply Act 1995, the Gas Supply Act 1996 and the Gas Pipelines Access (NSW) Act 1998. IPART ceased being the regulator for electricity and gas networks in NSW on 1 July 2009, transferring responsibility to AER and AEMC. Industry & Investment NSW (NSW Department of Industry & Investment). This department is responsible for setting NSW energy policy and regulations including licence conditions, contestability requirements and reporting. NSW Department of Planning. The Department is responsible for environmental assessment of network proposals under the Environmental Planning and Assessment Act, 1979 (EP & A Act) and relevant planning instruments, in particular the State Environmental Planning Policy. NSW Office of Fair Trading. The Office is responsible for monitoring the safety of customer electrical installations under the Electricity (Consumer Safety) Act and Electricity (Consumer Safety) Regulation and authorising accredited service providers under the Electricity Supply Act and Electricity Supply (General) Regulation. It is also responsibility for certain regulatory activities under the Gas Supply Act 1996. Energy and Water Ombudsman NSW (EWON). EWON is a consumer service resolving complaints about all electricity and gas suppliers in NSW and some water suppliers 136

9 Electricity 9.1 Summary Infrastructure Type NSW 2010 NSW 2003 National 2005 National 2001 Electricity C- B C+ B- This rating recognises that transmission and distribution systems performance has improved in the last few years and the committed medium-term investment will lead to further improvements. Of concern is the uncertain future of new baseload generation caused by uncertainty over the future of gas prices, carbon costs and government decisions. If new generation capacity is not constructed, NSW s power needs will not be able to be supplied from within the State. Since the last Report Card, the major electricity sector developments in NSW have been: A significant growth in electricity demand Rising electricity prices Increase in the utilisation of infrastructure to the point where further increases are difficult without the construction of major new infrastructure Significant increase in capital investment by transmission and distribution companies Transfer of economic regulation for electricity transmission and distribution from IPART to AER An increase in renewable energy supply Major electricity supply disruptions in the Sydney CBD in April 2009. Recently completed and in-progress major infrastructure projects include: CityGrid CBD electricity upgrade Commissioning major gas-powered generators at Colongra, Uranquinty and Tallawarra Upgrades at Eraring, Bayswater and Mount Piper Power Stations Upgrade of the Bayswater to Mount Piper transmission line. Challenges to improving electricity infrastructure include: Renewing ageing infrastructure Implementing significant demand management measures to constrain peak demand growth Capturing the opportunities of smart network technology Building new generation plants Building economic baseload generation Ensuring retail competition. 9.2 Infrastructure overview 9.2.1 System description Electricity infrastructure refers to stationary electricity networks that comprise interconnected electricity transmission and distribution systems, together with connected generating systems, facilities and loads. It includes non-renewable and renewable generation. It excludes mobile generators and non-grid-connected electricity systems. The State s physical electricity infrastructure comprises: Generation Transmission networks 137

Energy Distribution networks Retail companies. Figure 9.1 illustrates the infrastructure components of an electricity network. Figure 9.1: Infrastructure components of the electricity network 503 The physical elements work within a market structure called the National Electricity Market (NEM). The NEM spans Victoria, Queensland, NSW, ACT, SA and Tasmania. Over 275 registered generators across the NEM offer to supply power and their production is bought by retailers. The central coordination of the dispatch of electricity from generators is the responsibility of the AEMO. Figure 9.2 illustrates the inter-relationship between the physical and financial components on the NEM. While generation and retail has been opened to competition, due to the nature of transmission and distribution networks, these are regulated monopolies. Figure 9.2: Structure of the National Electricity Market 504 transmission network physical electricity flows distribution network plant dispatch instructions load dispatch instructions* generators AEMO determines the amount of power required consumers supply offers purchase bids* electricity settlement payments electricity settlement payments financial contracts * currently no customers submit demand side bids 138

Electricity Generation NSW has around 18,000MW of installed electricity generation capacity (which includes Snowy Mountain hydroelectric generators) with Queensland and Victorian interconnectors providing an additional 1,100MW and 1,500MW respectively. 505 Over 90% of NSW-installed capacity is generated by black coal-power stations. Other fuel sources include gas, wind, distillate and photovoltaic. Figure 9.3 identifies the sources of electricity in NSW compared with the other States. Figure 9.3: Installed capacity by fuel type with Snowy Mountain generators extracted from the NSW figures, as at June 2008 506 Installed capacity ('000 MW) 14 12 10 8 6 4 2 Non-hydro renewable Oil and other Hydro Natural gas Coal 0 NSW QLD VIC WA SA Snowy TAS NT Table 9.1 identifies the major generation plants in the State. Most of the large power stations were built prior to 1990 and are expected to reach their end of their technical life within the next 20 years. Munmorah is expected to close in winter 2014 unless a major overhaul/re-powering occurs. 507 Table 9.1: Major existing NSW power stations (greater than 30MW) 508 Power station Location Owner Technology Installed capacity (MW) Commission date Current technical life Bayswater Hunter Macquarie Steam/Coal 2,720 1985/86 2035 Generation Eraring Lower Hunter Eraring Energy Steam/Coal 2,640 1982/84 2030 Tumut Snowy Snowy Hydro Hydro 2,116 1959-1973 Liddell Hunter Macquarie Steam/Coal 2,080 1971/73 2025 Generation Murray* Snowy Snowy Hydro Hydro 1,500 1967-1969 Mount Piper Central West Delta Electricity Steam/Coal 1,400 1992/93 2040 Vales Point Central Coast Delta Electricity Steam/Coal 1,320 1978/79 2030 Wallerawang Central West Delta Electricity Steam/Coal 1,000 1976/80 2030 Colongra Central Coast Delta Electricity Open Cycle Gas 668 2009 2040 Turbine Uranquinty Wagga Wagga Origin Energy Open Cycle Gas 648 2008 Turbine Munmorah Central Coast Delta Electricity Steam/Coal 600 1969 2013/14 Tallawarra Wollongong TRUenergy Combined Cycle 435 2009 Gas Turbine Shoalhaven Nowra Eraring Energy Hydro 240 1977 2040 Smithfield Smithfield Marubeni Gas Cogen 160 1997 139

Energy Power station Location Owner Technology Installed capacity (MW) Commission date Redbank Hunter Redbank Project Coal Tailings 145 2001 Capital Wind Tarago Renewable Wind 141 2009 Farm Power Ventures Blowering Snowy Snowy Hydro Hydro 80 1969 Guthega Snowy Snowy Hydro Hydro 60 1955 Appin Mine Illawarra EDL Group Coal Seam 56 1996 Methane Warragamba Sydney Eraring Energy Hydro 50 1959 Tower Mine Illawarra EDL Group Coal Seam 41 1996 Methane Broadwater North Coast Delta Electricity BaGasse 30 Condong North Coast Delta Electricity BaGasse 30 Cullerin Upper Lachlan Origin Energy Wind 30 * in Victorian region of the NEM Current technical life About 6% of NSW electricity generation is derived from renewable sources, and the contribution of each is: 88% hydro 5% biomass 5% landfill methane 1% wind 1% solar. 509 Table 9.2 details the capacity of renewable generation in NSW and other jurisdictions. Table 9.2: Capacity of renewable generation (MW) at 31 December 2008 510 Fuel type NSW & VIC QLD SA WA TAS NT Snowy TOTAL ACT 1 Hydro 3,966.1 620.4 161.4 2.5 30.1 2,279.6 0.0 3,676.0 7,060.0 BaGasse 15.5 0.0 362.6 0.0 6.0 0.0 0.0 0.0 384.1 Biomass 3.9 0.2 36.5 3.5 1.0 0.0 0.0 0.0 45.1 Black liquor 20.0 54.5 2.0 0.0 0.0 0.0 0.0 0.0 76.5 Geothermal 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.1 Landfill gas 50.9 35.3 16.6 20.9 22.8 3.9 1.1 0.0 151.4 Sewage gas 3.5 18.1 4.5 5.5 1.8 0.1 0.0 0.0 33.5 Solar 2 1.5 0.5 0.3 0.3 0.3 0.0 1.4 0.0 4.3 Wave 0.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.5 Wind 16.7 191.9 12.5 482.4 202.6 142.3 0.1 0.0 1,048.4 Total 4,078.4 920.9 596.4 515.1 264.6 2,425.9 2.6 8,804.0 1. Includes Snowy region. 2. Solar capacity does not include solar hot water installations. The NSW Government renewable energy goal, as stated in the State Plan, is to achieve 20% renewable energy consumption by 2020. 511 To accelerate the uptake of wind energy, the NSW Government is creating six wind energy precincts New England Tablelands, Upper Hunter, Central Tablelands, NSW/ACT Cross Border Region, Cooma Monaro and the South Coast with streamlined planning assessments and dedicated coordinators. 512 To increase rooftop photovoltaic (PV) systems, the NSW Government introduced a feed-in tariff scheme called the NSW Solar Bonus Scheme on 1 January 2010. The scheme pays a gross tariff (i.e. the consumer is paid for all the electricity that they generate). The tariff is set at 60c/kWh. The 140

Electricity feed-in tariff applies to customers who consume less than 160MWh of electricity per annum and have a PV system or wind turbine up to 10kW in capacity. 513 The Scheme aims to result in 10,000 new installations each year. 514 The Scheme will be reviewed in 2012, or when the installed capacity of renewable energy generators participating in the Scheme reaches 5MW, whichever occurs first. 515 The costs paid to customers benefiting from the scheme are recovered from all electricity customers via a distributor levy. Retailers pay their customer the appropriate tariff through an additional line in their quarterly bill, and then recoup this cost by billing the distributor. 516 This subsidy by all electricity customers will result in an increase in household electricity bills of $1.90 to $7.47 per annum depending on take-up. 517 Details of feed-in tariff schemes for other jurisdictions are listed in Table 9.3. Table 9.3: Feed-in tariff rates in other Australian jurisdictions 518 Jurisdiction Current status Nature of scheme* Rate Duration NSW Commenced in January 2010 Gross 60c/kWh 7 years VIC Commenced 1 November 2009 Net 60c/kWh 15 years QLD Commenced 1 July 2008 Net 44c/kWh 20 years (subject to review) WA Commencing 1 July 2010 Net 40c/kWh 10 years 519 NT Commenced 1 July 2009 in Alice Springs only Net 45.76c/kWh (capped at $5 per day, then reverts to 23.11c/kWh) To be determined ACT Commenced in March 2009 Gross 50.05c/kWh reducing to 45.7c/kWh in July 2010 5 years SA Commenced on 1 July 2008 Net 44c/kWh 20 years * Nature of the scheme options: Gross tariffs which are where the consumer is paid for all the electricity their system generates, and net tariffs which are where the consumer is only paid for the generated electricity they export to the grid, not for the proportion of generated electricity they use themselves. Transmission NSW s transmission network can be divided into: The intrastate network linking generators to distribution networks and major end users Interconnectors that link NSW s intrastate network with the transmission network of Victoria and Queensland. Intrastate transmission network NSW s intrastate transmission network is owned, operated and managed by TransGrid, a NSW State-owned corporation. It is also responsible for planning and developing the NSW transmission system within the State and to facilitate operation of the National Electricity Market. It has assets worth over $4.2 billion. 520 Table 9.4 provides details of its assets. Table 9.4: TransGrid s transmission network assets (as at June 2009) 521 Assets Asset High Voltage Overhead (km) 12,445 High Voltage Underground (km) 47 Substation and switching stations 85 Structures 36,543 NSW s intrastate transmission network is illustrated in Figure 9.4. 141

