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Environment and Communications Legislation Committee
27/02/2017
Estimates
ENVIRONMENT AND ENERGY PORTFOLIO
Clean Energy Regulator

Clean Energy Regulator

[14:33]

CHAIR: Ms Munro has given her apologies for not being able to appear today. I would like to note that her term expires on 1 April, so it is highly unlikely that she will be back here for budget estimates. If that is the case, could you, Secretary, please pass on this committee's best wishes and sincere thanks for everything she has done to assist the committee and in her role.

Dr de Brouwer : Thank you, Chair. I will do that.

Senator Birmingham: The government echoes those sentiments.

CHAIR: Welcome, Ms Swirepik. Would you like to give an opening statement?

Ms Swirepik : No, I do not want to give an opening statement.

CHAIR: Senator Chisholm.

Senator CHISHOLM: In relation to the Large-Scale Renewable Energy Target certificates, my understanding is that a number of retailers have chosen not to meet their obligations. Does the Clean Energy Regulator have any comment on that?

Ms Swirepik : Yes, as the regulator, we made it clear as we were moving towards the surrender for this year that we were encouraging people to meet the objectives of the act by surrendering renewable energy certificates. It is quite clear that surrendering certificates and paying a shortfall charge are not equal because surrendering certificates actually incentivises renewables, whereas the shortfall charge goes into consolidated revenue. This year the majority of entities still chose to do the right thing, so we had a compliance rate between the small-scale and the large-scale scheme of over 94 per cent. There were a number of small entities and two large entities who chose to pay the shortfall charge for either part or all of their obligation.

Senator CHISHOLM: In terms of the renewable energy target is it true that the existing renewable energy target will only provide support to new projects to 2030?

Ms Swirepik : Yes, at the moment the scheme is due to sunset at 2030 and the target flat lines, if you like, after 2020.

Senator CHISHOLM: Do you believe this lack of long-term policy supporting renewable investment post 2030 could be having an impact on investment decisions?

Senator Birmingham: I think we started the day with some advice to senators about questions that start with 'do you believe' in terms of seeking opinions from officials, which is not appropriate. You might be able to rephrase that question in terms of what evidence exists or anything of the sort.

Senator CHISHOLM: Do you think in terms of impacting investment decisions the lack of target beyond 2030 is a problem?

Ms Swirepik : I do not think I would comment on the 2020 to 2030 period. What we are seeing at the moment, which I can comment on, is that there is a lot of momentum building towards reaching the 2020 target. In the 2016 year we had about one-third of the build that is required to reach the 2020 target come on with a lot of momentum late in the year, and we would expect that to continue through 2017.

Senator CHISHOLM: In terms of a policy mechanism post 2020, like an emissions intensity scheme for the electricity sector, would that support renewable investment today?

Ms Swirepik : I guess it is not my place to comment on what the policy might achieve post 2020. There is a question about whether renewables will need incentivisation, if you like, post 2020, which would be a matter for the Finkel review and the 2017 review to consider.

Senator CHISHOLM: Thank you, Chair.

CHAIR: Thank you. Senator Back.

Senator BACK: Thank you very much, Chair. I want to go back to the renewable energy target if I can. Under the act the target for this year, 2017, is 26,000 gigawatt hours. My understanding, if you can confirm, is that the level of renewable generation for 2016 was 16,000 gigawatt hours. Is that consistent with your prediction?

Ms Swirepik : I might pass to my colleague, Mark Williamson, to answer that question, but there is an important factor to consider in terms of the target versus liability, and liability can come from any certificates in the market including that there historically has been a surplus. There were sufficient certificates in the market this year for all entities to meet their liability.

Senator BACK: So 16,000 gigawatt hours is what you were predicting for 2016. Did that happen?

Mr Williamson : Yes, it was a little over 16,000 gigawatt hours in 2016.

Senator BACK: So the target was 21,000—

Mr Williamson : Sorry, Senator, I have just realised, the number for 2016 was 17,300 gigawatt hours.

Senator BACK: Thank you. You had a surplus so the shortfall between 17,300 and 21,400 is roughly 4,000 gigawatt hours, so that has reduced somewhat the surplus.

Mr Williamson : You have talked about the target for this year being about 26,000 gigawatt hours. I think for last year, 2016, it was around about 21,400. We had a surplus after the February 2016 surrender deadline. I think we had about 18 million certificates. We have about 13.4 million large generation certificates left in the market after the surrender period just gone by.

Senator BACK: What do you predict the 2017 certificate level is going to be? There were 17,300 last year. What do you predict 2017 will be?

Mr Williamson : Firstly, I would like to wholly qualify this answer. There are a lot of things that can vary the pace at which new construction that has been announced might come on and start generating. Also, hydro can vary materially between a good and a bad year. So with those sorts of qualifications I would say that this year I would expect something around 20,000 gigawatt hours.

Senator BACK: And the target is 26, so you will be six short?

Mr Williamson : Correct.

Senator BACK: The regulator gave me a list at estimates of 76 new power stations accredited. But, of those 76, 68 have got a total less than one megawatt. So you would be looking for generation from those generators of about a thousand to 1,200 gigawatts per annum. Is that consistent with what you are predicting?

Mr Williamson : For the 2016 calendar year, I am pretty sure it was 494 megawatts of new capacity we accredited, which was around double what we were expecting. So we did see some projects come forward a bit. That will add back in. Also, we are seeing a return to more normal generations from hydro. There is a range of factors. We are yet to see what the accreditation numbers will be for this year.

Senator BACK: Your target for 2020, which is what I want to get to, is 33,850. You are on about 20. What chances have you got of getting to 33,850 by 2020, which is three years time?

Mr Williamson : We say the target can be met. We said in our first annual statement to parliament that around 6,000 megawatts of new build was required. That would need to be committed—in other words, a final investment decision made—in the 2016, 2017 and 2018 years, and effectively be built in 2017, 2018 and 2019. So far we have seen almost 2,800 megawatts of announcements that we say are firm announcements. As Ms Swirepik indicated, the rate of those announcements has ramped up in the last quarter of last year, and even the first two months of this year. We still believe that that amount of build can be committed and built before 2020.

Senator BACK: Going back to Senator Chisolm's earlier questions, the shortfall charges were $131 million. The year before, it was $8 million, as I understand. Is that $8 million included in the $131 million, or is that separate? That is the previous year.

Ms Swirepik : That is separate, I believe. I do not have the numbers last year discretely, but I could get those fairly quickly to you.

Senator BACK: My calculation of a $65 fine for each forsaken, $131 million, comes to just over 2 million RECs not being surrendered. Do you agree with that?

Ms Swirepik : Yes, that is correct. Our numbers include people who surrender within 10 per cent, which is actually a flexibility that they have under the renewable energy act. The total number of the certificates not surrendered was 2.35 million.

Senator BACK: So those funds have gone into consolidated revenue. Clearly there has not been carbon dioxide emission reduction in consideration of those. The price of renewable energy certificates, you will agree, will probably rise. It is about $88 at the moment. It will probably rise to close to $92. That is my market prediction. Would you agree with that?

Mr Williamson : The last price I saw was about $87. Predicting market prices is something that we do not do. I would not see, though, in terms of available information, any reason to suggest the price is going to rise to the levels you talk about. It has stayed well back from the post-tax penalty price of $93 so far.

Senator BACK: I have made a prediction of about $2 billion per annum, which consumers are now having imposed on them under the large-scale renewable energy target. I think you mentioned that $130 million represents 9.5 per cent, if we stay with the large certificates. Obviously the fine has to be taxed up—does it not?—because when on-charged to the consumer the $65 becomes about $92 or $93. So, if that figure—by my calculation it is about $200 million—represents 10 per cent, do you think I am right? If about $200 million is 10 per cent, then the overall cost—100 per cent—is $2 billion?

Ms Swirepik : I might just correct a number you said—$130 million for shortfall charges this year. The number that is being paid is actually $148 million, because it includes a number of small entities. I just wanted to make a correction to that.

Senator BACK: And that $148 million combines the large and the small, does it?

Ms Swirepik : Yes, that is across all of the large and small schemes and the large and small entities. I think the $130 million was from the two bigger players.

Senator BACK: Just the large scheme?

Ms Swirepik : Yes. With the other thing you asked before about the certificate shortfall, which I said was 2.35 million, that includes people who pay to within 10 per cent, and they do not actually pay a shortfall charge then. They can carry over that 10 per cent into the next year and surrender certificates that year.

