15 February 2015
Energy Strategy Submissions
Department of State Growth
GPO Box 536
Hobart Tasmania 7001
Level 22
530 Collins Street
Melbourne VIC 3000
Postal Address:
GPO Box 2008
Melbourne VIC 3001
T
F
1300 858724
03 9609 8080
By email: Energystrategy@stategrowth.tas.gov.au
Dear Sir
Tasmanian Energy Strategy submission
AEMO is the independent operator and developer of physical energy markets in Eastern and
Southern Australia. Among other roles, we are the National Transmission Planner established
under the National Electricity Law. Accordingly, AEMO is well placed to comment on a number
of matters raised in the Tasmanian Energy Strategy.
We welcome the government’s commitment to making Tasmanian energy businesses as
efficient as possible. Efficient operations and investment will ensure process are as low as
possible while maintaining reliable supply to customers.
Energy markets are evolving as technology makes more options available to customers and
the ways in which they source their energy needs. A key consequence of changing consumer
behaviour is that Australia has entered a new phase of declining demand for grid-supplied
electricity.
Previously, electricity networks were able to undertake large network augmentations with
confidence that even if the investment was not required immediately knowing that eventually
demand would grow and the asset would be used and useful. This is no longer the case.
Transmission network investment, which is characterised by large, “lumpy” increments,
becomes riskier when there is less certainty as to whether the assets will ever be required. In
this environment, it is more important than ever to ensure that all new investment in electricity
networks is efficient.
Accordingly, we take a particular interest in section 4.2 of the strategy paper, which sets out a
number of proposals which could help to reduce the cost of delivering electricity via networks.1
AEMO has developed an integrated package of measures which are designed to support
efficient transmission investment in the NEM. We:

prepare independent, consistently derived forecasts of electricity usage patterns for
each NEM region and publish the results in the National Electricity Forecasting
Report (NEFR);2
Tasmanian Government. Restoring Tasmania’s Energy Advantage. Available:
http://www.stategrowth.tas.gov.au/energy/strategy. Viewed: 12 February 2015, p13-17
2 AEMO. Forecasting page: Available at: http://www.aemo.com.au/Electricity/Planning/Forecasting.
1

develop long-term planning strategies for both current and potential national
transmission flow paths3 and publish the results in the annual National Transmission
Network Development Plan;

conducted a national review of the economic value different users place on a reliable
supply of electricity.4 This assists network planners, asset owners, and the AER to
align future network investment with how much customers are willing to pay for a
secure and reliable electricity supply;

prepare independent planning reports which provide an additional source of
information for the AER to consider when assessing transmission businesses’ capital
expenditure requirements;5