Energy Figure 9.4: NSW transmission network 522 The transmission network carries loads to six main areas as identified in Table 9.5. Table 9.5: NSW load areas and their indicative peak loads 523 Load area Indicative peak load (MW) The NSW north, supplied from the Hunter Valley, Newcastle and over Queensland to NSW 1,000 Interconnector (QNI) Newcastle area (this includes aluminium smelters with a load greater than 1,000MW) 2,000 Greater Sydney 6,000 Western Area 600 South Coast 700 South and South West 1,600 142

Electricity Electricity transmission networks are regulated due to their monopolistic nature, meaning that they operate within regulatory arrangements established in the National Electricity Law and National Electricity Rules, and administered set by the AER. TransGrid s current regulatory period runs from 1 July 2009 to 30 June 2014. Interconnectors Interconnectors connect the transmission networks of different NEM regions. They enhance competition by allowing multiple generators to compete for supply, as well as improving security and reliability of supply. The interconnectors are: Queensland NSW interconnector (QNI) commissioned in 2002 Terranora (NSW Qld) interconnector, previously called Directlink Victoria NSW interconnector. Distribution Electricity is delivered to consumers by the following three State-owned distribution companies: EnergyAustralia, which covers eastern Sydney, the Central Coast, the Newcastle area and the Hunter Valley Integral Energy, which covers Greater Western Sydney, the Blue Mountains, the Southern Highlands and the South Coast Country Energy, which covers the remainder of NSW. The distributors supply regions are identified in Figure 9.5 and their infrastructure characteristics are listed in Table 9.6. Figure 9.5: NSW Distribution supply regions 524 143

Energy Table 9.6: Distributors infrastructure characteristics (June 2009) Characteristics Country Energy 525 EnergyAustralia 526 Integral Energy 527 Distribution Customer Numbers (Total) 786,241 1,591,372 859,718 Maximum Demand (MW) 2,332 5,918 3,798 Energy Received by the distribution network to 13,076 32,289 18,235 year end (GWh) System Loss Factor (%) 7.9 4.66 5.18 Transmission System (km) 0 885 N/A Transmission Substation (Number) 17 40 41 N/A Sub-transmission System (km) 12,277 3,685 3460 Substation - Zone (Number) 321 177 151 Substation - Distribution (Number) 132,212 29,974 29,219 High Voltage Overhead (km) 144,5462 10,290 11,325 High Voltage Underground (km) 1,7952 7,071 3,413 Low Voltage Overhead (km) 26,3082,3 21,156 8,891 Low Voltage Underground (km) 4,897 6,459 6,490 Pole (Number) 1,373,649 502,126 311,756 Street Lights (Number) 143,753 249,292 185,177 Being a monopoly service, electricity distribution networks are regulated by the AER. The regulatory period for all three distributors runs from 1 July 2009 to 30 June 2014. Retail Full retail competition for NSW electricity customers was introduced in January 2002, meaning that all customers can choose a retailer from which to buy their electricity. There are 21 528 licensed electricity retailers in the State as of March 2010, 11 529 of which sell to small customers. Some 81% of small retail customers in NSW are supplied by Country Energy, EnergyAustralia and Integral Energy. 530 There are two types of tariffs for small customers unregulated retail tariffs offered by all retailers, and regulated tariffs offered only by the three host retailers, which are Country Energy, EnergyAustralia and Integral Energy. The regulated tariffs were intended to be a transitional measure during the development of retail markets, and the NSW Government has agreed to eliminate it where effective competition has been demonstrated. Since 2004, this regulated tariff has been made under a Voluntary Transitional Pricing Agreement (VTPA) by each host retailer. In 2009, the NSW Government stated that it would keep this tariff at least until 30 June 2013. This decision was justified on the basis of protecting consumers. 531 In 2011, the AEMC will undertake a review of the effectiveness of competition in NSW s electricity and gas retail markets. 532 Electricity demand Over the last decade, electricity demand has increased annually on average by 1.9%. 533 The peak summer demand growth has been increasing faster at 3.3% 534 with a major contributor being the increased use of reverse cycle air-conditioning in homes. For instance, in Integral Energy s supply area a decade ago, only 25% of households had air-conditioning, but today some 70% have it. 535 Because of the air-conditioning growth, peak electricity demand has now shifted from winter to summer. 536 Electricity demand increases on workdays compared with weekends, and during periods of high and low temperatures. 537 9.2.2 Policy and governance A key component of the NSW Government s vision for the electricity sector is reflected in its agreement to the national electricity objective. This objective is to promote efficient investment in, and efficient operation and use of, electricity services for the long-term interests of consumers of 144

Electricity electricity with respect to price, quality, safety, reliability and security of supply of electricity; and the reliability, safety and security of the national electricity system. 538 The overarching regulatory framework for the NSW network is provided through the National Electricity Rules which are made under the National Electricity Law. The National Electricity Law is applied as law in NSW by the National Electricity (New South Wales) Act 1997. The National Electricity Rules provide the detailed standards that govern participation in, and the operation of, the NEM. They specify a range of technical performance criteria that network service providers must observe while planning, designing and operating their networks. The role of the NSW and Australian Governments in controlling electricity infrastructure is now very constrained compared to the past, as they have transferred control to independent regulators and authorities within a market framework. However, Governments can influence the direction of the electricity industry through the Ministerial Council on Energy and the setting of Rules by the AEMC. In addition, Governments can indirectly influence both costs and demand through mechanisms such as applying a price to carbon and encouraging energy efficiency. Key documents to guide the development of electricity networks in NSW are summarised in Table 9.7. Table 9.7: Key electricity planning documents Document Annual Planning Report and Network Management Plan (for transmission) Description TransGrid prepares an Annual Planning Report, which provides information on NSW energy demand projections; emerging constraints in the NSW network; information on completed, committed and planned augmentations; and proposed network developments over the next five years. This information allows the market to identify potential demand management solutions and allows TransGrid to implement appropriate network solutions. TansGrid s Network Management Plan outlines its approach to managing existing network assets. 539 Electricity System Development Review (ESDR) Electricity Statement of Opportunities (ESOO) National Transmission Statement (NTS) & National Transmission Network Development Plan (NTNDP) Each of the distributors produces an ESDR that identifies emerging constraints for each sub-transmission and zone substation, and provides an indicative solution. An ESOO is published annually by AEMO and provides a 10-year forecast to help market participants assess the future need for electricity generating capacity, demand side capacity and augmentation of the network to support the operation of the NEM. It includes a year-by-year annual supply-demand balance for the regions as a snapshot forecast of the capacity of generation and distribution. These documents are published by AEMO in its role as the National Transmission Planner for the electricity transmission grid. The annual network development plans guide investment in the power system. In 2009, an interim NTS was produced, which replaced the previous Annual National Transmission Statement produced by NEMMCO. This document will be superseded by the NTNDP in 2010. The NTNDP will provide historical data and projections of network utilisation and congestion, summarise emerging reliability issues and potential network solutions, and present information on potential network augmentations and non-network alternatives and their ability to address the projected congestion. 540 The key electricity supply legislation in NSW is the Electricity Supply Act 1995. This Act establishes a competitive retail market in electricity, confers on network operators such powers as are necessary to enable them to construct, operate, repair and maintain their electricity networks, regulates network operations and electricity supply in the retail market, and encourages safety. Following a number of electricity blackouts to the Sydney CBD, notably in March 2009 and May 2009, 541 the NSW Government introduced the Energy Legislation Amendment (Infrastructure 145

Energy Protection) Act 2009. It requires that energy (electricity and gas) distribution network operators are members of the Dial Before You Dig Scheme, meaning that they have to provide contractors with information on the location and type of underground powerlines in the vicinity of any proposed excavation work. 542 The Act also requires contractors undertaking excavation work to contact Dial Before You Dig and obtain relevant information, with failure to do so resulting in a maximum fine of $2,200. Any person who damages vital electricity cables could face criminal charges or negligence proceedings, especially if they have not sought advice through the Dial Before You Dig hotline. In addition, the Act requires all government buildings to regularly test their back-up power systems, and the NSW Government will be putting in place a best practice program for private sector CBD landlords. 543 9.2.3 Sector trends Reform of the NSW electricity sector Table 9.8 lists the major developments in electricity reform since 2006. Table 9.8: Major developments in NSW electricity sector reform since 2006 Date Event 2006 The electricity market operator, MEMMCO, forecast that NSW would require 372MW of additional generation to meet existing demand by 2010/11. 544 11 September 2007 The government commissioned Inquiry into Electricity Supply in NSW, undertaken by Professor Tony Owen, and made the recommendation that the NSW Government should divest itself of all State ownership on both retail and generation. 545 10 December 2007 In response to the Owen report, the NSW Government announced that it would: Lease existing electricity generators to private operators, while keeping them in public ownership Retain the poles and wires assets of the State-owned companies Country Energy, EnergyAustralia and Integral Energy in Government ownership, while their retail functions would move to private operators Introduce safeguards to protect and create jobs, keep prices as low as possible and protect the environment. 10 April 2008 Following the release of the Consultative Reference Committee (headed by Barrie Unsworth), the NSW Government stated that it would produce a $272 million electricity safety net package containing rebates for pensioners and help for low-income families. 546 4 June 2008 The Premier, Hon Morris Iemma, introduced in the Legislative Assembly the Electricity Industry Restructuring Bill 2008 to provide for the restructuring of part of the NSW electricity industry by authorising and facilitating any of the following transfers of assets to the private sector: The lease of the power stations of an electricity generator and the transfer of the rest of its business The transfer of the retail business of an electricity distributor. 547 The Premier also introduced a cognate bill, the Community Infrastructure (Intergenerational) Fund Bill 2008, to establish a fund into which the net proceeds of the restructuring would be paid and from which funds for capital works projects would be drawn. 19 June 2008 The Parliament passed the Auditor-General (Supplementary Powers) Bill 2008 to require the Auditor-General to review the Government s program for restructuring the NSW electricity industry. On 21 August 2008, the Auditor-General tabled his report. 28 August 2008 The Treasurer, Mr Costa, introduced the Electricity Industry Restructuring Bill (No 2) 2008 and the Electricity Industry Restructuring (Response to Auditor-General Report) Bill 2008. The leader of the Opposition in the Council, the Hon Michael Gallacher, advised in his second reading speech that the Opposition would not support the Bills. The effective result of this was that the Bills would not pass the House. 548 146