Senator BACK: They can have it returned to them if they then comply, is that—

Ms Swirepik : No, they are two different provisions. One is that a liable entity can surrender up to 90 per cent of their certificates—so, within 10 per cent of their full liability. And, in that case, they are actually compliant with the act—they do not pay a shortfall charge and they can pay that extra 10 per cent in their next year's liability. The other ones are ones who surrender lower than 90 per cent towards their obligation, and then they will pay a shortfall charge for everything that they have not paid up to 100 per cent. You asked whether they can pay that back. There is a three-year rule that they can actually come and apply for—

Senator BACK: I want to go back to question 323 from the last estimates. I asked the regulator the cost of a tonne of abatement under the ACCU. The response given was that the CER has purchased 143 million tonnes of abatement at an average price of $12.10. And then, in further response to question 327, there is a figure I need you to clarify for me. The figure that we have is 30,072,424 million ACCUs. I am keen to know what the actual figure is. Is it 30 million or is it 30 billion?

Ms Swirepik : At the moment, we have contracted the numbers that you got in the first question on notice that you spoke about. We have had an auction since then, so the total number of ACCUs committed, if you like, under auction is 178 million. At the moment, about 33 million ACCUs have been credited. Of those, about two-thirds have been credited under the ERF and a third were credited under the previous Carbon Farming Initiative. Sixteen million of those have come in against the contracted abatement which we purchased at auction. So about nine per cent of the abatement that we have contracted so far has been delivered.

Senator LEYONHJELM: For the calendar year 2016, I know ERM and Alinta have paid the shortfall charge. Can you tell us who the other energy generators are who pay the shortfall charge?

Ms Swirepik : Yes, that is on the public register. All the information is on our website, but I will just grab the list for you. There are 15 entities. Besides Alinta and ERM, the rest are small: QEnergy; CovaU; Next Business Energy; Online Power & Gas; COzero Energy; GoEnergy; SPARQ Solutions; People Energy; 1st Energy; Globird Energy; Sanctuary Energy; and OzGen Retail.

Senator LEYONHJELM: Thank you. And I think you said earlier that the total estimated revenue for the shortfall charge in 2016 is $148 million. Is that correct?

Ms Swirepik : That is correct.

Senator LEYONHJELM: The 24 January 2017 CER statement referred to that shortfall charge as a penalty. But doesn't the legislation refer to it as a shortfall charge, not as a penalty?

Ms Swirepik : I might refer that to our general counsel, but under the act the primary mechanism which meets the objectives of the legislation is to actually surrender large-scale certificates. So, alternatively you can pay a shortfall charge. I think in some of the explanatory memoranda it maybe describes that as penalty, so that was the intention at the time. But Geoff Purvis-Smith, our general counsel, might add some comments.

Mr Purvis-Smith : Ms Swirepik is correct: the way the legislation operates is that if they fail to acquit the number of LGCs—large-generation certificates—if they fail to surrender those, a charge applies; that is the $65. There is also a penalty charge by way of interest on that. But the explanatory material talks about both the charge and the penalty interest as being a penalty under the scheme.

Senator LEYONHJELM: Well, the CER statement in January said that compliance rates have been running at more than 99 per cent. So, are you suggesting that in surrendering certificates that represents noncompliance and paying the shortfall charge represents noncompliance?

Ms Swirepik : It does not meet the purpose of the act. The primary obligation is to surrender certificates, and that is what we consider to be fully compliant.

Senator LEYONHJELM: So, you do not think that paying a shortfall charge is a method of compliance?

Ms Swirepik : It is an alternative method of compliance, by paying a penalty or a charge.

Senator LEYONHJELM: It is an alternative method of compliance, which is not the same as noncompliance, is it?

Ms Swirepik : Well, it is not compliant in the sense that it does not meet the objectives of the act. So, it does not go towards incentivising renewables. There is a provision if you cannot surrender certificates to pay a charge. We have made it clear this year that there are sufficient certificates in the market, so people should be fulfilling their obligations by meeting the purposes of the act.

Senator LEYONHJELM: Well, you might see it as noncompliance, but it seems to me that they are complying with the act. But anyway. I will just pursue that a little further. The Renewable Energy (Electricity) Act of 2000 is the legislation that applies to this. Isn't the constitutional head of power for this act the Commonwealth taxing power?

Ms Swirepik : I would refer to our general counsel.

Mr Purvis-Smith : I think the short answer is that there is a charges act, which applies to the charges. That is a separate piece of legislation. And from memory that is a 2010 act. I think that is the act that you are referring to as relying on the constitutional head of power in relation to taxation. But they are two separate acts.

Senator LEYONHJELM: What head of power does the other act rely on?

Mr Purvis-Smith : I would have to go back and refresh my memory. I was not around when the legislation came in in 2000 and certainly not within the portfolio. I would have to go back and check. Perhaps we can take that on notice.

Senator LEYONHJELM: Yes, that would be interesting. On the basis that at least one of the acts, if not both of them, relies on the Commonwealth taxing power, doesn't it mean that the constitutional basis for the RET is a requirement to pay the shortfall charge and that surrendering certificates just triggers an exemption from the tax?

Mr Purvis-Smith : It is expressed in two different ways in the legislation. That is true. There is a part of the act that refers to being able to reduce the amount of charge by the surrender of LGCs. But when you come to the LGC surrender part in the act it certainly places the surrender of LGCs as the primary obligation, and that is consistent with the explanatory material.

Senator LEYONHJELM: Yes, but the whole legislation and the whole explanatory material would presumably aim to be consistent with the constitutional head of power. So, if it is a taxing power then it would seem to me that the shortfall charge is a tax from which you can be exempted by means of the certificates. Is that true?

Mr Purvis-Smith : You can avoid the charge by surrendering the large-generation certificates. And, as Ms Swirepik has already indicated, it is the surrender of the LGCs that incentivises the use of renewable—

Senator LEYONHJELM: I understand that bit—

Mr Purvis-Smith : And that is one of the objects of the Renewable Energy (Electricity) Act 2000.

Senator LEYONHJELM: Yes, I understand that bit, but assuming it is dependent on the Commonwealth taxing power, isn't it true to say that you are administering a carbon tax with big loopholes?

Mr Purvis-Smith : I would not characterise it that way.

Senator LEYONHJELM: The 30 January CER statement stated that any shortfall charges are paid into consolidated revenue. And the 24 January CER statement said that paying shortfall charges has 'no return'. Doesn't paying money into consolidated revenue generate a return by reducing net debt and the associated interest obligations?

Ms Swirepik : The intention of that statement was that it has no return in the renewable sector. It does not incentivise renewables. What happens to it in consolidated revenue is a matter for government.

Senator LEYONHJELM: So, a return on one is not a return on the other. The 24 January statement also said:

We view the intentional failure to surrender certificates as a failure to comply with the spirit of the law …

In fact, I think in your own language in answer to a previous question you said that surrendering the certificates is the right thing to do. My point is this, though: isn't the Corporations Act, which has an obligation on companies to act in the best interests of the shareholders, also part of the law? So, how would surrendering certificates when the alternative of paying the shortfall charges increases returns for shareholders be in the best interests of shareholders?

Ms Swirepik : As a regulator it is not our job to view what is in the best interests of shareholders. That is a matter that the companies have thought through, and ERM in particular made a declaration that it was for tax purposes, that they chose to pay the shortfall charge. So, for us as a regulator we need to look towards the purposes of our schemes, and the purpose is to incentivise renewables for that scheme. So, that is the purpose that we have regard to in administering that legislation.

Senator LEYONHJELM: But you have effectively said that doing the right thing, in your terms, equates to reducing returns to shareholders for which they have a legal obligation?

Ms Swirepik : I have said nothing about shareholders. What I have said is that the primary obligation in the act is to surrender certificates.

Senator LEYONHJELM: But you have said 'doing the right thing'. So, if the companies were doing the right thing, in your terms, they would not be complying with their obligations under the Corporations Act to maximise returns to shareholders.

Ms Swirepik : That is a matter for the companies. As I have said, the primary obligation is to surrender certificates, and our purpose is to accelerate carbon abatement. So, as a regulator, we are of the view that we would encourage those entities, if you like, to meet their obligations under the law. I might pass to Mark Williamson, who would like to add something.

Mr Williamson : The lowest-cost solution for retailers to get certificates is to take longer-term offtake agreements, as Alinta and ERM have both indicated they intend to do. Based on price disclosure, the bundled prices in power purchase agreements for the certificates and the wholesale electricity are between $65 and $85 a megawatt hour, and that is not much different to the wholesale prices. So, those entities that are contracting through power purchase agreements are paying very little for the certificates, and that would seem to be in the best interests of shareholders.

Senator LEYONHJELM: Well, yes, perhaps. But given the deductibility of significant costs and the nondeductibility of the $65 shortfall charge, wouldn't a business that gets full value out of its deductions improve its finances by incurring the shortfall charge whenever the certificate price is over $93?

