Electricity Market

> Click for enlarged view of SWIS.

Market Structure

In the context of Western Australia, all details provided here refer to the South West Interconnected System (SWIS), which stretches from Kalbarri north of Perth, to Kalgoorlie-Boulder in the Eastern Goldfields and south to Albany. It represents 90% of the WA power market with total expected generation capacity of 4115MW in 2007-08. The estimated 07-08 system peak demand is just over 3800MW and is forecast to rise by 3.2% (120MW) per year over the next 10 years.

Western Power Corporation, the previous integrated state owned utility, was in April 2006 disaggregated into separate generation (Verve Energy), retail (Synergy Energy) and networks (Western Power) businesses supplying the SWIS, and the regional arm (Horizon Power) to supply the small North West Interconnected System and non-interconnected power stations around WA.

Alinta, which was split from Western Power's predecessor the State Energy Commission of WA to supply the gas market, was privatised in 2002 and is engaged in electricity retail and generation. It is building gas-fired generation plant in the SWIS. Besides Synergy and Alinta, Perth Energy is the only other electricity retailer licensed to supply small-use customers (as defined by regulation) in the SWIS.

Market Design

The current market arrangements in WA commenced in September 2006. The model differs from the National Electrcity Market (NEM) by being a net pool based on separate capacity and energy markets. It is governed by the Wholesale Electricity Market (WEM) Rules 2004 as administered by the WA Independent Market Operator (IMO). WA is not interconnected to the NEM and will not be in the foreseeable future.

The WEM's capacity market is based on a system of capacity credits allocated by the IMO to all generators in the SWIS. Capacity must be certified by the IMO in order to receive the credits, which are a form of guaranteed capacity payment made by either contracted customers or the IMO. Energy is traded in the Short Term Energy Market (STEM), a net pool arrangement in that it is used mainly for trading uncontracted energy that is generated beyond the bilateral contract arrangements between generators and retailers/loads.

All retailers and independent users must purchase capacity credits to match their peak demand plus a reserve capacity margin set by the IMO. This ensures sufficient capacity will be installed for the forecast peak demand in future years which the IMO issues annually. This model eliminates the requirement for extreme spot energy prices to signal the need for new capacity entry (as in the NEM). STEM prices are therefore capped at lower levels than in the NEM, at $150-250/MWh for gas fired and $300-600/MWh for liquid fired energy.

For further details see www.energy.wa.gov.au and www.imowa.com.au.

Consumers

The number of contestable customers is approx 12,500, out of a total SWIS customer base of 850,000. The contestable load demand threshold is 5.7kW, or 50,000kWh per year in consumption, about the size of a suburban deli. This market represents roughly two-thirds of total SWIS demand in volume and value terms, or about $1 billion.

Perth Energy has long term off-take arrangements with most landfill gas based generators in the SWIS. The company supplies this renewable energy to a number of commercial and industrial customers covering hundreds of sites. We also purchase power from other major generators including Verve Energy which we use to complement our renewable power sources. Perth Energy's ability to provide more supply to contestable customers has to date been somewhat constrained by the lack of available third party generation capacity, a limitation that will be rectified through our own generation project development.

Generation Support to Perth Energy

The WA Government has placed a cap on Verve Energy's total capacity at 3000MW, which means Verve is not permitted to install any further generation capacity (except for renewable) given the company already has 3400MW. It is due to retire some of its oldest plant in the next several years. All new capacity must therefore be provided by private investors.

Perth Energy is developing a 120MW gas turbine power station in Kwinana, a project that has been conditionally certified by the IMO. This fast response plant will be used to complement intermittent renewable energy that Perth Energy buys from generators, helping smooth the supply profile for Perth Energy and making renewable energy supply much more viable to us and our customers.