work with TNSPs to develop a list of projects to be included in the AER’s network
capability incentive scheme.6 The AER’s scheme rewards TNSPs for undertaking
initiatives that improve usage of existing network assets through low-cost projects.
Tasmanian customers already benefit from these initiatives. However, there is scope to
strengthen the regulatory framework. The figure below shows that there are a range of
options which could help to improve the efficiency of Tasmanian energy businesses.
Reinforce existing initiatives
Establish a regime that
commits TasNetworks to work
with AEMO when we prepare
our demand forecasts and
independent planning reports.
Obtain independent advice
Develop a framework for
obtaining independent advice
from AEMO with respect to
other matters, such as
transmission reliability
standards.
Extend contestability
Separate the planning and
procurement functions from the
role of transmission network
owner in order to benefit from
impartial decision making and
competitive asset provision.
In this submission, we discuss each of these options in turn.
1.
Reinforce existing initiatives
AEMO has established capability to prepare electricity demand forecasts on a consistent and
comparable basis across the NEM, at both the regional and transmission connection point
levels. AEMO’s forecasts have helped to reduce the pressure on electricity prices insofar as
they indicate reduced need for transmission network investment compared to the forecasts
prepared by the network businesses. The National Electricity Rules do not specifically require
AEMO to develop independent forecasts.
3
National transmission flow paths are defined in the Rules as any portion of transmission networks
used to transport significant amounts of electricity between generation centres and load centres.
4 AEMO. Value of Customer Reliability review page: Available at:
http://www.aemo.com.au/Electricity/Planning/Value-of-Customer-Reliabilityreview.
5 AEMO. Independent Planning Review page. Available at:
http://www.aemo.com.au/Electricity/Planning/Independent-Planning-Review--NSW-and-TasmanianNetwork
6 AER. Electricity Transmission Network Service Providers Service Target Performance Incentive
Scheme. Version 4. s 5.2, pg 12.Dec 2012.
AEMO SUBMISSION TO TASMANIAN ENERGY STRATEGY CONSULTATION
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The Energy Council has proposed to amend the National Electricity Rules to formalise AEMO’s
demand forecasting role as part of its National Transmission Planner functions, and to ensure
that AEMO has access to the information needed in order to prepare high quality forecasts.
AEMO recently undertook an independent review of Tasmania’s transmission investment
needs over the period 2014-2019. AEMO’s assessment helped TasNetworks to identify
several opportunities to reduce its forecast capital expenditure during the current transmission
determination. Among other things we identified two planned network augmentation projects
which we considered to be unlikely to be required during the period.
Between January and September 2014, TasNetworks was able to reduce its forecast
transmission capex requirements over the 2014-19 period by $48 million, or 19%.7 While
TasNetwork’s own efforts to identify cost savings are the primary driver for this reduction,
AEMO’s input helped TasNetworks to achieve this result.
In undertaking our independent planning review for Tasmania, AEMO was fortunate to have
access to TasNetwork’s forecast cost information. This information was made available as a
result of the transitional arrangements for the new rules governing economic regulation. In
future, our ability to undertake independent cost assessments will depend on whether network
businesses will voluntarily share their cost forecasts with us.
We support changes to the National Electricity Rules (or relevant Tasmanian regulations)
which ensure that we continue to have access to the information we need to prepare
independent planning reports going forward.
2.
Obtain independent advice
AEMO would be happy to work with the Tasmanian government to develop a framework for
obtaining independent advice on matters which affect network costs. AEMO’s specialist
transmission planning capability enables it to provide an informed, independent view of
transmission network investment requirements.
We agree with your view that reliability standards have been a key driver of network costs.8
AEMO considers that the form of reliability standards applied in Tasmania – which do not apply
fixed levels of redundancy and take into account load and energy at risk – give rise to more
efficient outcomes than the arrangements that apply in some other NEM jurisdictions.
There is scope for AEMO assist the Office of the Tasmanian Economic Regulator when it
undertakes its review of transmission reliability standards. For instance, AEMO assists the
Essential Services Commission of South Australia (ESCOSA) when it determines the
reliability standards that should apply at South Australian transmission connection points. At
ESCOSA’s request, we advise whether reliability standards for any connection points should
change in light of various factors including AEMO’s demand forecasts and the Value of
Customer Reliability (VCR) specific to each connection point.
AEMO also provides advice to the South Australian government on other matters, such as the
extent to which ElectraNet’s capital expenditure aligns with the investment program accepted
by the AER during the regulatory determination process.9
7
See TransEnd, Transitional Revenue Proposal, 31 January 2014 and AER, Draft decision TasNetworks transmission determination 2015-16 to 2018-19 Overview, November 2014.
8http://www.stategrowth.tas.gov.au/__data/assets/pdf_file/0009/97236/Tasmanian_Energy_Strategy_2
0141219.pdf
9 http://www.aemo.com.au/Electricity/Planning/South-Australian-Advisory-Functions
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The government may wish to consider whether to develop a framework for obtaining
independent advice from AEMO with respect to matters which affect network costs. An
example of this type of arrangement is our South Australian Advisory Functions, which we
provide in accordance with the National Electricity Law.10
3.
Adopt a contestable model
AEMO welcomes the government’s consultation on whether a contestable transmission
framework, such as the one that applies in Victoria, would be beneficial in Tasmania.
Pro-competitive reforms have the potential to benefit customers through lower prices and more
innovative service offerings. There are also benefits associated with an independent
transmission planner. The regulatory framework provides little or no incentive on network
businesses to efficiently invest and to find alternatives to building assets. In contrast, AEMO’s
objective in delivering transmission services is to ensure that the network will, over the long
term, minimise total delivered cost of electricity to consumers.
Chart 1 below compares the transmission regulatory asset base per megawatt of peak demand
for Tasmania, South Australia and Victoria. It shows that Tasmanians have invested more than
twice as much as Victorians to meet each megawatt of peak demand. While there are a number
of drivers for these results (such as asset ages and population density) we consider that the
Victorian market framework is a relevant factor.
Chart 1 Comparison of regulatory asset bases per MW of peak demand
RAB per MW of peak demand (real $k 2014)
900
800
700
600
500
400
300
200
100
0
2006
2007
2008
2009
AusNet/AEMO
ElectraNet
2010
2011
2012
2013
TasNetworks
SOURCE: AER AND AEMO.
In this competitive model, where it has been decided an increase in a service level is
required, the independent planner-procurer can in many cases use the competitive market to
source the lowest cost solution. AEMO fulfils this role in the Victorian transmission network
and, in this role, has observed a significant increase in the level of competition in its tender
processes over recent years. The increase in competition applies both between rival
providers of network solutions (as network businesses seek new opportunities) and between
network and non-network solutions.
10
National Electricity Law, Section 50B.
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In a situation of low or falling demand, the potential benefits associated with contestability are
expected to increase. There is now more scope to consider alternatives to expensive, lumpy
network upgrades. Options such as demand management and embedded generation have
the potential to be more cost effective and flexible in circumstances where it is unclear
whether an identified constraint is likely to persist.
There is scope to develop a contestable framework which is tailored to the needs of the
Tasmanian electricity market. A tailored solution could establish the range of projects for
which contestability might apply and whether funding and ownership of these projects was
also contestable.
4.
Conclusion
AEMO would welcome the opportunity to work with the government to develop strategies to
ensure that Tasmanian energy businesses are as efficient as possible. If you would like to
discuss the ideas set out in this submission, please don’t hesitate to contact Louis Tirpcou on
03 9609 8415 or louis.tirpcou@aemo.com.au.
Yours sincerely
David Swift
Executive General Manager, Corporate Development
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