Ladies and Gentlemen The world is about change and the management of that change. Today’s presentation is an attempt to canvas a few key questions which, in my view, need to be asked as the answers provide a way to the future in the energy industry. Of course the point of today is to focus specifically on the NSW gas industry and the particular challenges facing us as the introduction of FULL RETAIL CONTESTABILITY (or FRC) on 1 January 2002 fast becomes reality. In sensibly addressing the range of policy and business issues which are raised by FRC and the changing nature of energy markets, it is fundamental to learn from previous experience. In particular, there are several emerging themes from the United Kingdom, the United States and Europe which potentially provide us with signposts. I propose to touch on a handful of key themes which I will refer to as GLOBAL ENERGY TRENDS. It is important that, particularly in this context, I acknowledge the work of both PriceWaterhouseCoopers and the Commonwealth Department of Industry, Science and Resources. Further, after a brief analysis of future projected energy trends in Australia, I will attempt to highlight some of the issues for the NSW gas industry. What will hopefully become clear at the end of my presentation, as it has to me, is that the NSW energy markets are part of Australian and, increasingly, global energy markets. How we respond in this context will influence how we move into the future reality of national and global markets and players.
I WILL START BY LOOKING AHEAD 15 YEARS There are a number of key questions we face as members of the energy industry and as consumers of energy ourselves. These questions help provide us with a reference or framework as we work back towards addressing the challenges facing us today. A proposition: Energy services to build and sustain quality of life. This is just one view of where we will be in 2015. It reflects assumptions about the fundamental nature of energy in our economy and communities. In particular it reflects answers to the following questions: Where do we think we will be in a global context and as a nation? What do we expect our energy sources to be? What do we expect our mix of energy sources to be and from where will they be supplied? What do we expect the energy supply markets to look like (including generation, transmission, retail and trading)? What do we think will be the key market drivers? How will community expectations develop and how will they influence the way energy markets grow and respond? How will government’s respond to dynamic community expectations? What will the balance be and how do we get it right? Fundamental to answering these questions is what can we learn from other country’s experience in ensuring we identify and respond to the right challenges.
A further proposition: In 2015 energy services will be based around health, prosperity, the environment – and tradeoffs. For many of us, in both our professional and personal lives, this proposition applies to the energy sector now. I do not believe however it could be said to be shared broadly across business and community sectors in Australia. For although a growing number of people are concerned about the negative and unsustainable impacts of our activities on the environment, there are still significant sectors of the community who do not appreciate cause and effect. This is not intended as a criticism but an observation – and it is also said in full knowledge that the debates on cause and effect are not finished and will continue to be developed as we learn more. Even so, trends in developed countries show that quality of life is being defined broadly and in a more informed manner. (Trends in developing countries are obviously different and are particularly challenging.) Recent work on community preferences shows that people are concerned about things such as the possible impacts of electro-magnetic fields, air pollution, reliable service, environment protection and value for money. These could be summarised as personal health, personal and commercial prosperity and the impact of our collective actions and decisions on the lives of our children. Where does this leave us? In my view 2015 will be about tradeoffs and managing negative externalities in the context of people’s lives and expectations about the future.
If my proposition holds Then it follows that Choices will be made by us all about the nature of energy services.
In particular: These energy choices will be based around three key themes: ENERGY SOURCES What will they be and are they sustainable? This is the very debate that underpins the current Kyoto and Bush energy policy discussions, emissions trading, investment in renewables, support for further energy research and development as well as regulatory structures and commercial incentives. 2.TRADEOFFS What are the impacts of decisions on people’s lives and how are they managed? As you all know there is much discussion about the tradeoffs between gas and coal fired generation, tradeoffs between reliable supply and the possible impacts of high voltage transmission lines (including visual amenity) and tradeoffs between price and service quality including reliability of energy services. CUSTOMER LOYALTY & SATISFACTION It may be that in the future our relationship with our energy service provider becomes as important as our relationship with our medical practitioners in the sense that they are essential services necessary to sustain our quality of life – however we will communicate through the internet. The emergence of more sophisticated but streamlined product packaging is the beginning of this possible consumer revolution. It is certainly underpinned at this stage by strong government involvement. This may change.