Ms Swirepik : That is a matter for the companies.

Senator LEYONHJELM: Well, it is a matter of straight economics. The question then is, do you consider selling certificates at prices over $93 to be against the spirit of the law?

Ms Swirepik : We do not sell certificates. There is a demand and supply market out there. We do not regulate that. The market sets the price.

Senator LEYONHJELM: No, the question was not that you sell certificates—I mean the selling of certificates.

CHAIR: Senator Leyonhjelm, you are just at your 10 minutes. If you have many more questions, we might have to come back to you, if we have time, or you can put them on notice. Perhaps you want to ask one more question now before we move on to Senator Di Natale.

Senator LEYONHJELM: I guess my final question is a repeat of what I just asked. Do you consider selling certificates at prices over $93, which would seem to me to be consistent with the best interests of a company, to be against the spirit of the law?

Ms Swirepik : I cannot answer that question, the way you have framed it, because I do not think certificates have ever sold at over $93. We do not sell certificates, and it is up to the market to set the price.

Senator LEYONHJELM: Indeed, but within a market—and I never suggested that you sell certificates—is it against the spirit of the law for an electricity supplier to sell certificates at prices over $93?

Ms Swirepik : Well, it is not up to us to set the market price, and I think as my colleague said we do not imagine that it would actually go to that price.

Senator Birmingham: And to the point you were making before, Senator, it may be a curious commercial decision—that is perhaps the point you were driving at in some of your earlier questions. But of course companies are entirely free to make curious commercial decisions, aside from their other obligations to shareholders or the like.

Senator LEYONHJELM: Yes, indeed they are, except that then the Clean Energy Regulator says:

We view the intentional failure to surrender certificates as a failure to comply with the spirit of the law …

That was what prompted that question.

Ms Swirepik : So, we have been through that already, and I cite my colleague's comments that at the moment the marginal cost that they are paying for the renewable generation over the top of just generation that they might be sourcing is nothing like the full cost of the certificate.

Senator LEYONHJELM: All right. I will leave it there.

Senator DI NATALE: I am interested in following this up a little more, and obviously for people who might be listening in or interested in this conversation, I just want to be sure I understand it. So, we have renewable energy certificates trading at somewhere around $80, let's just say. The effective penalty price is $93. You mentioned two large-scale retailers who are paying the penalty price and not purchasing the renewable energy certificates. Am I correct?

Ms Swirepik : Yes.

Senator DI NATALE: Those two retailers—I think you mentioned ERM and Alinta—

Ms Swirepik : Yes, that is correct.

Senator DI NATALE: Why is it in their interest to pay a high price? I do not get it. Just explain to me the economic incentive here for a company to be paying a penalty price of $93 when they could be purchasing the RECs at significantly lower than that?

Ms Swirepik : I believe that at least in the case of ERM that question relates really to what is tax effective. And if they are incurring a loss as a company, then to pay the shortfall charge is a cheaper avenue for them, really, than—

Senator DI NATALE: Can you just talk me through that?

Ms Swirepik : I might ask my colleague Mark Williamson to talk about the price of RECs.

Mr Williamson : The $65 shortfall charge is a non-tax-effective penalty. It is only equivalent post-tax to $93 if you are paying tax. So, if you have tax losses then, in effect, it is like paying $65. ERM stated in its announcement to the ASX that it is carrying forward some tax losses, and it was a combination of that and the high spot price that it concluded that that was in its best interest.

Senator DI NATALE: That says to me that there is a significant failure here that allows a company to be able to do that—the fact that they can write this off as a tax loss and be better off by undermining the intention of the act. Am I correct in saying that? If it is in a company's financial interests to do that and not meet its obligations under the act then we have a problem.

Mr Williamson : I understand the point. As Ms Swirepik indicated, we have indicated our stance—that it is not the same. However, both of those companies have now indicated that they will be seeking to write offtake agreements. I think the two together have announced that it is probably of the order of 800 megawatts, which would be quite material. If they do move ahead and write offtake agreements for that amount, that would be a positive development, and both have indicated that they are looking at whether or not they will be able to redeem their penalty under that three-year rule.

Senator DI NATALE: Is the justification for Alinta the same—the fact that they basically can write this off as a loss and basically pay a lower price?

Ms Swirepik : They have not stated as such; they have gone on the public record as saying that they are looking at striking up power purchase agreements for a number of renewables projects, and they are yet to come on board. They are hoping that the portfolio they will acquire in the coming years will help them remit or come back into compliance.

Senator DI NATALE: I come back to the point that if it is not tax effective what other justification could there be for doing it?

Ms Swirepik : To maintain their obligations, I guess. Most customers would feel like, if they are making a payment towards this, that would be going towards renewable energy.

Senator DI NATALE: But I am asking why is it in their interests to pay this effective penalty price of $93, assuming they cannot write it off as a loss? Why would they do that? It is a pretty straightforward question—why is it in their interests to do it?

Ms Swirepik : At the moment the cost of acquiring certificates is lower than that, so unless they have a loss—and most large electricity retailers do not run at a loss—

Senator DI NATALE: I understand in the first case you mentioned ERM and you are saying they are actually paying an effective price of $65 or so, but if they are not able to write it off as a loss then the effective price they are paying is $93, which is significantly more expensive than what they would be able to purchase the renewable energy certificates for, so why would it be in their interests to do that?

Ms Swirepik : It would not be—they would be much better off acquiring certificates—

Senator DI NATALE: So I am asking you why have Alinta done it?

Mr Williamson : As I indicated before, for anyone entering into a power purchase agreement, based on disclosed prices it is in that range of about $65 to $85 a megawatt hour for both the certificates and the wholesale electricity. If you assume that, looking at the Australian Energy Regulator website and forward wholesale prices, you are essentially paying very little for the certificates in a bundled way. As Ms Swirepik indicated, Alinta said that they wanted to redeem their shortfall. So, yes, it is currently $65 non-tax deductible; we have not looked into their tax position but potentially that is as high as $93, but if they get certificates for these projects they have said they are going to enter into arrangements to move ahead with, if they get those in the future and get those at very low cost, they can come back and redeem their penalty—the $65 from us less any charges—and they can then true up their tax position with the ATO. So if in fact they do go ahead and get certificates at a lower price, that could be the reason.

Senator DI NATALE: What if certificates are higher than that price at some point? Aren't they just gaming the system?

Mr Williamson : They have indicated that they intend to contract for—

Senator DI NATALE: There is an intention to contract, but if you are a smart operator that is what you would do—you would just game it out.

Ms Swirepik : I am sensing a bit of a misunderstanding. I wonder if part of this is that the spot price is actually much higher than what people generally strike as their ongoing power purchase agreement. If Alinta has the intention and they actually put out a statement about a portfolio of renewables, if they can contract that at a much lower price they are better off doing that as an ongoing thing, the way they meet their certificates, rather than paying the higher spot price this year. Their stated intention is to make good by incentivising renewables in future years.

Senator DI NATALE: Let me ask you from the perspective of a consumer: at this point, if you are a customer of one of these companies, you are expecting that they are going to be meeting their obligation in terms of the purchase of renewable energy certificates—is that right?

Ms Swirepik : I would have thought that the majority of people would be under that understanding, if they thought any part of their bill was going towards the renewable energy target, yes.

Senator DI NATALE: So, as a consumer, what information are you told about what both ERM and Alinta are doing?

Ms Swirepik : That is not for us as the regulator; you would have to actually look at what those companies are telling their customers.

Senator DI NATALE: But one can assume they are not telling their customers that this is what they are doing. Let me ask you the question this way: do you think there are consumers who believe that they are customers of ERM and Alinta and are under the impression that they are purchasing renewable energy?

Ms Swirepik : There may be people in that category, but our job as a regulator, I guess, has been to be transparent that they have not met those obligations this year. That is why we publish that information on our website, so anyone who has more than a passing interest could check that out. That relationship between the customer and the retailer is between them, not the regulator.

Senator DI NATALE: I get that perhaps it is not your specific role but, given that you are a significant player in this space—

Ms Swirepik : Yes, so we are transparent by publishing those results.

Senator DI NATALE: But that information is not accessible to consumers.

Ms Swirepik : We have made statements—

Senator DI NATALE: To ordinary consumers.

Ms Swirepik : As the other senators referred to, we have made two—

Senator DI NATALE: Not many people follow estimates hearings. Let me ask you about whether you think the price is high enough: would a higher penalty price have an impact on changing the behaviour of companies like ERM and Alinta?

Mr Williamson : That is a policy matter that we cannot speculate on. Just lifting the penalty price would potentially raise the spot price for everyone.

