Legislative Council, Tuesday 21 March, 2023

Ms FORREST question to LEADER of the GOVERNMENT in the LEGISLATIVE COUNCIL, Mrs HISCUTT

QUESTIONS:

With regard proposed reform in the energy sector and matters related to energy prices, in an answer to a Question on Notice from Minister Barnett on 10 November 2022, the Minister stated:

“Based on modelling undertaken by Marinus Link Pty Ltd, Tasmanian residential electricity bills will be lower than they otherwise would be following the construction of Project Marinus. This is because of downward pressure on wholesale energy prices arising from the national rollout of lower cost new renewables.”

(1) What effect will lower wholesale prices have on Hydro’s profits;

(2) for a given percentage change in wholesale prices does the model provide the percentage change in Hydro’s revenue;

(3) for a given percentage change in wholesale prices does the model provide the percentage change in Hydro’s profits;

(4) (a) if the Marinus Link model doesn’t provide this information has Hydro Tasmania modelled the sensitivity of future profits to changes in wholesale electricity prices;
     (b) if so, what does the modelling show; and
     (c) if not, when will this modelling be done;

(5) does OTTER use Victorian wholesale prices when determining Tasmanian retail prices;

(6) is this likely to change as Tasmania increases the production of renewable energy;

(7) with an expanded NEM what does the Marinus modelling assume will happen to the differences between Tasmanian and Victorian wholesale prices?

(8) Roughly 40 per cent of current retail electricity prices set by OTTER comprises networking costs.
    (a) What is the current breakup between transmission and distribution costs;
    (b) what is the estimated breakup when the 200 per cent renewable energy goal is achieved; and
    (c) (i) do or will non-regulated transmission costs impact retail prices;
    (ii) if so how; and
    (iii) if not, are non-regulated transmission costs simply borne by generators and/or other users of transmission services such as major industrials?

ANSWERS:
Question 1

Marinus Link will support lower wholesale energy prices in Tasmania through its two-way flow of energy. The national energy market is expected to need access to flexible and on-demand capacity to keep supply reliable for consumers. Battery of the Nation (BotN) with 1500 MW additional capacity will provide 'back-up' energy in a sustainable way. Due to the intermittent nature of renewable energy sources, the half hourly prices are expected to be highly variable/volatile during the day. For example when the wind isn’t blowing and the sun isn’t shining, the prices are expected to be higher. Conversely prices will be lower (or even negative) when there is excess renewable energy in the system, which effectively means being paid to consume energy from the grid.

The flexible nature of the Hydro generation system allows Hydro Tasmania to benefit from this price arbitrage opportunity, even if the average wholesale energy prices are lower. Therefore, even if the average wholesale energy prices may be lower, Hydro Tasmania will still be able to effectively buy (store water) when prices are low or negative and sell (generate) when prices are higher. BotN and Marinus will allow Hydro Tasmania to repurpose its generation base to take advantage of the market shift. In which case, Hydro Tasmania’s revenue base at the portfolio level will be significantly different to its current make-up.

Question 2 and 3

The Marinus modelling does not analyse Hydro Tasmania’s revenue or profits.

Hydro Tasmania’s revenue and profit outcomes is a function of a large number of variables including yield, generation, interconnector flows, contract positions (hedging strategy) and spot and wholesale pricing.

Given the nature of Hydro Tasmania’s flexible system, the revenue and profit outcomes may also be a function of the price spread between higher price events and the lower price events and how Hydro Tasmania may choose to operate based on these pricing signals. It is therefore not possible to establish a direct relationship between a percentage change in wholesale prices and Hydro Tasmania’s revenue and profits.

Question 4

Hydro Tasmania maintains a forecast financial model which is underpinned by a range of input assumptions including in relation to wholesale pricing. In addition, Hydro Tasmania is developing business cases for both the

Tarraleah and Cethana projects as part of the Final Investment Decision for these projects. The modelling underpinning the business cases will include the expected revenue and cash flows from the projects and the associated impacts on Hydro Tasmania’s forecast financial projections.

Question 5

Victorian contract prices are one of the factors considered as part of the wholesale pricing model used by the Tasmanian Economic Regulator (TER) in setting the wholesale allowance component of regulated retail prices. More information is available from the Regulator’s website in the form of guidelines, specifically the Electricity Wholesale Contract Guideline and the Standing Offer Price Approval Guideline, and can be found here: https://www.economicregulator.tas.gov.au/electricity/regulatory-framework/guidelines

Overall, there are seven building blocks considered by the TER and wholesale electricity costs made up approximately 29 per cent of the costs associated with the full stack of building blocks related to Aurora Energy’s costs of providing retail services considered through the Standing Offer Electricity Price Determination 2022.

Question 6

There are no plans to change the regulatory framework for Standing Offer prices in Tasmania.

Question 7
The forward energy prices in Tasmania are currently linked to Victoria through the Tasmanian Wholesale Contract Regulatory Instrument. This relationship is assumed to remain with Marinus Link.

Question 8
(a) The 2019-2024 Australian Energy Regulator final decision on TasNetworks transmission and distribution determination has the split of network costs at 37 per cent for transmission and 63 per cent for distribution.
(b) A building-block approach is taken to determining standing offer prices, with each of the seven components being assessed on their own merits. It is not possible to estimate now the estimate of each component of those costs at 2040 (the end-date of the TRET target).
(c) Non-regulated transmission costs do not factor into retail prices and are borne by the party contracting for those services.