Electricity Date Event 1 November 2008 The NSW Government announced its Energy Reform Strategy, which consisted of: Selling the retail arms of the three State-owned energy corporations (Country Energy, EnergyAustralia and Integral Energy) Selling the seven power station development sites around NSW Contracting the electricity trading rights of the nine State-owned power stations to the private sector (the Gentrader model ) Maintaining public ownership of existing power stations Maintaining public ownership of electricity transmission and distribution networks. 549 March 2009 The NSW Government released the Energy Reform Strategy: Defining an Industry Framework, which identified a range of implementation considerations to be resolved, and the Government undertook to seek market feedback to inform its final policy decisions on a range of transaction implementation issues. September 2009 The NSW Government released the Energy Reform Strategy: Delivering the Strategy, which set out the Government s final policy position on key reform and transaction implementation issues for the generation trading rights, retail businesses and development sites. This document also set out next steps and anticipated timelines for implementing the energy reforms. Major network investment project NSW distribution and transmission companies are planning to invest $18 billion in electricity network infrastructure from 2009/10 to 2013/14. This is the largest energy infrastructure program in the State s history. For the three distributors, it will involve $14 billion of capital investment, an 80% increase from the past regulatory period 2004/05 to 2008/09 when it was $8 billion. 550 It will result in a significant expansion of assets. For instance, TransGrid's asset base will expand by 27% over the 2009/10 to 2013/14 period compared with 4% over the 2004/05 to 2008/09 period. 551 A significant reason for the growth is that over the last two decades, the focus has been on finetuning to maximise the utilisation of existing assets rather than building new ones. An illustration of this is that over the last 20 years there have only been a few major transmission lines built despite the massive increase in electricity consumption. 552 As the load continues to grow and constraints arise, there is now little option but to construct major new infrastructure. Table 9.9 details the capital expenditure over the 2009/10 to 2013/14 period for NSW transmission and distribution companies. Table 9.9: Capital expenditure between 2009/10 and 2013/14 for NSW transmission and distribution companies approved by AER ($ millions) 2009/10 2010/11 2011/12 2012/13 2013/14 Total TransGrid 553 523.3 447.1 549.7 505.2 379.7 2,405.1 Country Energy 554 715.7 757.5 776.5 779.1 797.2 3,826.0 EnergyAustralia distribution 555 1,132.7 1,281.7 1,422.2 1,377.1 1,423.3 6,637.7 EnergyAustralia s 263.7 174.2 245.3 320.4 197.0 1,200.5 transmission 556 Integral Energy 557 570.7 618.7 550.9 500.9 480.3 2,721.4 This expansion has been justified because of the need to: Augment the networks to accommodate the growth in maximum demand for energy Replace ageing assets 558 559 Improve network security and reliability. Growing electricity demand Electricity demand is driven by economic activity, population growth, price, domestic air-conditioner penetration, the comparative cost of natural gas, and several less important factors. For residential growth, key driver is population and hence household numbers. For commercial loads, the most 147

Energy significant drivers are economic activity and population growth. 560 The electricity 10-year growth rate is estimated to be 1.5% 561 per annum and projections for future growth are shown in Figure 9.6. Figure 9.6: Energy projections for different economic growth scenarios 562 The peak electricity rate continues to grow at a faster rate than average growth rate. The summer peak (10% POE rate) f rate is forecast to be 2.2% and winter 2.0%. 563 Table 9.10 details the forecast growth in electricity demand and customer numbers over the 2009/10 to 2013/14 period for NSW distribution companies. Table 9.10: Distributors customer numbers and energy forecasts for 2009/10 to 2013/14 564 Forecast 2009/10 2010/11 2011/12 2012/13 2013/14 Average annual growth 2009/14 a Country Energy s customers (number) 565 1,321,286 1,339,074 1,357,118 1,375,421 1,393,989 1.3% EnergyAustralia s customers 2,073,691 2,087,691 2,102,703 2,117,640 2,132,584 0.6% (number) 566 Integral Energy s customers 860,392 866,018 873,565 885,078 896,496 1% (number) 567 Country Energy s energy 12,092 12,147 12,202 12,556 12,314 0.5% forecast (GWh) 568 EnergyAustralia s energy 27,948 28,041 27,989 27,673 27,477 0.1% forecast (GWh) 569 Integral Energy s energy 17,373 17,313 17,526 17,967 18,202 0.7% forecast (GWh) 570 The importance of growth drivers varies with distributors, but the ones experienced by all are: Population growth Growth in air-conditioning loads Obligations to meet N-1 reliability requirements Replacement of the ageing infrastructure. f Probability of Exceedence (POE) refers to the probability that a forecast maximum demand figure will be exceeded. 148

Electricity Growth factor Population Electricity demand is directly related to population growth and growth varies significantly between NSW supply areas. Population growth in the supply area of Integral Energy is highest in the State and its population is expected to grow by 6% by 2013/14, while the maximum demand for electricity is forecast to increase by 33% by 2013/14. Its supply area is served with rural and semi-rural feeders but is now becoming urbanised. This means that customers now expect improved reliability performance in these areas. 571 In Country Energy s supply area, population growth is pronounced only along the coastal strip and this population has a high penetration of air-conditioning. 572 Meeting this peak demand growth is difficult using non-network options, meaning that new infrastructure has to be built to service the loads. Growth factor Air-conditioning The uptake of air-conditioning has resulted in peak demand growing faster than average demand. As meeting peak demand is a primary driver of network capital investment, the growing peakier load pattern means that more assets are required to service demand that only exists for very short times each year. This is leading to a deteriorating load factor, as seen in Figure 9.7. Figure 9.7: Integral Energy forecast system load factor 573 Growth factor n-1 reliability requirements The NSW Government has introduced mandatory licence conditions on distributors that have imposed additional infrastructure requirements. The conditions contain new planning design security levels that include n-1, 1 minute reliability standards for sub-transmission lines and zone substations supplying loads greater than to specified minimums, e.g. 15 MVA in urban and nonurban areas. An n-1 reliability standard allows for maximum forecast demand to be supplied when any one of the n elements of a network is out of service. An n-1, 1 minute standard allows for a risk that there will be some loss of supply for up to 1 minute to provide, for example, automatic switching to alternative supply arrangements. 574 These requirements were first introduced in 2005, and revised effective from 1 December 2007. The NSW Government requires that the new conditions be met by 2014, resulting in the distributors and TransGrid initiating a number of new projects. 575 Growth factor Ageing infrastructure Many transmission and distribution assets in NSW are reaching the end of their useful life. This is because much of the network was built from the 1960s through to the 1980s, and many assets have a design life of about 50 years as seen in Table 9.11. It needs to be noted that the actual life 149

Energy depends on the design, equipment specification and maintenance. Just because assets are ageing, it does not imply that they will fail. But, generally, there is a relationship between asset age and declining performance and increased operating expenditure due to more preventive and corrective maintenance. EnergyAustralia has the oldest energy distribution network in Australia, with many assets over 50 years old. 576 For TransGrid, some 35% of substations and switching stations were commissioned before the 1970s. 577 Table 9.11: Design life of assets 578 Asset Design life of assets Transmission and zone substations and switching stations 45 Power transformers 50 Transmission and sub-transmission steel tower lines 60 Transmission and sub-transmission pole lines (concrete poles) 55 Transmission and sub-transmission underground cables 45 Distribution substations and switching stations (ground mounted) 45 Distribution substations (pole mounted) 45 Distribution overhead lines (concrete poles) 55 Distribution overhead lines (wooden poles) 45 Distribution underground cables 60 Metering equipment 25 Substation secondary systems (SCADA and protection systems, excluding cabling) 15 Substation control building 40 Communications systems 10 Street lighting 20 Growth in generation There are currently three new generation projects either committed or under construction in NSW that have a total capacity of 362MW according to Australian Bureau of Agricultural and Resource Economics. 579 There are another 23 fossil-fuel and 14 renewable energy projects that are in the less developed category. 580 A comparison of advanced energy projects underway in NSW and the other States shows that NSW has attracted about 28% of all new plants being developed in Australia. 581 Given the existing and committed investment in new electricity generation plant in NSW, AEMO considers that NSW has sufficient capacity to meek both peak and average demand until 2013/14. After this date, additional capacity will be required to meet demand. AEMO 10-year predictions of the supply and demand balance are provided in Figure 9.8. The region is forecast to experience a reserve deficit from 2015/16. 582 Figure 9.8: NSW supply demand balance 583 17000 16500 Additional Capacity required Allocated Installed Capacity 16000 15500 15000 14500 14000 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 Capacity (MW) 150

As part of the Electricity Reform strategy, the Government intends to sell the generation development sites of the State-owned generators. These include sites suitable for gas-fired generation (peaking and combined cycle) and dual fuel sites, which are suitable for the development of either coal- or gas-fired generation capacity. They are detailed in Table 9.12. Electricity Table 9.12: State-owned generator sites to be sold 584 Development Site Owner Size (MW) Fuel Progress Bamarang Delta Electricity 300-450 Gas Full Development Approval (DA) Tomago Macquarie Generation 500-790 Gas Full DA Marulan EnergyAustralia 350 Gas Director-General s (DG s) requirements issued Marulan Delta Electricity 300-450 Gas DG s requirements issued Munmorah Delta Electricity 700 Gas/coal Planning process underway Bayswater B Macquarie Generation 2000 Gas/coal Planning process underway Mt Piper extension Delta Electricity 2000 Gas/coal Planning process underway Figure 9.9 identifies their location in relation to major gas supply pipelines and electricity transmission lines. Figure 9.9: NSW generation development sites 585 9.3 Performance 9.3.1 NEM reliability and security The performance of the National Electricity Market is based on the criteria of: Reliability, the availability of adequate bulk supply to meet consumer demand. The current standard for reliability is that there should be sufficient generation and bulk transmission 151

Energy capacity so that no more than 0.002% of the annual energy of consumers in any region is at risk of not being supplied; that is, unserved energy (USE) is less than 0.002%. Security, the continuous operation of the power system within its technical limits. For the NSW region of the NEM, the USE reliability criterion for a rolling 10-year average has been met. Over the last decade, the State s USE was 0.0%. 586 9.3.2 Generation The key performance measure for a generational plant is its ability to deliver a reliable supply when required. Its availability is affected by the number of internal plant planned outages (e.g. for maintenance and renewals), internal plant forced outages (e.g. plant breakdowns) and external forced outages (e.g. fuel unavailability, third party industrial actions). Internal plant outages usually increase with a plant s age, and when major upgrades occur. Table 9.13 contains the most recent availability figures, which show that NSW plants are in the mid-high range for planned outages and forced outages. Older generators generally have higher requirements for maintenance and higher rates of failure than new plants. Table 9.13: Availability factors for generation 1587 Equivalent availability factor (%) Forced outage factor (%) Planned outage factor (%) State 2006/07 2007/08 2006/07 2007/08 2006/07 2007/08 NSW & ACT 86.4 85.2 4.2 4.3 9.4 10.5 Victoria 90.3 90.6 4.0 3.5 5.7 6.0 Queensland 93.1 88.9 3.3 3.8 3.6 7.3 South Australia 85.9 95.2 6.9 0.2 7.1 4.6 Western Australia 82.1 81.5 3.3 7.5 14.6 11.0 Tasmania 90.3 87.0 0.9 4.2 8.8 8.9 Northern Territory 84.1 89.7 4.6 3.6 11.3 6.7 Other performance indicators of generation, listed in Table 9.14 consist of: System load factor, the ratio of the average load supplied during the year to the maximum load. It measures the fluctuation in demand. Capacity factor, the ratio of the actual output of a power plant over the year and its output if it had operated at full nameplate capacity for the entire time. Reserve plant margin, the total plant capacity available less the actual maximum demand for electricity in a particular year, expressed as a percentage of maximum demand. Table 9.14: Technical indicators: generation 1588 System load factor (%) Capacity factor (%) Reserve plant margin 2 (%) State 2006/07 2007/08 2006/07 2007/08 2006/07 2007/08 NSW & ACT 63.6 61.5 66.1 69.0 9.0 5.0 Victoria 59.6 56.0 68.5 68.3 11.9 3.3 Queensland 65.1 69.3 65.6 60.0 21.0 38.1 South Australia 50.9 47.1 40.8 42.5 22.0 16.6 Western Australia 52.1 53.5 38.4 37.2 45.3 51.5 Tasmania 69.6 71.1 38.9 36.3 58.2 57.4 Northern Territory 64.5 65.2 44.2 6 41.1 48.8 60.4 Australian weighted average 60.6 60.2 60.5 59.7 18.7 21.0 152