Senator DI NATALE: What happens to the penalty price paid by ERM—where does that money go?

Ms Swirepik : It goes into consolidated revenue.

Senator DI NATALE: Let me ask you are few questions about the clean energy investment pipeline. Do you think we are on track to meet the albeit reduced renewable energy target; or do you think that, ultimately, we are going to be facing a bottleneck?

Ms Swirepik : What we have said is that we can still meet that target. I referred earlier to the fact that we had about a third of the renewable build that would need to occur over a three- or four-year period for that to be met. It has been shown into 2016, and we are seeing a lot of momentum, so we believe the target can be achieved.

Senator DI NATALE: If there is a lot of activity approaching the end of that target—there is somewhat of a bottleneck—what does that do to prices? Does it raise the price—

Ms Swirepik : The price is a reflection of supply and demand. I might refer to my colleague about what we foreshadow.

Mr Williamson : The current price, which is around $87, is essentially reflecting the market view that there is a lot more build that is needed and that supply of certificates will get tighter in the coming years. We say that there will be an adequate operating surplus of certificates for this 2017 compliance year. It gets quite tight for 2018, but we still see it in positive territory and we see the outlook for the operating surplus improving. So, based on that—again, we cannot speculate on prices—the market's pricing at this stage has a potential scarcity of certificates, but our view is that that outlook is improving.

Senator DI NATALE: So your view and the view of the market differ somewhat?

Mr Williamson : We would say that we are seeing some things to do with the rate of projects being committed. As Ms Swirepik indicated, we are seeing an acceleration. We are seeing that, typically, as soon as projects announce financial close, construction is starting. There is no lag, so financial close just seems to be a formality for those who have things well organised with their contracts. So we are seeing a lot of positive signs and we are also seeing that hydro generation is starting to return to more normal levels. At this stage, things look tight in 2018—

Senator DI NATALE: But that is not information that is not accessible to other people, and yet the market is pricing in scarcity and you are saying that things will be tight. Where do you think that divergence comes from?

Mr Williamson : Some of the things that I have said in answer to your questions are pieces of information that would only just be coming out to the market. The hydros have to reach their baseline first. They tend to produce their certificates around this time of the year. So that is early information from which the market will start to see what I am suggesting will be an increase from hydro. But certainly, yes, there is a range of information. There are so many announcements about projects that I think it is going to take a while for the market to digest how quickly those projects are going to be built and when they will start generating. It has only been in the last five months that we have seen this acceleration of announcements. We have to wait and see how quickly they can be built.

Senator DI NATALE: I want to ask you about the claims that have been made in this place that the state renewable energy targets are complicating the market. From your perspective, do you have more difficulty—or do you hear from stakeholders that these state targets are causing a problem?

Mr Williamson : I do not think that is something we can answer as the regulator—

Senator DI NATALE: Does it make your job harder?

Mr Williamson : There are some voluntary sources of surrender. They come from GreenPower and potentially other schemes such as the ACT feed-in tariff. Where you are piggybacking other schemes off the core scheme, there are some potential risks relating to whether the market understands what the build signal is. The build signal is higher than—

Senator DI NATALE: Can you explain that? That is a bit of jargon I do not understand.

Mr Williamson : GreenPower volumes, for example, have been declining, but are still around a million certificates a year. When the market looks at the 33,000-gigawatt-hour target, it actually needs to build above that if GreenPower is still going to sell those volumes. So there is some uncertainty in some of those things that are attached to the scheme which the market has to factor in.

Senator ROBERTS: Is my understanding correct that we have two markets—one for renewable energy certificates and another for electricity—with government compulsion in both?

Ms Swirepik : Yes, we cannot talk to the National Electricity Market, but there is obviously is a market, so yes.

Senator ROBERTS: There is a market for both. Given an article in The Australian showing the renewable energy certificate price is at $90 and that energy retailers are choosing rationally and legally to pay the $65 penalty instead, how is this agency going to respond—because it seems that will not drive production of intermittents, otherwise known as renewables?

Mr Williamson : The spot large generation certificate price is currently $87. It has not run up to the $93 post-tax equivalent penalty price. But, as I mentioned earlier in these proceedings, currently those retailers who are entering into power purchase agreements are in fact buying the certificates and the electricity for around the wholesale price of electricity. So they are buying the certificates very cheaply, and that would seem to be the most rational thing to do.

Senator ROBERTS: If the prices go any higher for the renewable energy certificates, would not that mean that the renewable energy target would not be met?

Mr Williamson : No, we say the target can be met. At the moment, as Ms Swirepik said earlier, almost half of the capacity required to be built has been firmly announced, so even if the price does run up to that level—and I am certainly not suggesting it will—that does not necessarily mean that the target cannot be met.

Senator ROBERTS: Does it almost mean that, with a $90 subsidy for intermittents—or renewables—that would drive the reliables out, the base load?

Mr Williamson : We cannot talk about the electricity market and what the result is, but it is very small volumes being purchased at the spot price. Most certificates are purchased through long-term offtake agreements or were left as part of inventory, which is still the surplus of about 13.4 million which were purchased some time ago. We do not believe at all that the spot price, or those playing penalty, reflects at all what the costs are to retailers overall.

Senator ROBERTS: It would seem to be a lot of complication. How are either of these—the renewable energy certificate market and the market for electricity—a true market and not just an aberration that is a regulatory aberration?

Mr Williamson : I can only talk about the renewable energy target. The demand is set in the Renewable Energy (Electricity) Act. So, yes, the market is set by that increase in statutory demand through the 33,000 gigawatt hours in 2020, and the spot price is simply reflecting that more build needs to be committed to reach that target.

Senator ROBERTS: Thank you for bearing with my ignorance on this matter. It is a complex matter, as Senator Di Natale showed. Without security, how can there be any investment in any energy—base load or intermittence?

Ms Swirepik : That is not a matter for the regulator. We administer the law as it stands and the schemes as they are established by government under law.

Senator ROBERTS: Thank you. Am I correct that these measures increase the price of energy and decrease the security of liability and stability?

Ms Swirepik : There has been a discussion earlier in this chamber about security and reliability, and other people are better informed to say. We could comment on the price. My understanding is that for electricity bills it is a reasonably small percentage. I pass to my colleague, Mark Williamson.

Mr Williamson : I am not sure there is much more we can add. I think program 5.1 will deal with the issue of energy security and reliability. The renewable energy target is doing what it was designed to do, which is to encourage more additional renewable generation, and it is doing that.

Ms Swirepik : Sorry, Mr Williamson, I meant in reference to the comment about pushing up prices. Our understanding is that there is less than about four to five per cent of someone's bill that might come from obligations

Senator ROBERTS: I know that when we are not sitting in Canberra, in our party we go out and see the electorate. I went through South-West Queensland last week and everywhere I went they were talking about energy prices. It would seem we need to look at a lot of things, because the increase in energy prices is a reverse of humanity's progress in the last 160 years.

Mr Williamson : The Australian Energy Market Commission has indicated recently for the 2016-2017 financial year that the total costs of the renewable energy target in an electricity bill will be about 4.7 per cent. They have indicated that other things such as wholesale prices are likely to be larger factors going forward.

Senator ROBERTS: One wonders—this is not a question—whether or not they are similarly mucked around by regulations.

CHAIR: Is that a question or a comment, Senator Roberts?

Senator ROBERTS: That is a comment.

CHAIR: Have you finished?

Senator ROBERTS: Thank you very much Chair.

CHAIR: In that case, I thank you very much for appearing here today and, as I said, if you could pass our best wishes on to Ms Munro.

Ms Swirepik : We will certainly do that. Thank you, Senator.

[15:23]

CHAIR: I now call officers from the department in relation to program 5.1, energy. As I indicated, we have a lot of questions in 5.1, so we will break at 3.50 as scheduled, but we are very likely to come back to 5.1 for further questions. Senator Urquhart, would you like to kick off?

Senator URQUHART: We heard today from CEFC that they would not view an investment into a new coal plant as viable unless the project would be provided with an indemnity for future carbon costs. Have you performed any analysis of what the cost of such an indemnity would be to taxpayers based on achieving the government's 2030 emissions targets?

Dr de Brouwer : The government has not made any decisions around this. What has been very clear is that it is looking to cover all the range of technology as it addresses the security and affordability of the electricity system as well as reduce emissions in the sector and across the economy. As you know, the government has also set up an energy committee to look at these matters. It has said that there is a public debate around this. It has encouraged that public debate, but no decisions have been made at this stage. To your question around the advice, we cannot say where that has landed.

Senator URQUHART: Okay. But you have not performed any analysis at this stage?