Let’s look at GLOBAL ENERGY TRENDS NOW and see what signposts there are for the future of Australian energy markets and the NSW gas industry in particular. There are 7 key global trends which emerge and impact on countries’ energy industries, including Australia. Commercilisn/Privtsn – Many countries have undertaken commercialisation & p/tisation initiatives in liberalising their energy markets. The key lessons are that a competitive structure is vital for a market to work. Globalisation – Competition has made more assets available on the global stage. Size, market presence and number of customers are viewed as important to success by global players. Future dominance however will be significantly influenced by strategy and innovation. Although market structure is changing and there is growing specialisation, competition will continue drive businesses to become the best in their class. This suggests increasing specialisation will occur, however there are growing trends of companies seeking a natural hedge between generation and retail supply. This is occurring in Australia also. Competition/FRC – Competition drives innovation, product development, service creation and efficiencies which in turn impact on prices and margins. E-commerce is making customers smarter and competition more aggressive through pricing access to customer, new products and greater competition between incumbents. Convergence – is becoming increasingly prevalent in the global energy industry in upstream (generation, supply) and midstream (trading, marketing) although it is not new at the retail level in both Europe and the UK. Energy Trading – Trading is becoming more prevalent to hedge risk, optimise asset positions and as a speculative exercise. There are diverging experiences about whether it is necessary to own the assets, for example in Europe compared to the UK and the US. Environment – There is increasing movement towards gas fired technologies and growing consumer demands for reasonably priced green energy. This is a consistent theme. Regulation – There is also a clear theme of customer focus throughout regulatory structures.
WHAT HAS HAPPENED IN THE UNITED STATES GAS INDUSTRY AND WHAT IS LIKELY TO EMERGE OVER THE NEXT DECADE? The information in this table is sourced from Cambridge Energy Research Associates and PriceWaterhouseCoopers. The trend in exploration and production is the shift back to growth, particularly with the requirement for generation and transmission capacity augmentation. The trend in transmission & storage is for their integration into other energy midstream networks. The trend in wholesale trading is for ongoing growth in the size and complexity of the financial markets. The trend in energy distribution is for the emergence of multi regional utilities and unbundling and outsourcing of functions such as asset management The trend in retail energy is to have customer choice linked with information technology and convergence into general household or business services beyond energy. The focus is energy services and not a single energy source. With customer interface IT and the internet will redefine the consumer-supplier relationship.
Turning to the UK briefly, let’s look at the focus of regulation. Policy lessons for the gas industry from the UK electricity restructuring experience are: Retail is the area where competition has had the greatest impact. This is not surprising because it is the end of the supply chain in terms of customer interface. Policy objectives play a pivotal role. In particular social policy issues such as appropriate customer protection impacts on the behaviour of market participants. Since privatisation UK retail companies have shown a continuing improvement in service levels. Regulatory developments in one market will have effects on the other and it is important to maintain consistency and proper integration A single regulator is desirable although it is still necessary to have a high level of regulatory expertise in each sector because of differences in the physical characteristics of the gas transmission network. The UK reforms reflect the increasing integration between the gas and electricity industries brought on by liberalisation and competition. For example, all former regional electricity companies now have a gas supply arm.
Let’s turn now to Australia and have a look at what our fuel supply mix is projected to be in 2015. In 1997/98 total Australian energy production was around 12,100 PJ. By 2015 energy production is expected to increase to almost 19000 PJ, an annual growth rate of 2.6%. In that same timeframe, natural gas production is expected to undergo very rapid growth, more than doubling. Its share of total production is projected to rise from 11% to around 16%. Of course coal and uranium dominate in current and projected production, much of which is exported.
Turning to energy consumption by fuel, let’s look at total energy consumption in 2015: For clarification purposes, total energy consumption includes the energy actually used by consumers and energy consumed or lost in conversion, transmission & distribution. The above table shows that overall energy consumption is projected to continue to grow. In 1997/98 total energy consumption in 1997/98 was 4810 PJ. By 2014/15 total energy consumption in Australia is expected to reach 6100 PJ – an annual growth rate of 1.5%. Interestingly, the projections show that demand for natural gas will increase at about three times the average rate of growth of energy demand, rising from around 18% to almost 30%. This forecast growth in energy share is likely to be at the expense of black coal. Natural gas has been the fastest growing primary source since 1973/74 with an average of 7% per annum. Gas accounted for 18% of total energy consumption in 1997/8 compared to only 7% in 1973/74.