Electricity 9.3.3 Transmission Technical service standards for TransGrid are: Reliability. This is a measure of frequency and duration of power supply loss due to a temporary failure of TransGrid s plant. The measure of reliability is the number of system minutes of lost network supply. Availability. This is a measure of the readiness of TransGrid s plant to effectively transfer energy from the generators to the distributors. Availability reduces with planned outages for scheduled maintenance and capital construction or replacement programs, and with unscheduled outages from plant failures. Average Outage Restoration Time. This is a measure of the time taken to return equipment to service after an unplanned outage. It is calculated by totalling the durations of unplanned outages that are longer than one minute, and dividing the total by the number of those outages. Quality of Supply. This is a measure of electricity quality including power frequency voltage, voltage fluctuations, voltage waveform distortion, voltage unbalance and fault clearance times. 589 Table 9.15 sets out TransGrid s performance for the last three years. Availability measures have been below target which TransGrid claims is due mainly to a large quantity of capital work for transmission line rebuilds, pole replacements and transformer replacements. 590 Table 9.15: TransGrid s performance measures Performance measure 2006/07 591 2007/08 592 2008/09 593 Target 594 System minutes unsupplied 1.19 0.37 0.47 * Transmission line availability 99.44 98.55 98.44 99.50 595 Transformer availability 98.16 97.69 98.42 99.00 596 Reactive plant availability 99.96 98.97 98.96 98.60 597 Outage (unplanned) Average Duration (minutes) 613 843 862 1,500 598 * TransGrid s target for system minutes unsupplied is now specified in terms of numbers of large and small events incurred, not as a particular value. 9.3.4 Distribution Technical performance of the distribution network is measured by reliability and quality of supply. Performance measures for these are: System Average Interruption Duration Index (SAIDI). The sum of the duration of each sustained customer interruption (in minutes), divided by the total number of distribution customers. SAIDI excludes momentary interruptions (one minute or less duration). System Average Interruption Frequency Index (SAIFI). The total number of sustained customer interruptions, divided by the total number of distribution customers. SAIFI excludes momentary interruptions (one minute or less duration). Quality of supply. The quality of supply factors consist of voltage (e.g. sustained overvoltage and undervoltage) voltage variation (e.g. fluctuations, dips, switching transients), current (e.g. direct current, harmonic content and inter-harmonics) and other qualities (e.g. signalling reliability, noise and interference, level of supply capacity). Table 9.16 provides Normalised SAIDI figures, which exclude severe weather events. This provides a better insight into the underlying quality of the network. There has been an overall improvement trend in SAIDI for Integral Energy and Country Energy, which reflects positively on network improvement strategies. The increase in SAIDI for EnergyAustralia over the last year was due to two large network failures that affected parts of the Sydney CBD in April 2009. 153

Energy Table 9.16: Normalised SAIDI for NSW distributors 2004/05 2005/06 2006/07 2007/08 2008/09 EnergyAustralia SAIDI 599 90.4 90.2 102.0 100.3 108.5 Integral Energy SAIDI 600 93 99 94 98 89 Country Energy SAIDI 601 299 304 242 225 267 Figure 9.10 compares SAIDI across the nation. Figure 9.10: System Average Interruption Duration Index (SAIDI) across Australia 602 Average minutes of outages per customer 500 450 400 350 300 250 200 150 100 50 Queensland New South Wales Victoria South Australia Tasmania NEM average Western Australia 0 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 Table 9.17 provides SAIFI figures for NSW distributors. EnergyAustralia s increase in 2008/09 is also due to the Sydney CBD disruptions in April 2009. Table 9.17: SAIFI for NSW distributors 2004/05 2005/06 2006/07 2007/08 2008/09 EnergyAustralia SAIFI 603 1.20 1.15 1.15 1.16 1.31 Integral Energy SAIFI 604 1.2 1.2 1.2 1.2 1.1 Country Energy SAIFI 605 2.82 2.55 2.39 2.28 2.37 Table 9.18 identifies the national comparisons. Table 9.18: System average interruption frequency index (SAIFI) 606 State 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 Queensland 3.0 2.8 2.7 3.4 2.7 3.1 2.1 2.4 NSW 2.5 2.6 1.4 1.6 1.6 1.8 1.9 1.7 Victoria 2.1 2.0 2.0 2.2 1.9 1.8 1.9 2.1 South Australia 1.7 1.6 1.8 1.7 1.7 1.9 1.8 1.5 Tasmania 2.8 2.3 2.4 3.1 3.1 2.9 2.6 2.6 NEM weighted 2.4 2.4 1.9 2.2 1.9 2.1 2.0 1.9 average Western Australia 3.3 3.3 Quality of supply performance measures are defined in the Electricity Distribution Code. Monitoring and reporting of compliance against these performance factors is based on the distributors monitoring program and customer complaints received by it. Table 9.19 identifies the number of customer complaints about quality of supply issues. The most common complaints were voltage fluctuations, sustained undervoltage and overvoltage, voltage dips and supply failures. 607 While EnergyAustralia and Integral Energy s complaints are decreasing, this is not the case for Country 154

Electricity Energy. Country Energy considers that complaints continue to increase due to higher community expectations in reliability and quality of supply, as well as improvements in the recording of complaints. 608 Increases in complaints may also be attributed to the introduction of more sensitive and less tolerant electronic equipment. Country Energy also considers that the use of split system air-conditioning units installed without consideration of existing supply limitations contribute to complaints, and that the major cause of voltage fluctuations is an increasing number of airconditioners installed with poor start characteristics. 609 Table 9.19: NSW distributors customer complaints for quality of supply (complaints per 1,000 distribution customers) 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 Proportion of complaints relating to quality of supply Country Energy 610 2.9 3.3 2.7 3.0 4.2 75% EnergyAustralia 611 0.93 0.99 1.06 0.89 50% Integral Energy 612 4.45 4.25 3.95 2.12 1.89 74% All distributors have been working to improve the security of network assets and the prevention of theft, notably copper theft. An example of this is EnergyAustralia s ongoing rollout of a $90 million security and surveillance campaign. 613 9.3.5 Environmental sustainability Electricity consumption in NSW produces over 79 million tonnes of greenhouse gas emissions per year. This is over 37% of the State s greenhouse gas emissions. 614 The NSW Government has a range of initiatives to both reduce electricity consumption and increase renewable energy uptake. These include: A feed-in tariff for PV and small wind generators The NSW Greenhouse Gas Reduction Scheme, establishing a local market for emissions reductions and greenhouse credits. Under the scheme, mandatory annual targets based on NSW per capita greenhouse emissions must be met by electricity retailers. The Energy Savings Scheme, creating financial incentives to reduce electricity consumption by encouraging the adoption of cost-effective energy-saving practices by households and businesses. It requires electricity retailers to pursue additional energy efficiency measures in households and businesses. The energy savings target started on 1 July 2009 at 0.4% of electricity sales in NSW and increases to 4% by 2014. The Climate Change Fund, which provides rebates for energy-saving measures such as solar hot water and insulation, and a range of other funding programs for energy savings in schools, businesses and public facilities. Under the Building Sustainability Index (BASIX), home builders, developers and some renovators in NSW, are required to meet targets to reduce energy consumption. 615 Specific environmental improvements pursued by electricity sector participants include: Reducing the carbon footprint and waste output of the organisation Educating customers on ways to reduce energy consumption Demand management measures. Demand management initiatives are actively being pursued as a way of deferring network augmentation that would otherwise be required to meet demand growth and network security requirements. Demand management options include: Improved energy efficiency devices and systems 155

Energy Thermal insulation Renewable energy sources such as solar Alternative reticulated energy sources such as natural gas Tariff incentives Load interruption and reduction incentives Arrangements to transfer load from peak to off-peak times Energy storage systems Standby generators Power factor correction equipment. 616 A major development in advancing demand management was completed in 2008 by EnergyAustralia and involved producing a comprehensive knowledge base of demand management technologies and practices with the potential to reduce electricity demand in the Sydney inner metropolitan area. An example of successful demand management was the introduction of a portfolio of 350MW of demand reduction to the Newcastle Sydney Wollongong load area in the summer of 2008/9, which enabled the completion of the Western 500kV Upgrade project to be deferred to summer 2009/10. 617 A number of demand management projects are actively being pursued by TransGrid 618 and the distributors. 9.4 Future challenges The challenges to achieving improvements in electricity infrastructure are: Renewing ageing infrastructure. Much of the distribution network is nearing the end of its design life. A significant rise in the level of upgrades and renewals of network infrastructure will be needed, requiring a large pool of labour resources. Implementing significant demand management measures to constrain peak demand growth. Peak demand is currently growing faster than average demand. Peak demand growth needs to be reduced to the level of average demand growth to improve network reliability and security, and maximise asset utilisation. Achieving significant reduction in demand, particularly given air-conditioning demand on hot days, will be a major challenge. Capturing the opportunities of smart network technology. There is a need to prepare for an increasingly intelligent network, with proliferating network-integrated digital technologies, and growing numbers of small and micro generators such as solar/photovoltaic and wind linking into the network. Electricity providers are currently planning for smart grid networks that provide real-time information on electricity supply and the ability to remotely control the network. Increased initiatives, such as EnergyAustralia s research and development activities via its university Intelligent Network Centre of Excellence program, are required both to accelerate the development and deployment of smart network technology. Building new generation plants. An assumption in the Electricity Reform Program is that new generation will be built if the reforms occur. However, new generation in the scale and type required may not be constructed by the private sector due to market problems such as a lack of confidence in the long-term electricity demand and supply forecasts, concern over sovereign risk, and uncertainty about revenues and costs. While market mechanisms theoretically will result in new generation construction, there is a significant risk that over-relying on the market to deliver this will result in insufficient electricity supplies at certain times, and erratic prices. Building economic baseload generation. Due to uncertainty over carbon pricing, baseload coal-fired plants are not being developed. Instead, gas-fired plants are being built as they are quicker and cheaper to construct, and less subject to carbon pricing. However, their cost of generation is far more sensitive to gas prices, which are likely to become more volatile due to the internationalisation of Australian gas prices. Providing economic baseload generation will become increasingly important as NSW s existing coal-fired plants reach their technical end of life. All options should be considered in the provision of baseload power, including renewable and nuclear power. 156