Dr de Brouwer : As I said, there is a committee of cabinet. The way we would normally work, as you know, is that we would advise the minister and cabinet, and that is a deliberative process that we do not normally talk about.

Senator URQUHART: We try to get you to, but you will not. What would providing such an indemnity mean for the meeting of future carbon reduction targets and the broader shift to a low-emissions electricity sector?

Dr de Brouwer : I really cannot answer that question, because we really have not got into that analysis, except to be clear that the government is committed—

Senator URQUHART: But if there was to be an analysis on it and an indemnity?

Dr de Brouwer : I cannot go to the indemnity issue; that is a very specific form of intervention. Government has been clear about its 26 to 28 per cent commitment to reduce emissions by 2030 on 2005 levels. It will use whatever technology or be engaged in whatever technology achieves that target and puts us on a path to a longer term emissions target profile.

Senator URQUHART: I know you indicated earlier that it was cabinet information, but have you as a department done any analysis to inform government at all?

Dr de Brouwer : That would be for the purposes of cabinet, and we do not talk about the deliberative processes of our advice to government.

Senator URQUHART: So you cannot tell us whether you have actually done an analysis or not?

Dr de Brouwer : No.

Senator URQUHART: No, you have not, or no, you cannot tell us? Sorry, I am just trying to—

Dr de Brouwer : I am not confirming the content of advice that we give to provide—

Senator URQUHART: No, I am not asking about the content. I am just asking whether or not you have actually done any analysis.

Dr de Brouwer : Specifically on the nature of guarantees or the interventions?

Senator URQUHART: Yes.

Dr de Brouwer : I would have to take that on notice. That is a very specific element.

Senator URQUHART: Are you able to get back to us today?

Dr de Brouwer : I am not sure. I am not going to commit to that, because I really want to make sure that I am accurate in the answer. It is going to take a little bit of a look around.

Senator URQUHART: I am on the indemnity thread, so I will keep going. What implications would such an indemnity have on the functioning of electricity markets?

Dr de Brouwer : Again—unless my colleagues want to come in—I think we are getting into speculation when we do not have an indemnity talked about or any proposition for an indemnity for us to look at what the impact would be on markets.

Senator URQUHART: Have you performed any analysis on the costs of new coal power stations—ultra, supercritical or plants with carbon capture—compared to alternatives like gas and renewables?

Dr de Brouwer : In general, again, we provide advice to government in its own deliberative processes. There is a wide range of public material that we would draw on as well that would look at either what is called the 'levelised cost of electricity' or the capital costs required for different kinds of generation. There is a large amount literature on that from the CO2CRC and a range of other bodies. We are happy to talk about what those numbers are, but that is just, in a sense, public. It is all in the public domain.

Senator URQUHART: It is all public anyway, so I am sure we have that information. How has the energy industry reacted to the idea of building new coal power plants in Australia?

Dr de Brouwer : We would all read the press and hear what people say. I do not think I have anything in addition to what you read in the press, Senator. I do not want to provide a commentary around what I think the nature is of the strength or weakness of public debate on that.

Senator Birmingham: The energy industry is, like many other statements one can make, a fairly broad collection of companies stakeholders and others as well.

Senator URQUHART: It is indeed, Minister.

Senator Birmingham: I am not sure there is one single voice in relation to such matters.

Senator URQUHART: Based on the reaction that I have read about, is there much appetite from private industry to invest in new coal power plants?

Dr de Brouwer : The government said its first proposition is to talk about technology neutrality, or that there are many paths to emissions reduction and all those paths should be available. Specific proposals are what come next, and as you heard this morning, there is a proposal with the CEFC. What the government has been saying is, 'Get the overall global approach right, be technology neutral or technology agnostic and use whatever means you can to maintain security and affordability while achieving the emissions reduction.'

Senator URQUHART: If there were to be new coal powered plants, would they require public subsidies to be viable?

Dr de Brouwer : That is a matter for what the specific proposal is by a proponent.

Senator URQUHART: Given that public statements from the energy industry have been dismissive of new coal plants, do you think that private investment would be forthcoming?

Dr de Brouwer : I think you are asking for my personal opinion there.

CHAIR: You have to rephrase the question slightly.

Senator URQUHART: That is alright. It was worth a try.

Senator Birmingham: As you heard before, the CEFC has received a proposal quite recently on such matters. Who knows whether it is viable or not? That is one for markets and others to determine.

Senator URQUHART: Coal plants are able to provide a steady stream of power but are inflexible in the sense that they cannot turn on and off quickly, as we know and have read about. Is this type of plant a good complement to—

Senator Birmingham: Again, I think the officials from ARENA indicated that there are some technological changes even in that regard that do provide some peaking capabilities.

Senator URQUHART: Yes, but I am talking about now. We know that they are inflexible now. The new technology may be different, but we are talking about what is there now. Is this type of plant a good complement for an increased amount of intermittent renewable energy, or are more flexible technology options such as gas plants more so?

Dr de Brouwer : I will ask my colleagues to come in on this, but when people talk about the properties of different kinds of generation, there are not just one or two; you get into things called ancillary services, which go to the frequency, the inertia of the system and restart capability. The one you mentioned about how quickly things can be powered up is about restart, but these other aspects about how to maintain frequency and inertia in the system, which are very important, are attributes that are attached to coal generation, hydro and gas. If this would be helpful, I might ask my colleagues to go through some of these additional attributes that are part of the cause of the public discussion now.

Mr Heferen : Senator, I understand that you were talking about just the start-up ancillary services?

Senator URQUHART: It was mostly the start-up.

Mr Heferen : When a system goes down or goes black, like I said back there, there are probably three categories of ancillary services: system restart ancillary services, often known by their acronym SRAS—that is the one in question—the network support and control ancillary services; and the one that I guess is the subject of most conversation, which is the frequency control ancillary services or FCAS.

With the system restart ancillary services, when a system goes black, AEMO, the Australian Energy Market Operator, essentially coordinates the system; they do not actually run anything. They all go through a process of making sure that in each jurisdiction generator owners will bid to provide those services, and they will be paid an amount of money. My understanding is—Ms Wilke and Mr O'Toole will correct me if I am wrong, I am sure—hydro provides that very effectively, because it can be switched on very quickly, and gas does also. AEMO's third report on the recent system black event that occurred last September in South Australia made clear that the two SRAS operators, Quarantine station and Mintaro, both failed in the start-up. They think lightning hit one; there were some technical problems with the other—I am unsure as to the precise detail. But in those situations they could not start up, which is why it took a while for South Australia to come back, as it had to be re-energised from Victoria through the large Heywood interconnector.

As the secretary mentioned, the frequency control ancillary services are very important to the overall market. Stepping back—without overusing that phrase—the system frequency has to stay at around 50 cycles per second. When it goes above or below—I think it is above 50.15 and below 49.85—there is a risk of a lack of system security, and so AEMO needs to make sure it operates within that frequency. With that, there are essentially eight FCAS markets. People will bid and AEMO will take up the offers according to a dispatch for the FCAS markets. There are basically two types. There is regulation, and there is contingency. There is an analogy documented in the tremendous AEMO Guide to ancillary services in the National Electricity Market. AEMO is normally a bunch of engineers that write really complicated things, but it says at the front that this is for laypeople.

Senator Birmingham: This is bedtime reading, clearly.

Mr Heferen : At the start they say it is for laypeople, and the first four pages indeed are; the last 20 not so much. But they use a neat analogy: if you think about a car travelling at a constant speed, if it goes up a slight hill, it will slow down; a slight downhill and it will speed up. If we think about the first type of frequency control, which is the regulation one, that is for the little adjustments. In other words, if it slows down, the system needs to speed up a bit, or if it speeds up, the system needs to slow down a bit.

Senator URQUHART: Sorry, Mr Heferen, I do not want to cut you off—

Mr Heferen : because it is pretty interesting.

Senator URQUHART: Yes, it is.

Senator Birmingham: He is just getting to the good bits, you know.

Senator BACK: I thought it was an indictment on the way you drove!

Senator URQUHART: We actually heard quite a bit about this in the references committee that we had the other day, so we have sort of been there.

Mr Heferen : My apologies. I did not make it to that.

Senator URQUHART: My question goes back to the point. Are USC coal plants as flexible and therefore as good to complement with intermittent renewables such as hydro, gas or battery storage?

Mr Heferen : So not so much for the contingency ones, but in relation to the regulation one, coal-fired generation is particularly good, because I think they release the steam out of the valves or something to deal with that regulation for gradual ramp-up or gradual slowdown. My understanding is that coal-fired generators do it quite well. The other element that coal-fired generation is useful for is not so much an FCAS market or an SRAS market but for the provision of inertia. There are markets for all these other ones I have spoken about; people pay money, get money and make a buck. For inertia there is not, and so there is this continuing debate about whether there ought to be a capacity market or a market for inertia. That is where any coal-fired station, I think, is the best in the sense that the inertia service is more effective the larger, if you like, the rotating mass, and it just so happens that the coal-fired ones are structured to be bigger; gas and hydro are slightly smaller. For the purposes of providing the inertia service, a coal-fired generator will be superior.

