Market Evolution: The Situation in Asia Pacific

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Market Evolution The Situation in Asia Pacific
Allan Dawson Chief Executive OfficerEnergy
Market Company
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Agenda

• Asia - hot spot of global growth, energy
  investment and change
• Australia and New Zealand more mature electricity
  markets
• Regional overview
• China, India
• Japan, Korea
• Philippines, Indonesia, Singapore
• Australia and New Zealand
• Summary of key themes

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Asia - Overview
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Asia Hot spot of growth

• Asia (especially India and China) are key global
  growth areas
• Total energy consumption is high but per capita
  consumption is low
• Developmental disparities within the region
• Electricity sector reform is progressing slowly

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Investment Requirements
Source International Energy Agency (IEA) World
Energy Investment Outlook 2003
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Electricity Investment
Source International Energy Agency (IEA) World
Energy Investment Outlook 2003
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Electricity Market Reform

• Diversity in regional development reflected in
• Level of electrification
• Quality and reliability of supply
• Level of subsidies
• Most nations are somewhere along the reform path
• Reforming legislation
• Establishing new institutions and markets
• Introducing competition to supply and demand

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Electricity Market Reform

• Main driver for liberalisation is encouraging
  private sector participation and attracting
  investment
• Another driver is improving countrys
  competitiveness by introducing competition into a
  key sector of economy
• There is also desire to reform state-owned
  incumbents to improve efficiency

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China

• Industry overview
• Large and growing economy
• Electricity market is second largest after US
• Installed generation capacity in excess of 350GW
  but per capita consumption low
• Facing supply shortage and associated blackouts
• Transmission system is fragmented
• Surplus supply cannot be moved to where it is
  needed

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China

• Investment requirements
• US1.9 trillion investment required for
  electricity generation by 2030
• Significant investment to build transmission
  corridors to move electricity to energy-hungry
  regions
• Major supply reliability issues
• Central government has put in measures to help
  taper investment in high energy consuming
  industries

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China

• Reforms Pilots
• Trial market project in 1999
• 5 provinces Shanghai
• Objective to allow separation of generation and
  grid interests and encourage competitive supply
• The experiment was short lived in all pilot areas
  because
• Increased demand in 2001 that absorbed excess
  supply
• Monopoly utilities created unfair competition

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China

• Reforms Next wave
• State Power Corp was broken up in 2002 into 5
  generation companies and 2 grid companies
• State regulator established in 2003 State
  Electric Regulatory Commission
• Recent unexpected power shortages have led
  government to consider market orientated policies
  to attract new investment
• The measures the government is pursuing or has
  implemented include
• Regulatory changes
• Electricity pricing reform
• Investment reform

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India

• Industry overview
• 100GW of generation capacity by 2012
• Private participation is essential if growth
  targets to be met
• Quality, access, theft and subsidies are big
  issues
• Industrial consumers pay the bulk of the money
  collected
• Little price signals or incentives for efficient
  production and transmission or investment
• State corporations dominate the sector
• They are in various stages of being disaggregated
  and will provide building blocks for a market

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India

• Reforms Corporatisation
• 1990s Corporatisation of State Electricity
  Supply Boards
• Structured so they could be broken up into
  potentially competing generation, transmission
  and distribution companies
• Private sector participation in supply

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India

• Reforms - Electricity Act 2003
• Eases requirements for private entry into
  generation
• Opens transmission and distribution to private
  participation
• Requires all transmission utilities to provide
  non-discriminatory open access
• Proposes a new tariff framework based on
  competitive bidding
• Designed to encourage competition in electricity
  supply but basic framework for power markets is
  yet to be determined
• Requires contracts for new projects to be
  determined by competitive bidding

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Japan

• Sector dominated by 9 regional franchises
• J-Power only major player that operates in
  multiple regions
• Large consumers are contestable
• Mid-sized consumers will become contestable in
  2005
• Full deregulation is scheduled for 2008
• New energy exchange will be established so
  generators can price electricity sold onto the
  national grid
• IPO of J-Power is the biggest in Japan for 6
  years (US3.4b)

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Korea

• KPX established in 2001 to operate the one-way
  bidding pool based on marginal costs and capacity
  payments
• Marginal costs are determined by a committee, so
  generators can submit only capacity offers, not
  price offers
• A two-way bidding pool (TWBP) has not yet been
  established as planned
• Government is rethinking plan to introduce
  competition in the power distribution sector
• Genco privitisation programme well behind schedule

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Philippines

• Legislation passed in 2001
• Renegotiation of PPAs
• Regulator and market operator established
• Market rules written and systems currently being
  developed and implemented
• Net pool with distributed utilities required to
  trade at least 10 of its total demand from spot
  market
• Locational marginal pricing methodology
• Expect market trials to commence in June/July
  2005 and commercial operations in December 2005/
  January 2006
• Process to sell transmission operator and gencos
  continues

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Indonesia

• Legislation passed 2002
• Tariffs to be increased to economic levels by
  2005
• Requirement to establish a trial market by 2007
• Renegotiation of PPAs

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Singapore

• Market liberalisation programme began in 1995
• Reform designed to promote the supply of
  competitively-priced electricity
• New arrangements for wholesale trading commenced
  on 1 January 2003
• Prices established every half-hour for
  approximately 400 locations
• Recent participation of demand side in reserves
  market
• Retail contestability for large and medium sized
  customers
• Full retail competition deferred at this stage

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Key themes in Asia

• Investment requirements are astonishing
• Electricity market reform is progressing slowly
• Reform delays in most jurisdictions
• About face by Thailand and Malaysia
• Investment climate for asset sales yet to improve
• Attention also focused on energy security and
  diversification due to oil price increase
• If oil prices and shortages bite, focus on reform
  likely to resume

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Australia

• NEM operating since 1998
• Zonal market but now considering nodal pricing
• Bass link will allow participation by Tasmania in
  2005
• Reform underway in Western Australia
• FRC - 5.5m customers are contestable
• Likely changes to regulatory structure

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New Zealand

• NZEM operating since 1996
• Establishment of Electricity Commission
  represents a major regulatory shift
• Minister and Commission have strong involvement
  now whereas before it was a voluntary
  self-regulated market
• Implications
• Mandatory pool
• Dry-year supply contracted by Commission making
  it a regulator and market participant
• Commission likely to adopt new approaches for
  transmission investment and transmission pricing