Electricity Ensuring retail competition. The sale of State-owned retail electricity activities has the potential to transfer the existing monopolies from State to private ownership. There is a considerable risk that competition will not be enhanced following the reforms, resulting in no competitive tension between suppliers and no downward pressure on prices. 9.5 Report Card Rating Infrastructure Type NSW 2010 NSW 2003 National 2005 National 2001 Electricity C- B C+ B- Based on considerations of planning, funding, and infrastructure capacity and condition, NSW s electricity infrastructure has been rated C-. This rating recognises that transmission and distribution systems performance has improved in the last few years and the committed medium-term investment will lead to further improvements. Of concern is the uncertain future of new baseload generation caused by uncertainty over the future of gas prices, carbon costs and government decisions. If new generation capacity is not constructed, NSW s power needs will not be able to be supplied from within the State. Positives that have contributed to the rating are: Growth in renewable generation in the State Significant expansion in investment in network infrastructure Sound transmission and distribution networks New requirements for n-1 reliability and introduction of enhanced Dial Before You Dig arrangements. Negatives that have contributed to the rating are: Ageing transmission and distribution infrastructure Ageing of many of the major generation units Peak demand is rising faster than average demand Congestion and network constraints in certain areas of the transmission network Increasing population and increasing electricity demand resulting in a predicted reserve deficit after 2012/13 Inadequate attention given to demand management. 157

Energy 158

10 Gas 10.1 Summary Infrastructure Type NSW 2010 NSW 2003 National 2005 National 2001 Gas C Not rated C+ C This rating recognises that the gas transmission and distribution systems are in a sound condition, and increases in gas exploration, production and pipeline capacity have increased supply. However, as future supply and demand for gas is highly uncertain due to government policy, the internationalisation of domestic gas prices, and the construction of new gas-fired generation plants along the east coast of Australian, it is impossible to determine if the infrastructure is appropriate for future demand. Since 2005, the major gas sector developments have been the: Increased quantity of gas required for gas-powered generation Transfer of economic regulation for gas distribution from the IPART to the AER Reduction in cross-subsidies paid by large gas customers resulting in real price reduction for large customers and price increases for small customers Supply of gas from Queensland to NSW via the Ballera and Moomba pipeline (QSN Link) Increased exploration and development of coal seam gas reserves. Recently completed and in-progress major infrastructure projects include: Construction of the QSN Link Construction of the Sydney Primary Loop to improve security of supply to the Sydney basin Expansion in capacity of the Moomba Sydney Pipeline, Eastern Gas Pipeline and NSW Victoria Interconnect. Challenges to improving gas infrastructure include: Planning gas infrastructure to meet demand Expanding the distribution network. 10.2 Infrastructure overview 10.2.1 System description Gas infrastructure refers to reticulated natural gas infrastructure. NSW s gas infrastructure comprises the following components: Production Transmission Distribution Retail companies. This section does not cover liquefied petroleum gas (LPG), biomass and other fuel gases. Figure 10.1 illustrates the entities and physical flows in the State s natural gas sector. Producers extract and process the gas, and sell gas directly to large customers, retailers or traders. Supply is also provided from interconnecting pipelines and storage providers. Transmission pipelines carry the gas under high pressure to city gates (also known as gate stations/custody transfer meters) 159

Energy that control and measure the gas flow into the distribution network. The odorant is normally added at the city gates to make the detection of gas leaks easier. The distribution network takes the gas from the gates and distributes it via high, medium and low pressure pipelines to the customer s meter/regulator set. The customer pays the retailer for the gas. The retailer buys the gas from producers, and pays the transmission and distribution businesses for transporting the gas. g Retailers must balance their purchase and sale contracts to ensure security of supply. Retailers also operate customer call centres and implement customer demand curtailment in the event of major gas shortages. Figure 10.1: Schematic of natural gas entities and physical flows Storage Providers Producers Interconnecting pipelines Injections Traders Transmission and Distribution Systems Withdrawals Large Customers Retailers Retail Customers Production Natural gas can be divided into two categories - conventional natural gas which is found in underground reservoirs of trapped rock, and coal seam gas, which is located in coal seams. There are currently no commercially viable reserves of conventional natural gas within NSW. 619 Consequently, natural gas consumed in NSW is imported from other States. Principally, it comes from three basins: Cooper/Eromanga Basin, which spans SA, NT and Queensland Surat-Bowen Basin, which spans Queensland and NSW Gippsland Basin, which spans the State s south east and Victoria. Imports from Queensland s Surat-Bowen Basin only started in January 2009 following the commissioning of the QSN Link pipeline between Ballera and Moomba. 620 A small component of NSW s gas consumption comes from coal seam gas. This is supplied from the Camden Gas Project, located 50km south west of Sydney. The project has been supplying gas since 2001 and provides about 5PJ/year. 621 This accounts for 4.5% of gas delivered in NSW. The locations of the existing sources of coal seam gas are shown in Figure 10.2. g The charges are known as transmission use of system (TUOS) and distribution use of system (DUOS). 160

Gas Figure 10.2: Sources of gas and major pipelines in eastern Australia 622 The supply of gas from different sources is changing, notably due to the declining reserves in the Cooper/Eromanga Basin and the increase in coal seam gas from Queensland. There are considerable coal seam gas reserves in NSW, primarily located in the Clarence-Morton, Gunnedah and Gloucester basins, which may be commercially exploited. Exploration in these basins is underway. The locations of coal seam gas projects are illustrated in Figure 10.3. 161

Energy Figure 10.3: Coal seam gas projects in NSW 623 The coal seam gas reserves in NSW have risen significantly over the last few years as exploration increases, as seen in Figure 10.4. Figure 10.4: 2P coal seam gas reserves in NSW basins 624 400 350 300 250 Gunnedah Clarence Moreton Gloucester Sydney PJ 200 150 100 50 0 2003 2004 2005 2006 2007 2008 Over the next few years, several production projects are expected in NSW coal seam gas basins. Each will require wells, processing facilities and high pressure gas pipelines to connect the supply to existing pipelines or customers. Proposed projects include: Gloucester Gas Project (AGL), located near Stratford, 100km north of Newcastle, which will supply gas to Sydney 625 Bulga area of the Hunter Valley (AGL) 626 Eastern Star Gas development of the Narrabri, which includes exporting LNG via Newcastle port. 627 Clarence-Moreton basin projects (Metgasco). 162

Gas Transmission and storage The vast majority of gas in NSW is imported via the following three main transmission pipeline systems: Moomba Sydney Pipeline, which transports gas from the Cooper/ Eromanga Basin, and from the Surat-Bowen Basin via the QSN Link into Sydney and some major regional centres via lateral branches. It interconnects with the Central West Pipeline (CWP) and the Central Ranges Pipeline (CRP). Eastern Gas Pipeline, which transports gas from the Gippsland Basin via Longford and Orbost, and via the VicHub interconnect facility, along the eastern seaboard to Sydney. NSW Victoria Interconnect, which is a bi-directional pipeline linking the Moomba Sydney Pipeline to Victoria s Gas Principal Transmission System. The Interconnect imports gas from Victoria to NSW in summer, and the reverse in winter. 628 Below is a description of the recent and ongoing expansions of these pipelines. Moomba Sydney Pipeline. In 2008, a $100 million five-year expansion program commenced. The project will increase capacity by around 20% to meet winter peak demand, and provide flows for new gas-fired electricity generation projects such as Uranquinty near Wagga Wagga. 629 Eastern Gas Pipeline. A $41 million capacity expansion of the pipeline was completed in 2010. 630 The project involved installing an additional compressor at the Longford Compressor Station. The upgrade increased capacity of the pipeline from 250TJ/d to 268TJ/d. 631 NSW Victoria Interconnect. A partial looping of the Young to Culcairn pipeline was completed in 2010. This duplication increases gas storage and capacity to meet future demand. 632 Upgrades to pipeline infrastructure in Victoria connecting to the Interconnect were also completed in 2010 increasing the import capacity to NSW from 35TJ/day to 51TJ/day during winter. h These and other pipelines are seen in Figure 10.5. Figure 10.5: NSW s major pipelines gas transmission network 633 h The upgrade involved installing two new compressors at the Wollert Compressor Station; up-rating pipeline operating pressure of the Wollert to Euroa pipeline; and installing flow reversal capability at the Springhurst Compressor Station. Australian Energy Market Operator, 2009, 2009 Gas Statement of Opportunities for Eastern and South Eastern Australia, pp. 4-18. 163

Energy Details on the pipelines are contained in Table 10.1. Table 10.1: Main natural gas pipelines in NSW and ACT 634 Route Year Length External Pipeline Pipeline owner commissioned (km) diameter (mm) operator Moomba (SA) to Wilton 1976 1,300 864 APA Group APA Group (NSW) Wilton to Sydney 1976 52 864 Jemena Jemena Wilton to Wollongong 1979 32 508 Jemena Jemena Young to Wagga Wagga 1981 131 324/89 APA Group APA Group lateral Dalton to Canberra 1981 52 273 APA Group APA Group Horsley Park to Central 1982 214 508 Jemena Jemena Coast/Newcastle Young to 1987 270 168 APA Group APA Group Orange/Oberon/Lithgow Junee to 1993 180 114/168 APA Group APA Group Narrandera/Leeton/Griffith Wodonga to Wagga Wagga 1998 145 457 APA Group APA Group Marsden to Dubbo 1998 255 219/168 APA Group APA Group Eastern Gas Pipeline 2000 795 457 Jemena Jemena (Longford (Vic) to Horsley Park) Illabo to Tumut 2001 64 219 Country Energy Country Energy Gas Hoskinstown to Canberra 2001 22 273 ActewAGL ActewAGL (ACT) Central Ranges Pipeline System 2006 300 168/219 APA Group 2 Central Ranges Pipeline 2 Sydney Primary Looping 2007 30 500 Jemena Jemena There are a number of proposed major pipeline projects, which reflects the growing demand for natural gas. These are listed in Table 10.2. Table 10.2: Proposed major natural gas pipeline projects 635 Project name Proponent Capacity (PJ/year) Length (km) Status Proposed commissioning Hunter Gas Pipeline Hunter Gas - 36 Newcastle to Advanced 2011 Pipeline Kurri Kurri planning Lions Way Pipeline Metgasco 18 145 Casino to Proposed - Ipswich Narrabri to Bayswater Macquarie 300 Proposed - Generation, Eastern Star Gas Narrabri to Central Eastern Star 125 Proposed - Ranges Gas Pipeline Gas Queensland Hunter Hunter Gas 85 833 Wallumbilla Advanced 2012 Gas Pipeline Pipeline (Qld) to Newcastle (NSW) planning Wagga Wagga to ERM Power 50 On hold Young Wellington Power Station Pipeline ERM Power 900 Advanced planning 2009/10 164