Senator URQUHART: But not quite as flexible as gas or batteries.

Mr Heferen : In relation to the contingency FCAS, coal probably not so much, but in terms of regulation, yes. But when one is thinking about the relative utility of coal versus gas versus hydro versus wind versus solar, I think it is fair to say that the inertia service is probably the most important, because these other ones are used when the system goes outside the boundaries. If the inertia is strong enough, it does not go outside the boundary, so that is where the inertia service is useful.

Senator URQUHART: Can you confirm renewables can also provide these frequency control services? For example, I believe that all wind towers in Texas are required to be able to provide these frequency services.

Mr Heferen : I do not know if our colleagues at ARENA have comment on this, but at the Energy Council meeting in December, the council asked AEMO and ARENA to push forward proof-of-concept or pilot programs to have the FCAS services provided from wind farms, and so I think they have finalised the arrangements for that to occur. I might turn to my colleagues.

Mr O'Toole : I think the short answer to your question, Senator, is yes, provided they have the right electronics in place, which for the most part in Australia is not currently the case. As Rob referred to, ARENA is engaged in trialling a hundred-megawatt wind plant project now in South Australia—I think it is going to commence in June—to test whether they are capable of providing those frequency services you referred to.

Dr de Brouwer : The Chief Scientist, Dr Alan Finkel, is looking at these sorts of issues in his review.

Senator URQUHART: If the government decided to go ahead with building one of the new USC coal plants, when could we expect it to come online? What would be the time frame?

Dr de Brouwer : It is a speculative question. Perhaps your question is, 'What is the average time frame for a coal plant?'

Senator URQUHART: For a USC one to come online, yes.

Mr O'Toole : I suspect it would be a couple of years at least, but I am guessing.

Mr Heferen : Bear in mind that there has been no announcement of any build or anything.

Senator URQUHART: I said, 'If the government decided,' so it is very clear, but I am wondering what that time frame would be.

Mr Heferen : It might be best if we took that on notice to provide an answer.

Senator URQUHART: Are you aware of any commercially and financially viable CCS coal plants operating anywhere in the world? I mean plants that do not require public subsidy to be financially viable.

Mr Heferen : There is an element of that question that is very difficult. I do not mean to be obtuse, but for argument's sake China is still at a stage—I think they may have 100 per cent electrification; at least, they make that point—of building capacity. I am sure at least some of the new plants they are building are in the high efficiency low emission category, and they are certainly experimenting with carbon capture and storage, but the nature of the Chinese system is that they are state owned enterprises. When you say, 'without a public subsidy,' I would not say Australia is unique, but a lot of countries are yet to move to that idea of the pretty comprehensive privatisation we have across the system, and I am not sure of the situation here. I am familiar with China, but it may be best if we took that on notice to give a more comprehensive response.

Senator URQUHART: That would be good. It might be good to take the other one on the building time frame on notice, because I understand the last one took somewhere around seven years.

Mr O'Toole : We can take that on notice.

Senator BACK: Ladies and gentlemen, do you know when the semischeduled generator classification was introduced into the National Electricity Rules and what it refers to?

Mr O'Toole : I do not know the date, but it is a classification used for wind generation.

Senator BACK: What is the reasoning behind the introduction of a semischeduled classification?

Mr O'Toole : It was so that wind could be dispatched as part of a dispatch process, but could also be capped when needed.

Senator BACK: How does it differ from a scheduled generator?

Mr O'Toole : It is not fully firmed.

Senator BACK: Not?

Mr O'Toole : Fully firmed. When you bid in a full amount it differs in that sense.

Senator BACK: What it means is that a generator entering into a PPA with a retailer says, 'I'll deliver a certain amount of power to you, but I don't have to if the wind don't blow'?

Mr O'Toole : That is a nice way of describing a firm contract, yes.

Senator BACK: Are there any other jurisdictions that you know of that have this quaint semi-scheduled classification—the USA or others—or is it unique to Australia?

Mr O'Toole : Not that I am aware of. We would have to take it on notice.

Senator BACK: That would be good if you could do that. You were talking earlier about a frequency of 50 cycles per second. I think it might be 48/85, not 49/85 but 51/15. What does the whole process of a semi-scheduled delivery of electricity do to reliability in the grid?

Mr Heferen : By its nature it would have to be complemented. If we are talking about the semi-scheduler wind?

Senator BACK: Yes.

Mr Heferen : It would have to be complemented by something that is not. Either another form of generation or a form of storage that could then release sufficient power such that the frequency could remain.

Senator BACK: Under whose control would this come—yours, AEMO's? This is the managing of the actual delivery within that very, very narrow spectrum.

Mr O'Toole : AEMO's.

Senator BACK: Perhaps this would be a question more for the minister. If a decision were taken to remove the semi-scheduled nature, would that be a legislative change or would it be a ministerial decision?

Mr Heferen : I think I might be able to assist the minister. I think it would be a change to the National Electricity Rules. You sound like you are very familiar with this, Senator, so you probably know that the AEMC, the Australian Energy Market Commission, will go through the rule-making process. A request will be made. Anyone can make a request for a rule change. If governments wish to do it, the Energy Council would probably be the one to make the request. The AEMC would then go through a consultation process to make sure that all affected parties would have a say, then take that on board and then produce a rule to that effect.

Senator BACK: I want to go to frequency control ancillary services. Are these reasonable questions for you? You can answer now or later. I want to refer specifically to South Australia. Can you tell me how much reliable or on demand energy is required in South Australia to balance the grid, given the very high proportion of wind-generated or not-generated power in South Australia?

Mr O'Toole : In terms of a specific corner, we would have to take that on notice.

Senator BACK: That would be fantastic. At the same time if you could assist the committee I would be interested in knowing what the average costs would be in that scenario and who bears them under the current rules. I am obviously trying to get some understanding of whether it is the consumer who bears the costs or whether it is the retailer who bears the costs. Also, I am trying to come to some understanding of what might be the projected cost of new transmission infrastructure to maintain the stability in the national electricity market.

Mr Heferen : We will take that on notice. I am sure you would be reasonably aware that the FCAS costs will be, if you like, factored into something similar to the wholesale price. Consumers will largely not be subject to that. A lot will come down to the contracts that retailers have entered into with generators as to how those costs will be passed through. Maybe they are absorbed by the retailer, but it would be a function of those contracts. One of the ongoing challenges, particularly in South Australia, is the availability of contracts that generators can provide. I just flag that, but we will take it on notice and provide a more comprehensive answer.

Senator BACK: I guess, too, Mr Heferen, there are new technologies. We learnt about some in Adelaide the other day—molten salt and the 1414 molten silicon. As they are proven to be commercially viable, they may well have some influence in this whole space, you would think?

Mr Heferen : In time, definitely, I would have thought.

Senator BACK: This additional expenditure on transmission—I am just wondering if that is the most cost-effective way of achieving stability in the grid and, if not, what might be other ways of maintaining that? You might not be able to answer this now.

Mr O'Toole : I would flag that within the net, because the transmission lines are regulated, they are subject to a cost-benefit test, known as the RIT-T or the regulated investment tests for transmission. The role of that test is, in fact, to look at the relative costs and benefits of the transmission investment vis-a-vis other options that might provide the same services. So you would expect, as part of any of those augmentation projects, above around 50 million or so would be subject to that test.

Senator BACK: After the session in Adelaide the other day it would not surprise me to see the South Australian government making an investment in gas-fired power stations. It is not for me to talk about Pelican Point.

CHAIR: Is that a question, Senator Back, or a comment?

Senator BACK: I was concluding my line of questions.

CHAIR: With the committee's indulgence, I understand Senator Roberts has to leave again and he would like to ask some quick questions. Or would you rather come back after?

Senator ROBERTS: I have just one question, thank you.

CHAIR: Okay, please go.

Senator ROBERTS: Thank you for coming today. My staff tell me that program 5.1 does not exist in the current portfolio budget statements. Is that right?

Dr de Brouwer : It should be in there, in the updated ones.

Senator ROBERTS: Could the department simply provide that? Then I will put some questions on notice.

Dr de Brouwer : Yes, Senator.

Senator ROBERTS: That is all, thank you.

