Over the long term, the national electricity market had delivered stable reliability, improved productivity and – until very recently – significantly lower energy costs, Australian Competition and Consumer Commission Commissioner and Australian Energy Regulator member, Mr Ed Willett, has said.*
"Energy costs are rising as cheaper fuel sources are exhausted, while governments are increasing their focus on the environmental impacts of energy production and consumption, and in particular, on climate change issues.
"The reforms that have transformed the Australian energy sector over the past 15 years have placed the sector in a good position to face these challenges.
"The liberalisation of energy markets has been led to substantial new investment," he said. "Overall, real network investment will have risen by around 40 per cent in the five years to 2007–08, driven largely by transmission expansions and upgrades."
But recent events had caused the Australian Energy Regulator to express concerns about the exercise of market power in electricity generation.
Wholesale prices had risen sharply in the autumn due to the effects of drought and were exacerbated in June by rain and flooding.
"Cold winter conditions increased heating requirements, leading to a number of new record demands. These factors led to an extremely tight supply-demand balance during the early evening peak hours, particularly in New South Wales.
"These factors were exacerbated by day ahead bidding practices of generators. In particular, Macquarie Generation regularly repriced capacity into higher price bands during evening peaks throughout June."
In combination, these conditions led to an unprecedented pattern of high spot prices which flowed through to the forward market for electricity derivatives, which also experienced record prices in June.
"This put pressure on some retailers and those large energy users that needed to recontract their forward energy purchasing arrangements. Two retailers exited or scaled down their presence in the market," Mr Willett said.
"This generator bidding activity has shown that, while the NEM is the best electricity market in the world, it is very sensitive to market power. Going forward, competitive market structures in generation need to be achieved and maintained to ensure that the market works effectively, especially as base energy costs increase.
"Energy reform has also 'energised' the gas sector, with significant growth in exploration and production activity and expansion of the gas transmission network. Reforms include the introduction of free and fair trade in gas between the states and regulated third party access rights to pipelines. Development expenditure in the petroleum industry has increased four fold from 2002 to 2006.
"The development of new gas basins and fields is being supported by the construction of new transmission pipelines to ship gas to markets. Australia's gas transmission pipeline network has almost trebled in length since the early 1990s, with around $2.5 billion invested in new gas transmission pipelines and major expansions since 2000.
"Access regulation has been contentious, but open access is critical to growth and competition in gas markets, which will be increasingly important to electricity generation. The new regulatory framework for gas attempts to respond to some of the criticisms of the current regulatory approach and recognises that competition in gas markets is still developing."
* Mr Willett was addressing the Energy 21C Conference in Sydney. The address will be available from the ACCC website.