Gas Project name Proponent Capacity (PJ/year) Length (km) Status Proposed commissioning Gloucester Coal Seam Lucas Energy/ 15-22 98km Gloucester 2010 Gas pipeline Molopo Australia to Hexham Newstead to Bulla Park APA Newstead (Qld) to Bulla park (NSW) Distribution NSW has six distribution networks as illustrated in Figure 10.6. They are: i NSW Gas Distribution Network, owned by Jemena Gas Networks (NSW) Ltd (formerly Alinta AGN Ltd) ActewAGL Distribution network, owned by ActewAGL Distribution Albury and Murray Valley distribution networks, owned by Albury Gas Company Tweed Heads distribution network, owned by APT Allgas Energy Pty Ltd Central Ranges System, owned by APA Group Wagga Wagga distribution network, owned by Country Energy Gas Pty Limited. Figure 10.6: NSW s six distribution networks 636 Details of the distribution networks are listed in Table 10.3. i A natural gas network operator is defined as one that holds a Reticulator s Authorisation under the Gas Supply Act. 165

Energy Table 10.3: Size, area serviced and consumers for NSW distribution networks 2008/2009 637 Area serviced NSW Gas Distribution Network. The network is divided into five networks: Jemena (Sydney North) Jemena (Sydney South) Jemena (Sydney West) Jemena (Coastal) Jemena (Country) Lengths of mains (km) 2008/2009 Customers number 638 23,800 1,040,000 639 (66.37%) It services: Sydney Newcastle/Central Coast Wollongong Central Ranges System 180 0.13% The network services Tamworth. Wagga Wagga distribution network. The network is divided into nine 622 18,300 640 (2.31%) natural gas distribution districts of Culcairn Temora Wagga Wagga Walla Walla Cooma Tumut Henty Bombala Gundagai ActewAGL Distribution network. The non-act service areas are: 578.972 641 23,000 642 (1.35%) Queanbeyan and Palerang Capital Region (Bega Valley, Bombala, Boorowa, Cooma, Monaro, Crookwell, Eurobodalla, Goulburn, Gunning, Harden, Mulwaree, Snowy River, Tallanganda, Tumut, Yass and Young) Shoalhaven (Nowra) Albury distribution network. The network services the Albury area Not available 2.08% consisting of Thurgoona, Lavington, Jindera and Howlong. Tweed Heads distribution network. The network services Tweed Heads. Not available 0.11% NSW s gas distribution networks are regulated, meaning that a determination at the beginning of the regulatory period sets the price increases over that period, access terms and conditions, tariffs and services, extensions, expansions, trading, capacity management and tariff policies which third parties (retailers) may access. With the commencement of the National Gas Law on 1 July 2008, responsibility for economic regulation was transferred from the IPART to the AER. 643 The regulator period for the distribution networks and their ownership is detailed in Table 10.4. Table 10.4: Regulatory period for NSW gas distribution networks 644 Distribution network Current regulatory period Owner and key shareholders NSW Gas Distribution Network 1 July 2005/30 June 2010 Jemena (Singapore Power International (Australia)) Central Ranges System 2006/2019 APA Group Wagga Wagga distribution network ActewAGL Distribution network 1 July 2005/30 June 2010 Country Energy (NSW Govt). Country Energy has stated that it intends to sell its gas network operations in southern NSW by the end of 2010. 645 2005/2010 646 ActewAGL Distribution is a joint venture between the ActewAGL Retail Partnership and the ActewAGL Distribution Partnership. The ActewAGL Distribution Partnership comprises Jemena ATA Pty Ltd and the ACT Government owned ACTEW Corporation. 166

Gas Distribution network Current regulatory period Owner and key shareholders Albury distribution network 31 December 2012 647 The Albury Gas Company (AGC) is a subsidiary of Envestra Limited. Tweed Heads distribution network Not available APT Allgas Energy Pty Ltd is owned by APA. The gas networks have been growing very slowly in the last few years as seen in Table 10.5, and in 2008/09 grew by just 196km. This growth is mostly attributed to being driven by the demand for new connections not served by the existing infrastructure. It includes new subdivisions, in-fill developments and established households connecting to gas. The only large new area supplied with natural gas in the last few years has been Tamworth, with the construction of the Central Ranges System in 2006. 648 Table 10.5: NSW network length and growth 649 Year Total network length (km) Network growth (km) 08/09 26,696 196 07/08 26,500 513 06/07 25,987 435 05/06 25,552 215 04/05 25,337 274 NSW Gas Distribution Network The NSW Gas Distribution Network has its origins in 1837 when manufactured gas was supplied to Sydney. 650 With the commissioning of the Moomba Sydney Pipeline in 1976, natural gas became available. The network owner, Jemena Gas Networks (NSW) Ltd, has appointed Jemena Asset Management as the network s asset manager. The assets are managed under a rolling six-year Asset Management Plan with the current one covering the period from April 2009 to March 2015. The network s gas distribution assets for the network are listed in Table 10.6. Table 10.6: Gas distribution assets of the NSW Gas Distribution Network 651 Asset Class Volume Trunk mains (km)* 267km Primary mains (km) 143km Secondary mains (km) 1,417km Medium and low pressure mains (km) 22,078km Trunk receiving stations (including POTS) 53 Primary regulating stations (PRS) 14 District regulator sets (SRS, MPRS, LPRS) 575 Residential gas meters 969,348 I & C meter sets 28,903 A map of the network is illustrated in Figure 10.7. 167

Energy Figure 10.7: Map of the NSW Gas Distribution Network 652 There are two trunk mains the northern trunk made up of four pipeline sections between Wilton-Newcastle, and the southern trunk consisting of just the Wilton Wollongong pipeline. 653 Table 10.7 identifies the number of customers connected to the NSW Gas Distribution Network and their gas consumption. It shows that the majority of the network s gas supplied is consumed by 414 large customers. Table 10.7: Customers and load by region during 2008/2009 for the NSW Gas Distribution Network 654 Region Customers who use 10TJ or more per year Customers who use less than 10TJ per year Load (TJ) Number Load (TJ) Number Sydney 294 36, 597 823,061 27,275 Newcastle 60 18,884 89,480 2,378 Wollongong 13 5,976 55,479 1,377 Country 47 4,161 84,590 3,957 Total 414 65,618 1,052,610 34,987 Capital expenditure for the 2005/10 is detailed in Table 10.8. It identifies Jemena Gas Networks (NSW) Ltd s forecast expenditure, expenditure approved by IPART in the 2005/2010 access arrangement, and the actual expenditure. Table 10.8: Forecast and actual/estimated capital expenditure for 2005/06 to2009/10 for the NSW Gas Distribution Network ($m, 2009/10, real) 655 2005/06 2006/07 2007/08 2008/09 2009/10 Total Forecast (IPART approved) 141.5 117.7 113.2 98.6 92.6 563.4 Actual/estimated 99.6 131.7 108.3 101.3 115.6 556.6 Difference 41.9 14.0 4.9 2.7 23.0 6.8 Jemena Gas Networks (NSW) Ltd s capital expenditure was substantially less than that approved. It identified that the variance was due to: A substantially lower number of new customers than forecast. Between 2005/06 and 2008/9, the number of new connections was 38% less than forecast, meaning that less market expansion and capacity development investment was required. 656 168

Gas Higher than forecast expenditure on: Replacement and renewal of ageing high pressure facilities The Sydney Primary Loop project. This project addressed a major security of supply issue in Sydney. Customers in the Sydney basin east of Jemena s trunk main had previously been supplied from a single feed, 550mm primary main extending from Horsley Park to Botany. This infrastructure, in the form of the Sydney Primary Main and Horsley Park TRS, presented a single point of failure. The Sydney Primary Loop project involved the construction of approximately 28km of 500mm diameter steel primary gas main and ancillary works. 657 Mines subsidence mitigation projects The upgrade of high pressure facilities required by the pressure upgrade to the Moomba Sydney Pipeline. Reduced expenditure on system reinforcement projects due to substantially lower utilisation of the network than forecast and deployment of innovative technology to increase capacity of existing system and defer reinforcement requirements. 658 In particular, the anticipated growth in certain areas of metropolitan Sydney and the Central Coast did not occur allowing for the deferral and/or re-staging of projects. 659 Reduced capital availability due to the need to divert capital to the Sydney Primary Loop project. 660 The economic asset life and remaining life of the NSW Gas Distribution Network is detailed in Table 10.9. Not only is failure more likely as assets age, but it is normally more costly to monitor the condition of older assets. For example, the majority of primary mains were constructed 25 to 30 years ago and were not designed to allow for pigging, the process used for cleaning and in-line inspection. j Table 10.9: Economic asset life and remaining life of the NSW Gas Distribution Network 661 Asset class Economic asset life (years) Remaining asset life (years) Trunk pipeline (Wilton-Newcastle) 80 48.10 Trunk pipeline (Wilton-Wollongong) 80 42.82 Country POTS 50 35.36 Contract meters 20 9.23 Tariff meters 20 10.60 Meter reading devices 20 19.30 Fixed plant 50 37.47 HP mains 0 58.74 MP mains 50 28.98 HP services 50 26.35 MP services 50 36.00 Total system assets 35.36 Wagga Wagga distribution network Gas has been available in Wagga Wagga since the late 1880s. Table 10.10 identifies the number of customers connected to the Wagga Wagga distribution network and their gas consumption. It shows that the around 43% of total gas sales are to several large customers. j Pigging involves sending a tool (pig) internally through a high pressure main, usually without disruption to the flow of gas. The flow of gas and the pressure drop across the pig, to move the pig through the pipeline. Pigging is used for cleaning and for ultrasonic in-line inspection. Australian Energy Regulator, 2010, Jemena Access arrangement proposal for the NSW gas networks 1 July 2010 30 June 2015, pp. 30-31. 169