Proceedings suspended from 15:51 to 16:06

Senator DI NATALE: Can I begin with the issue of the SA power blackout and the software glitch that meant that three times the number of homes lost power than was necessary. I assuming that is not contested; I think that has been established now. There was a week that lapsed between the blackouts and the information coming out about the software glitch that caused that excessive load shedding. At what point did the department become aware that that was an issue?

Dr de Brouwer : I will just ask my colleagues.

Mr Heferen : AEMO gave the instruction I think to ElectraNet to shed 100 megawatts, and ElectraNet then passed the information on to SAPN, the distributor. That was where the software glitch came in, although there was a glitch in transmission and they ended up shedding 300 megawatts. I do not recall specifically when we became aware of that. I had a few conversations with both the people from AEMO and the people from the relevant South Australian department in that week. One of my colleagues might have a specific answer.

Ms Wilke : As to the first time we became aware of the software glitch, AEMO mentioned the fact that SAPN had shed more than necessary, as you mentioned, in its report on 15 February. In that report, AEMO actually said that they would be doing further investigations with SAPN as to why that occurred. On either the afternoon of 15 February or the day after, SAPN put out an apology and a press release indicating that it had been a software glitch. That was when we discovered that.

Senator DI NATALE: You were made aware of it at the time. So SAPN knew pretty much as soon as they made the blue—10 minutes after shedding the load—that they had made a mistake?

Ms Wilke : I think, from the time line, it might have been a little bit longer than that, but they were made aware on the afternoon of 8 February that more load had been shed.

Senator DI NATALE: Why did it take a week for the department to become aware of that mistake?

Mr Heferen : Just in the process of these things, when AEMO operates the power system their key clients are the generation, transmission and distribution networks, and, of course, the state governments, and then through that to the council; the Commonwealth minister is the chair of the council. So in the ordinary course of events, where there are, if you like, issues in the system that need to be dealt with, AEMO's first line would be to the relevant jurisdiction who would be affected. It would be the case that AEMO is very careful about what it will put in the public domain, as you can understand, because the area is fairly litigious and if an error is made people will want to try and pursue compensation if that would be appropriate, so they will want to be very sure before they put material out there, which I think is reasonable in the circumstances.

Senator DI NATALE: That is a week after that occurred, and you found out by press release. Is that right?

Mr Heferen : Found out that there was an error?

Senator DI NATALE: Yes. You became aware of that error—based on what Ms Wilke just said—you found out after reading a press release issued by the company.

Ms Wilke : The cause of the load shedding.

Senator DI NATALE: Yes. We know the power went out. But you found out the cause of the blackout by press release a week later.

Mr Heferen : Yes.

Ms Wilke : Yes.

Senator DI NATALE: I am just repeating what you have said in your earlier evidence.

Ms Wilke : That is correct.

Senator DI NATALE: Doesn't it strike you as somewhat remarkable that you would only find out this information by press release a week after it has happened?

Mr Heferen : I think the key thing would be the instruction to shed 100 megawatts and it translated into the 300—

Senator DI NATALE: Yes.

Mr Heferen : The reason why that occurred is a puzzle. As Ms Wilke said, it was only made clear once SAPN came out and made that—

Senator DI NATALE: But they knew as soon as they made the blue—or within minutes, hours, of making the blue—and you find out a week after the event, and in the meantime you have the Prime Minister going out, blaming all sorts of reasons for the contribution. Do you find that somewhat strange?

Mr Heferen : Which bit?

Senator DI NATALE: All of it.

CHAIR: Is that an opinion? It sounded a bit like an opinion.

Senator DI NATALE: No. I am asking a question. Why does it take a week for the department to be—not even—notified. Why aren't you notified? Why is it something you have to read in the papers, despite the fact that there is public commentary being made by the government of the day.

Mr Heferen : From SAPN's point of view, they would be thinking about making sure AEMO were aware, probably thinking about making sure the South Australian government was aware—they may well do that through AEMO—but I think that is probably a question best directed to them. In relation to the federal department, in a sense, the running of the system was formerly a state responsibility. It has now been largely privatised—in South Australia, pretty well privatised, pretty comprehensively privatised—and it would be a matter for the actors in that system to make the judgement about who needs what information and when.

Senator DI NATALE: Just to be clear, you did not know of the cause of the blackout until you saw the media release by SAPN.

Mr Heferen : When you say the blackout, we are talking about the load shedding that occurred.

Senator DI NATALE: Yes.

Mr Heferen : Obviously we did know AEMO directed the load shedding when the load shedding occurred.

Senator DI NATALE: Yes, but it was three times the amount that should have been shed.

Mr Heferen : It may be the case that even AEMO had to come to grips with why it was that, when they gave the direction to shed 100, 300 was shed.

Senator DI NATALE: Yes. I just want to be clear about your role in this. You only found out about that after you read the press release.

Dr de Brouwer : The difference between the 100 and the 300? We knew about the 100.

Ms Wilke : In its report on 15 February, AEMO says that it has still to investigate why the extra load was shed. Even when it released that report on 15 February it was unaware of what had happened.

Mr O'Toole : The press release goes to the fact that SAPN accepted responsibility that there was a power glitch for that 300. Just to be clear, we are not saying that we were not aware of the load shed, obviously, or the reasons for it.

Mr Heferen : Which is made clear in AEMO's report, that they were not aware.

Senator DI NATALE: When were you made aware that they were going to shed any load at all? When were you made aware of the 100?

Mr Heferen : Pretty contemporaneously.

Senator DI NATALE: As it happened?

Mr Heferen : When I say 'pretty contemporaneously', it would have been a little bit after. The actors in the system are AEMO, ElectraNet and SAPN. When you read AEMO's report, the decision to direct the load shedding happened, I think—I think the build-up was about half an hour, so it was a very quick response because they tried to get other generation to come on line. Other generation could not come on line, so then, as a last resort—

Senator DI NATALE: You were told about that pretty much as it happened, within the space of minutes or hours—

Mr Heferen : Hours.

Senator DI NATALE: not days?

Mr Heferen : That is right.

Senator DI NATALE: Why were you told about that?

Mr Heferen : That is public information, so that is all up on NEM Watch.

Senator DI NATALE: But you were informed about that by AEMO?

Mr Heferen : I was not personally, no.

Senator DI NATALE: No, but come on.

Ms Sewell : The department represents the Australian government on the National Electricity Market Emergency Management Forum. That is an operational emergency management role for that group, chaired by AEMO, and that group convenes whenever there is a significant interruption to electricity supply.

Senator DI NATALE: That is the answer I wanted to hear. So you are part of that, sitting around the table. Clearly there is something serious about to happen. You are a key stakeholder at the table.

Ms Sewell : Yes.

Senator DI NATALE: So why on earth aren't you told when they shed three times the load? It takes you a week to find that out?

Ms Sewell : Senator, I think that question has been answered. The emergency management forum—

Senator DI NATALE: But hang on—

Ms Sewell : deals with the event when it happens.

Senator Birmingham: Hang on, Senator; let Ms Sewell finish, please.

Senator DI NATALE: You are a key stakeholder in all of this. You are clearly involved in a decision, a very serious decision to effectively shed. To make a decision to shed that much load at that particular time is a significant decision. As a key stakeholder, you are involved in that. SAPN actually make a huge stuff-up—or there is a stuff-up. Three times what was decided was shed, and you find out a week later?

Ms Sewell : Sorry, just to clarify that: the emergency management forum was not party and is not party to decisions by AEMO in terms of regulating the system. The emergency management forum met eight times over the course of four days as the heatwave conditions rolled through South Australia, Victoria and New South Wales but met after the event. It is designed to convene after a significant interruption to electricity supply.

Senator DI NATALE: But you still have not explained to me why you find out that a decision to embark on a particular course of action that is going to impact on the state of South Australia is taken, that load-shedding exercise, and you are told contemporaneously, in real time, effectively. The company that is involved in doing it goes in there, and there is a big mistake made—and I am not going to lay blame about where that is—and then you find that out a week later after having read the press release, despite the company knowing at the time that they had made the mistake?

Dr de Brouwer : The actual event of the load shedding lasted about 40 minutes. We were fully aware of what was going on around what we thought was the 100-megawatt load shed. It turned out after the fact that it was not 100; it was more than that. But we are talking about an event, managed through the mechanism that Ms Sewell was talking about, that lasted for 40 minutes. It is really unpicking some of these elements of an event after the fact, and that depended on the information that came from AEMO and the information that was provided to AEMO. We knew what was going on as events were happening in general—

Senator DI NATALE: You just told me you did not know that there was three times the amount of load shed that they said they were going to shed until a week later. So in general you knew what was going on—except for one of the most important mistakes that were made at the time. I am not trying to be a smart alec here; I am trying to understand it and why at one level it is important that you know that this decision is being made and then, when a massive mistake happens that SAPN admit they knew within minutes of having made that mistake, that is something you do not know about for another week. And then the Prime Minister is in the parliament blaming renewable energy.