In light of the previous lessons and experiences, let’s now turn to the NSW gas industry and touch on a few challenges : 1.RETAIL DYNAMICS – 1 January 2002 is a very significant date for both the gas and electricity industries. Although the experience of other countries is that customers will often wait to see what competition might mean, it is not unreasonable to expect a level of customer transfer in the first year sufficient to rigourously test market participants & the supporting systems. The growth in energy marketers is anticipated as well as growth in the importance of IT and the internet in providing customers with more knowledge and informed choice. There will be greater focus on national energy markets with global players in the market. APPROPRIATE REGULATORY FRAMEWORK - If the experience of other countries, particularly the UK, US and Europe, is replicated even in part in NSW, the regulatory framework at retail level will prove to be very important. Given that this is still being finalised, it is important we are all involved in ensuring it achieves an appropriate balance between competition and customer protection. MEETING CUSTOMER EXPECTATIONS – This is of equal importance to both the industry and the government, for slightly different reasons. Customers are increasingly well informed and can make sophisticated judgments with that information. They will experience improvements in overall customer service with the packaging of products and services. Other less informed consumers will have an opt back arrangement EYE TO THE FUTURE - There are emerging opportunities in the areas of trading in “tradeoffs” such as emissions trading. This is likely to increase into the future. There will also be a greater focus on gas generally as indicated earlier. This will be important.
In conclusion all I would like to say is: Keep an eye on the future today – 2015 is nearer than we think. Thank you for your attention.
Energy developments 2015 final version
Energy Services - 2015
Which way to the
NSW Ministry of Energy & Utilities
NSW Ministry of Energy & Utilities
Energy services to build
and sustain quality of life
NSW Ministry of Energy & 2
2015 - Energy Services
Will be based around
and – tradeoffs.
NSW Ministry of Energy & 3
2015 - Energy Services
Choices will be made by us all about
the nature of energy services.
NSW Ministry of Energy & 4
2015 – Energy Choices
Sources – what will they be and are they
- what are the impacts on the
environment and how are they managed?
loyalty & satisfaction - who supplies
the services and how will they be costed?
NSW Ministry of Energy & 5
Global Energy Trends
Global trends which are impacting on
many countries’ energy industries
Globalisation – specialisation and focus
Competition and retail contestability
Convergence of gas/electricity markets
NSW Ministry of Energy & 6
United States – Gas
Rationalisation and focus
Shift back to growth
Consolidation & growth
Integration into midstream
Robust trading & forward financial
Ongoing growth in size &
Consolidation precedes deregulation Multi-regional utilities –
unbundling & outsourcing
Large customers have choice –
retail market is slow to develop –
Choice linked with IT –
convergence beyond energy
Hundreds of marketers –
information and choice expand
IT and internet redefine
NSW Ministry of Energy & 7
is the area where competition is having the
Utilities Act was passed in 2000 which provided a
new regulatory framework for bringing gas &
electricity markets in line
To ensure customer service, consumer protection
has become primary focus of energy policy &
NSW Ministry of Energy & 8
2015 – Australian energy
production by fuel
Source – ANZMEC Energy
NSW Ministry of Energy & 9
2015 – Australian energy
consumption by fuel
Source – ANZMEC Energy Trends,
Black and Brown Coal 2000 (42%)
NSW Ministry of Energy & 10
Challenges – NSW Gas
1. Changing energy market dynamics after 1/1/02
particularly with new entrants
Appropriate regulatory framework which supports
dynamic national energy markets – globalisation
Meeting and managing customer expectations –
convergence in energy services – reasonably priced with
reliable service - policy objectives are clear &
New market opportunities – emissions trading &
environmental concerns – focus on gas
NSW Ministry of Energy & 11
Keep an eye to the future today.
NSW Ministry of Energy & 12