Energy Table 10.10: Customers and load for2005/06 to2009/10 for the Wagga Wagga distribution network 662 Customers (No), Volume (GJ) 2005/06 2006/07 2007/08 2008/09 2009/10 forecast Volume load Small Customers 17,084 17,188 17,811 17,954 18,099 Medium Customers 178 181 178 183 188 Large Customers 10 9 10 12 12 Total Volume Customers* 17,272 17,378 17,999 18,149 18,299 Small Load 692,708 607,920 642,068 653,255 656,872 Medium Load 186,854 163,983 173,194 176,178 177,154 Large Load 44,542 39,090 41,286 56,285 56,491 Total Volume load 924,104 810,992 856,547 885,718 890,517 Contract load (Bomen, Central and Fringe Zones) Total Contract Customers 15 16 17 15 15 Total Contract Load 627,876 628,662 705,879 682,043 681,694 Total Load 1,551,980 1,439,654 1,562,426 1,567,761 1,572,211 Capital expenditure for 2005/10 is detailed in Table 10.11. It identifies Country Energy s forecast expenditure, expenditure approved by IPART in the 2005/2010 access arrangement, and the actual expenditure. Table 10.11: Forecast and actual/estimated capital expenditure for 2005/06 to 2009/10 ($m) 663 Capital Expenditure Jan to Jun 2006 2006/07 2007/08 2008/09 2009/10 forecast Total Forecast (IPART approved) 827 1,603 1,692 1,909 2,089 8,120 Actual/estimated 1,727 2,191 3,816 3,594 4,225 15,554 Difference (900) (588) (2,124) (1,685) (2,136) (7,434) Country Energy s expenditure was significantly higher than that forecast. It identified that the variance was due to: Unexpected growth in new customer connections as a result of substantial growth in the Wagga Wagga housing market. There was a 64% increase in new customer connections above the levels forecast. 664 Increased expenditure in replacing cast iron and galvanised iron steel pipes, and simultaneously converting the upgraded areas to medium high pressure (80-250kPa). This increase in pressure was required due to problems caused by long-term demand growth. 665 The need to rebuild the Bomen receipt point ($1.5 million), which receives gas from the main NSW Victoria Interconnect transmission pipeline supplying Wagga Wagga. The upgrade was required to cope with the increased pressure in the transmission pipeline, which was increased from 3,000-5,500kPa to 8,500-10,000kPa because of the commissioning of the 640MW Uranquinty gas-fired power station from August 2008. A major meter replacement program, commenced in 2007/08 in order to comply with regulatory requirements. 666 The Wagga Wagga distribution network contains: 112km of galvanised steel, the majority being constructed between 1950 and 1980 35km of cast iron mains constructed between 1950 and early 1990s. 667 These pipes have a median asset life of 50 years, and over the next few years a growing proportion will require replacement. 668 Country Energy has proposed that it will replace 2% of the galvanised steel/cast iron mains each year. 669 The economic asset life and remaining life of the Wagga Wagga distribution network is detailed in Table 10.12. 170

Gas Table 10.12: Economic asset life and remaining life of the Wagga Wagga distribution network as of 30 June 2010 670 Asset class Economic asset life (years) Remaining asset life (years) System Assets High Pressure 80 59 Medium-High Pressure 50 35 Medium-Low Pressure 50 25 Low Pressure 50 31 Services 50 30 Meters & Regulators 15 8 District Regulators 40 18 Gate Stations 50 45 SCADA and Telemetry 20 12 Non-system Assets 5 1 Other networks Details of the ActewAGL Distribution network are contained in the 2010 ACT Infrastructure Report Card. The other NSW networks are not discussed further, due to their small size. Retail As of May 2010, there are 13 licensed retailers in NSW of which the following six are active in the residential and small business customers: AGL Energy Country Energy Origin Energy ActewAGL Retail EnergyAustralia TRUenergy. 671 The NSW gas retail market became fully contestable from January 2002, 672 meaning that customers can choose their gas supplier. Retail gas prices are not regulated except for a regulated tariff provided by the host retailer. Since 2004, this regulated tariff has been made under a Voluntary Transitional Pricing Agreement (VTPA) by each host retailer. This current agreement, which expires on 30 June 2010, states that retailers will limit the tariff s price increase to the change in the Consumer Price Index (CPI) over the previous calendar year. 673 The regulated tariffs were intended to be a transitional measure during the development of retail markets, and the NSW Government has agreed to eliminate it where effective competition has been demonstrated. In 2009, the NSW Government stated that it would keep this tariff at least until 2013. This decision was justified on the basis of protecting consumers. 674 In 2011, the AEMC will undertake a review of the effectiveness of competition in NSW s electricity and gas retail markets. 675 Demand There are three main gas markets in NSW. They are: Electricity generation. About 20% of total sales gas in NSW is used for electricity generation. 676 Industrial/commercial. Gas is used by commercial and industrial organisations in food production, paper manufacturing, automotive, glass and cement manufacturing, metal smelting, and tyre production. A number of large customers also use gas for cogeneration, producing onsite power and process heat. Domestic sales. Gas is used for residential space and water heating, and cooking. The key driver of residential demand is winter temperatures and winter peak demands are around 50% higher than summer peak demand. 677 171

Energy Figures on consumption and customer number growth are detailed in Table 10.13. Over the last five years, the number of consumers has grown by over 14%. However, the last three years have the lowest number of new customers connected to the networks. 678 Table 10.13: NSW natural gas consumption and customer number growth 679 Year Consumers Consumer growth New customers connected Gas Delivered (PJ) 08/09 1,121,4172 62,566 25,864 109.5 07/08 1,058,851 26,319 25,895 105.7 06/07 1,032,532 23,031 26,928 103.6 05/06 1,009,501 32,998 32,666 102.0 04/05 976,503 27,978 37,775 102.4 Prices NSW retail gas prices are seen in Figure 10.8. It is not possible to assess the prices paid by industrial and large commercial customers as price information is generally not publicly available. This is because these customers sign confidential, long-term take-or-pay contracts, which can last for up to 30 years, but now more commonly last for 10 to15 years. The major change in NSW gas prices over the last decade has been the removal of cross-subsidies paid for by larger consumers. This means that retail gas prices have increased more than large customer gas prices. 680 For instance, NSW retail gas customers have experienced real gas price increases of 24% between 2000/01 and 2007/08. 681 Figure 10.8: Retail gas prices for Australian States 682 40 35 30 25 20 15 10 5 0 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 $ per gigajoule NSW Vic Qld SA WA ACT Gas prices in NSW are made up of four components: gas commodity and transmission costs retail operating costs retail margin distribution network costs (i.e. the fees imposed by distribution network operators), which account for about 45% of customers total retail gas bills. 683 Gas prices are expected to rise significantly in the short-term in response to increases in distribution network costs. The latest determination of network costs by the AER for the next regulator period allows the following real increases: 34.3% in 2010/11 for Jemena Gas Networks (NSW). 33.6% in 2010/11 and 2.5% per annum for 2011/12 to 2014/15.20 for Country Energy s network. 684 172

The impact of the increase in network charges can be significant. For instance, they will result in an average increase for retail gas from Jemena of around 15% in real terms in 2010. 685 Gas 10.2.2 Policy and governance The NSW gas network is part of an interconnected eastern Australian network. The overarching regulatory framework for this network is provided through the National Gas Law (NGL) and National Gas Rules (NGR), which took effect on 1 July 2008. The NGL governs third party access to natural gas pipeline services and some broader elements of natural gas markets. The NGR covers operation of the National Gas Market Bulletin Board k which publishes pipeline capacity, forecasts demand and market information, and the future operation of the Short Term Trading Market, which sets a daily wholesale price for natural gas. 686 Planning for gas infrastructure is principally the responsibility of the private sector owners of the infrastructure, rather than the NSW Government. To assist owners in developing plans, the Australian Energy Market Operator (AEMO) produces the National Gas Statement of Opportunities (NGSOO). This is an annual document that provides demand and supply data so that owners are better able to develop capital investment plans. The roles of the NSW and Australian Governments are limited, as their previous controlling powers have been transferred to independent regulators and authorities within a market framework. However, they can indirectly influence costs and demand through applying a price to carbon and encouraging energy efficiency. Key NSW gas legislation consists of: Gas Supply Act 1996 (NSW). The Act requires that a person who operates a gas distribution pipeline be authorised, and that the authorisation holder pay an annual authorisation fee. Gas Supply (Gas Meters) Regulation 2002. This Regulation requires that gas be metered, and imposes obligations in relation to the testing of gas meters prior to installation and when in service. Gas Supply (Safety and Network Management) Regulation 2008. This Regulation requires that organisations design, construct and operate their networks in accordance with specified standards, maintain emergency response capabilities, establish gas-fitting rules, implement Safety and Operating Plans that must be audited annually, and undertake certain actions in relation to gas quality and gas testing. 687 Market Operations Rules (NSW Gas Supply Continuity Scheme) 2008. This scheme, made under the Gas Supply Act 1996, was introduced to ensure a more reliable gas supply to residential and business customers. The need for the scheme arose after the disruption to gas supply following the Load Shedding Event of 22-24 June 2007. This incident resulted in approximately 250 large customers in NSW and the ACT being asked to curtail their natural gas consumption in response to shortfalls in the supply of gas into these regions via the Moomba Sydney Pipeline over a prolonged period. 688 The purpose of the Scheme is to ensure that the gas demand and supply imbalances that normally occur within the NSW natural gas system do not become large enough to threaten the operation of the system. Under the Scheme, Market Operations Rules (NSW Gas Supply Continuity Scheme) 2008 apply to the owners and operators of natural gas transmission pipelines and shippers of natural gas on those pipelines as well as natural gas distributors and retailers. 689 The Scheme uses market-based mechanisms to secure gas supply and Demand Side Management (DSM) to meet a relevant gas short-fall event and puts in place additional incentives for participants in the gas market to manage gas supply to avoid these events. 690 k The National Gas Market Bulletin Board facilitates trade in gas and tracks capacity flows on all major gas production fields, major demand centres and natural gas transmission pipeline systems. 173

Energy Pipelines Act 1967. The Act requires that a person who constructs or operates a pipeline must be licensed. Pipelines Regulation 2005. This Regulation requires that the organisation design, construct and operate its licensed pipelines in accordance with specified standards, establish and implement Environment Management and Safety and Operating Plans, report pipeline incidents and submit periodic reports, and ensure that Safety and Operating Plans are audited each year. 691 10.2.3 Sector trends Uncertainty about supply and demand Over the next decade, demand and supply for gas in NSW is expected to change significantly due to a combination of: Changes in gas demand from gas-powered generation (GPG). The demand for gas by GPG will increase if more plants are built and operate more frequently. Impact of carbon pricing. The introduction of a carbon pricing regime will change the relative attractiveness of gas and gas-fired electricity. Reform of the NSW electricity market. The sale of development sites may lead to more GPG. Increasing international demand for gas. Demand for gas worldwide is increasing, as is its price. With the development of LNG export infrastructure and the development of gas network across eastern Australia allowing gas to be exported, the domestic price of gas will become aligned with the international price. Other policy settings, such as the renewable energy target and mandatory energy performance standards. Domestic customer changes will have little impact on demand. As a general trend, demand per customer is likely to reduce in winter due to an increased use of solar water heating, an increase in the efficiency of appliances, and the reduction in the use of space heating due to climate warming. Jemena Gas Networks (NSW) estimates that: Customer numbers will increase from 1.1 million in 2010/11 to 1.3 million in 2014/15, representing annual growth of 3.2% Maximum daily load for demand customers will decrease from 327.9TJ in 2010/11 to 326.0TJ in 2014/15, representing annual reduction of 0.1% Total gas load for volume customers will increase from 32.4 PJ in 2010/11 to 34.8 PJ in 2014/15, representing annual growth of 1.8%. 692 Table 10.14 details the forecast in load growth between 2010/11 and 2014/15 for NSW Gas Networks. Table 10.14: Forecast load by customer type and tariff between 2010/11 and 2014/15 for NSW Gas Networks 693 2010/11 2011/12 2012/13 2013/14 2014/15 Residential (TJ) 20,475 20,513 21,059 21,558 21,992 Small business 11,961 11,966 12,128 12,451 12,777 Total load volume customers 32,435 32,480 33,187 34,010 34,769 Demand customers 63,590 64,149 62,570 62,829 62,933 Total load all customers 96,025 96,629 95,757 96,838 97,702 Table 10.15 details the forecast in load growth between 2010/11 and 2014/15 for the Wagga Wagga distribution network. 174

Gas Table 10.15: Load by customer type and tariff between 2010/11 and 2014/15 for Wagga Wagga distribution network 694 Customers (No), Volume ( 2010/11 2011/12 2012/13 2013/14 2014/15 Volume load forecasts Volume customers (number) 18,449 18,599 18,749 18,899 19,049 Total volume load (GJ) 895,278 900,925 904,682 909,326 913,929 Contract load forecasts Contract customers (number) 15 15 15 15 15 Bomen zone load (GJ) 496,372 496,193 496,013 495,834 495,655 Central/Fringe zone load (GJ) 184,972 184,802 184,632 184,461 184,291 Total contract load (GJ) 681,344 680,995 680,645 680,295 679,946 Total load (GJ) 1,576,622 1,581,920 1,585,327 1,589,621 1,593,875 Contract MDQ Bomen zone MDQ (GJ) 3,099 3,099 3,099 3,099 3,099 Central/Fringe zone MDQ (GJ) 1,084 1,084 1,084 1,084 1,084 Country Energy expects that there will be 150 new customer connections per year, which involves constructing an additional 25m of mains per new customer. 695 Significant growth in NSW Gas Network s capital expenditure Jemena Gas Network (NSW) has proposed to increase its capital expenditure between 2010/11 and 2014/15 to $851m, a 66% real increase on the 2004/05 to 2009/10 period. 696 The major components of this expenditure are: Wakehurst Parkway augmentation. This involves building a new secondary main to Warringah to support an increasingly complex and loaded system that serves the length of Sydney s northern beaches. Emu Plains Primary Mains. This project involves installing a new primary main across the Nepean River at Emu Plains to provide the capacity needed to connect new customers in the Blue Mountains, and to improve the reliability of supply to existing customers. Package off-take stations in country areas. This project consists of upgrading several package off-take stations and bath heaters for the Marsden to Dubbo and Junee to Griffith laterals, to accommodate increasing operating pressures on the Moomba Sydney Pipeline. 697 Part of the increase in capital works is due to the postponement of growth and capacity expansions projects that were intended to be undertaken over the previous few years. 10.3 Performance 10.3.1 Transmission Key performance indicators for transmission pipelines are capacity, network integrity, reliability and safety. AEMO has identified that while gas reserves are sufficient to meet annual demand projections to 2029, including LNG export, the increasing demand for gas will place pressure on the transmission pipelines and production infrastructure used to supply gas. 698 In NSW, as the winter peak demand is around 50% higher than summer peak days, winter is the period in which demand will first exceed supply. AEMO estimates that the capacity of pipelines serving NSW will be exceeded from 2012 under winter peak day 1 in 20 POE conditions and from 2018 under 1 in 2 POE conditions. 699 Probability of Exceedence (POE) refers to the probability that a forecast maximum demand figure 175

Energy will be exceeded. A forecast 1 in 20 POE maximum demand figure will, on average, be exceeded only one year in every 20. The demand supply balance is illustrated in Figure 10.9. Figure 10.9: Moomba Sydney Pipeline and Eastern Gas Pipeline winter 1 in 20 POE forecasts 700 The Energy Branch of Industry and Investment NSW produces a yearly performance report on the performance of NSW licensed pipeline operators in implementing the safety management systems required by the Pipelines Act 1967. There are 31 currently-operating pipeline licences, which include both major transmission and other pipelines defined in the next section as distribution assets. Table 10.16 identifies the trends in pipeline safety descriptors. It shows that the safety has not changed significantly over the last four years. Table 10.16: Safety descriptors of licensed pipelines 701 Year Near miss per 1,000km Incidents per 1,000km Loss of containment Ignitions per 1,000km Damage per 1,000km per 1,000km 2005/06 1.77 0 0.22 0.22 0 2006/07 0.41 0.83 0 0 0.41 2007/08 2.27 0.62 0.21 0 0.21 2008/09 2.05 0.62 0.41 0 0 10.3.2 Distribution In assessing the performance of a gas distributor network, it is necessary to consider multi-year trends rather than single years. This is because gas distribution infrastructure is sensitive to environmental conditions, such as heavy rain entering low pressure pipes, and the renewal program, which increases the number of planned interruptions in the short-term but reduces them significantly in the medium to long term. Two key factors in assessing the quality of a distribution network are reliability and network integrity. Reliability is measured in terms of the average frequency and duration of supply interruptions, which can be either planned or unplanned. Planned interruptions occur when a supply is deliberately disconnected to undertake maintenance or construction work. Unplanned interruptions mainly occur because of leakages or damaged pipes requiring immediate repair. Unplanned outages are often caused by third parties damaging pipes, or by water entering low pressure pipes. 702 Key reliability measures are: 176

Gas System Average Interruption Duration Index (SAIDI). SAIDI measures the total minutes, on average, that a customer could expect to be without gas over the reporting period. Total SAIDI comprises both planned and unplanned minutes-off-supply. System Average Interruption Frequency Index (SAIFI). SAIFI measures the number of occasions per year when each customer could, on average, expect to experience an interruption. It is calculated as the total number of customer interruptions, divided by the total number of connected customers averaged over the reporting period. 703 Planned interruptions are mainly due to mains replacements. Unplanned interruptions are due to third party damage, infrastructure failure and inadequate maintenance/installation. Figure 10.10 compares SAIFI figures of Jemena Gas Networks (NSW) (JGN) and ActewAGL s networks to other distribution networks around Australia. Figure 10.10: SAIFI for network around Australia 704 Network integrity can be measured by the quantity of leaks (loss of containment) and unaccountedfor gas. Levels generally reflect the distributors quality of operational and maintenance activities. Figure 10.11 compares all leaks per kilometre of mains for distributors around Australia. 177

Energy Figure 10.11: All leaks per km mains for distributors around Australia 705 Unaccounted-for gas (UAFG) is a measure of the difference between the gas entering the system and the amount delivered. This difference indicates how much of the gas injected into the network is lost in transit. This can be due to system leaks, theft, inaccurate meters, differences in times that meters are read, accounting errors, gas compressibility factors, temperature or heating value discrepancies, line pack differences, and losses in commissioning of new or replacement pipes. 706 It is estimated that approximately 80-90% of the UAFG can be attributed to gas leakage. 707 Table 10.17 identifies the volume of unaccounted-for gas for NSW networks. The decrease in UAFG over the last two years is primarily due to the reduction in accidental damage to network assets caused by third parties such as construction workers. This has been achieved by network operators working more closely with third parties. The introduction of the Energy Legislation Amendment (Infrastructure Protection) Act 2009 should continue this trend. 708 Table 10.17: Quantity of gas entering, and leaving NSW networks and unaccounted-for gas 709 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 Gas entering distribution 104.8 104.7 106.3 108.0 111.5 system (PJ) Gas delivered (PJ) 710 102.4 102.0 103.6 105.7 109.5 Unaccounted-for gas (%) 2.27 2.53 2.60 2.11 1.83 Figure 10.12 compares UAFG for distributors around Australia. 178

Gas Figure 10.12: Unaccounted-for network around Australia 711 Performance indicators on distribution network integrity and safety is stated in Table 10.18. Table 10.18: Network integrity and safety for NSW distribution networks 712 Reporting Period Third Party Third Party reported Percentage of network Leaks found Mechanical damage per Mechanical damage per Emergency exercises reported leaks per 10km leaks per 1000 consumers leak surveyed from survey per 10km 10km 1000 consumers 2004/05 4.04 10.49 24.92 3.75 0.99 2.58 8 2005/06 4.86 12.31 31.95 8.49 0.92 2.34 12 2006/07 6.11 15.38 22.10 16.01 0.95 2.39 14 2007/08 4.77 11.94 19.88 7.35 0.87 2.18 19 2008/09 5.20 12.38 23.02 8.20 0.81 1.92 22 The Energy Branch of Industry and Investment NSW produces a yearly performance report on the performance of natural gas distribution networks in NSW. In the 2009 report, it stated that the operators of the natural gas distribution networks have demonstrated a high level of performance in the network integrity, reliability, and safety aspects of operation. It noted that the averages for the Key Performance Indicators (KPI) indicate that all assets are being maintained to a very high standard. 713 10.3.3 Environmental sustainability Natural gas as an energy source has significant environmental benefits compared with electricity generated from coal. For example, coal used in producing electricity generates 80% more carbon dioxide emissions than natural gas. Jemena Gas Networks (NSW) is actively promoting the environmental benefits of natural gas, referring to it as the most environmentally-friendly fossil fuel. Key to its marketing is supporting the Natural gas: the natural choice campaign. This campaign is designed to increase the awareness of gas as an environmentally-friendly energy source, together with targeted incentives paid directly to appliance installers to encourage the uptake of gas appliances where upfront costs present a barrier to the purchase of gas appliances. Gas companies have also sought to minimise the risks of their operations, and in particular to reduce their environmental risk. Examples of this include: 179

Energy Minimising ground disturbance by using common trenching with other utilities, and directional boring to prevent damage to the root systems of trees Using long-life materials to minimise the need for future maintenance activities Minimising line purging operations and if necessary, using flaring to minimise the environmental impact. 10.4 Future challenges The challenges to achieving improvements in gas infrastructure are: Planning gas infrastructure to meet demand. Given the uncertainty over the demand of natural gas arising from the introduction of a carbon tax, other policy settings such as the Mandatory Renewable Energy Target (MRET) and the internationalisation of the domestic natural gas price, it is very difficult for infrastructure owners to be confident in their decisions about investment. Expanding the distribution network. The growth of the network has slowed. Expanding the network through servicing urban infill and unserved areas is expensive. Growing the network may require additional incentives for network operators that recognise the environmental benefits of natural gas. 10.5 Report Card Rating Infrastructure Type NSW 2010 NSW 2003 National 2005 National 2001 Gas C Not rated C+ C Based on considerations of planning, funding, and infrastructure capacity and condition, NSW s gas infrastructure has been rated C. This rating recognises that the gas transmission and distribution systems are in a sound condition, and increases in gas exploration, production and pipeline capacity have increased supply. However, as future supply and demand for gas is highly uncertain due to government policy, the internationalisation of domestic gas prices, and the construction of new gas-fired generation plants along the east coast of Australian, it is impossible to determine if the infrastructure is appropriate for future demand. Positives that have contributed to the rating are: Existing high quality transmission pipelines Good network integrity, reliability and safety of distribution networks Ongoing replacement of aged pipelines Increased exploration and development of coal seam gas reserves Expansion in capacity of the Moomba Sydney Pipeline, Eastern Gas Pipeline and NSW Victoria Interconnect Increased capital expenditure on the NSW Gas Network. Negatives that have contributed to the rating are: Uncertainty over future gas demand Very slow growth in domestic natural gas penetration Short-term transmission pipeline capacity concerns. 180