Dr de Brouwer : As I think my colleague said, it was the degree, the magnitude, of the event that was bigger because there was more load shedding, but the actual drivers of the event were more well understood: the difficulty in forecasting and the last-minute need to reduce load. It was the same event; it was the magnitude of that event.

Mr Heferen : As AEMO's report makes clear, AEMO asked for the load shedding at 18:03, so 6.03 NEM time, which is not daylight-saving time but in the east, so it would have been 5.33—6.33—in the afternoon in South Australia. At 18:03 NEM time, they said to reduce, and then at 18:30 they advised ElectraNet that the 100 megawatts of load that they had asked to be shed could be restored over the next 10 minutes. At 18:40, so 10 minutes later, they advised ElectraNet to restore all remaining power, as it appeared that over 200 megawatts was shed in total. In their report, which was produced on the 15th, they have gone through that, and they still did not know why. They gave the instruction for 100 and then, when they asked for the 100 to be restored, they realised that actually 300 went.

Senator DI NATALE: Yes, but this happened on the day. The report is a week old. This was happening on the day.

Mr Heferen : That is right. What they knew is that it looked like—bear in mind that these things happen very quickly and across an entire state, so they think, 'Okay, what's going on here?' and it did appear that 200 megawatts extra was shed, and then they had to get to the bottom of why that was the case. They have the week and they do the report, and in their report, I am pretty sure, it says that they are still to ascertain the reasons for that.

Senator DI NATALE: I get all that, but you are not answering. There is 100 megawatts that was shed that you were informed about, and on the same day another 200 megawatts was shed, and you did not know about that for another week?

Senator Birmingham: I think there is a point of distinction between knowing, as it became apparent that there was a greater level of load shedding than had been requested, versus knowing the cause for that greater level of load shedding.

Senator DI NATALE: Sure, and you were not made aware of either?

Mr Heferen : I think what would be more important from our point of view to understand was not so much the megawatts that were shed but the number of households and businesses that would be affected. A hundred megawatts could be shed and affect one user, or 100 or 300 megawatts could be shed and affect—

Senator DI NATALE: It is obviously important enough that you know that 100 megawatts will be shed because you are told about that because you are sitting around the table and you are actually brought into that conversation, and then suddenly 200 megawatts has been shed, and you do not find out about it until a week later.

Mr Heferen : I might get Ms Sewell just to confirm, because I was not party to that briefing. In fact, AEMO at NEM said 100 megawatts would be shed?

Ms Sewell : I will just check with my colleague. NEMEMF did not meet until after the event. AEMO directs load shedding—

Senator DI NATALE: When did they meet? When you say 'after the event', when are we talking about?

Ms Sewell : The morning after.

Senator DI NATALE: So at this point we already knew about the 200 extra megawatts that were shed that should not have been shed? I just heard that that was at 16:50 on the same day?

Mr Heferen : That is right.

Senator DI NATALE: So, the morning after, what are you told about how much load has been shed?

Ms Sewell : I am not sure whether we have got the exact record of the telephone conversation.

Ms Bennett : The National Electricity Market Emergency Management Forum met the day after the South Australian issue. It was actually largely set up to discuss the forthcoming heatwave, so it involved the range of jurisdictions. There was some brief discussion about the South Australian outage the night before, but I would need to check the record of exactly whether or not the amount of 100 versus the 300 was discussed. I cannot recall that level of detail being discussed.

Senator DI NATALE: Clearly, I will get that on notice.

Mr Heferen : Indeed, Senator. We will take that on notice. But if I could just go back to the point I was making, from our point of view in the role of advising the federal minister, regarding 100 megawatts and 300 megawatts, I think what is probably more germane is the number of householders and businesses that are affected. That was still in some doubt, because I know there were different figures being used. I had figures ranging from 30,000 to 40,000 to 90,000, and it may have been that an initial estimate of 30,000 or 40,000 was based on the fact that people thought 100 megawatts would be shed. It was certainly possible. Where we would spend our time is trying to pin down how many people are affected.

Senator DI NATALE: That is my whole point. If you are having to shed another couple of hundred megawatts, the impact on South Australia is going to be far more significant. You are saying you are concerned about what the impact of shedding 100 megawatts is on householders. I am saying: yes, of course it is concerning, but what actually happened was there were 300 megawatts and you did not find out about that until—

Mr Heferen : Sorry, Senator, I was not saying that at all. Whether it is 100 or 50 or 300 or 500, the capacity that is shed is relevant, but I think more relevant is: how many people are affected? I have no way of saying, 'If 100 megawatts is shed, how many people are affected?' because, of course, 100 megawatts could be one—

Senator DI NATALE: But you have just said it was 30,000 or 40,000 householders.

Mr Heferen : That is right. But that is the important number, I would have thought.

Senator DI NATALE: So, given that it was an accident, if it had been an extra 200 megawatts, are you implying that we are not talking about thousands of householders being impacted?

Mr Heferen : No. But I think we might be talking at cross-purposes.

Senator DI NATALE: How so?

Mr Heferen : What we knew was that load had to be interrupted. That was what we knew. There was going to be a blackout for a certain period of time for a certain number of households. That, I think, is the important thing.

Senator DI NATALE: Yes, it is important. This will be my last, because I suspect I am not going to get an answer from you. If you are worried about 100 megawatts being shed, and then another 200 megawatts is shed by accident, I think it stands to reason that the impact on householders is going to be significant. I think it is remarkable that you did not find out until a week later that a mistake of that magnitude had been made.

Ms Wilke : To go back to one of the points that Mr Heferen made, he said that 100 megawatts versus 300 megawatts does not necessarily matter to us. If you take the example of what happened in New South Wales in the following days, 290 megawatts were shed. It affected only one user.

Senator DI NATALE: I get that. But you do not know whether it affected one user or whether it affected 100,000 households. You would have no way of knowing that, and that information was not provided to you until a week later.

Dr de Brouwer : The number of households affected was determined the next day—pretty soon after. So this question of how many megawatts took a longer while.

Senator DI NATALE: But you did not know about that.

Dr de Brouwer : But the number of households affected—

Senator DI NATALE: But that is my point: you did not know until a week later.

Dr de Brouwer : No, we knew the number of households the next day. So the number of households was resolved early and quickly.

Senator DI NATALE: So tell me about that. Tell me about how that happens.

CHAIR: Senator Di Natale, I think you seem to be going at—

Senator DI NATALE: I think we have actually made some progress here.

CHAIR: From this, perhaps it might be helpful to put some additional questions on notice so that we can be very clear about what you are asking. Is that your last question?

Senator DI NATALE: I have a couple more, and I will be very brief. Did you know that the software glitch had caused the load shedding before you read that on the media release?

Mr Heferen : No.

Ms Wilke : No.

Senator DI NATALE: That was the time you were made aware of it?

Ms Wilke : We became aware of that at the same time AEMO did.

Senator DI NATALE: This is a question for the minister. Given the information that you have now received, don't you believe that the Prime Minister's public statements he has made around the cause of this blackout are inconsistent with the advice that has been provided by the department and, indeed, by the energy operator?

Senator Birmingham: Is there a particular quote you are asking about, Senator?

Senator DI NATALE: Yes, that the underlying cause here was the large reliance by South Australia on renewable energy.

Senator Birmingham: That did not sound like a specific quote; that sounded like an attempted paraphrasing.

Senator DI NATALE: Are you saying that that is an inaccurate paraphrasing?

Senator Birmingham: I do not know. All I know is that you appear to be paraphrasing in that regard. I think we have widely canvassed through a lot of the different agencies that have appeared today some of the issues of intermittency of supply and irregularity of supply and the challenges that those create within the management of different grids. I think I have heard the Prime Minister on numerous occasions acknowledge that clearly weather events have had impacts, whether it be on infrastructure or transmission infrastructure or whether it be on spikes in demand. They also clearly relate to how the system manages itself with that much higher level of intermittency that exists in SA compared to other parts of the system.

CHAIR: We will now go to Senator Urquhart, who has been very patient.

Senator URQUHART: I am going to keep up the theme of AEMO. Has AEMO performed adequately more recently in terms of ensuring reliability of electricity supply, in particular with respect to keeping the South Australian gas plant idle during a heat wave, getting weather and thus demand forecasts wrong, and appearing to prioritise New South Wales over Victorian customers?

Dr de Brouwer : I will pass over to Mr Heferen, but before I do so can I just say that AEMO has been a long-standing operator of the energy market. It was set up for the purpose of dealing with the difficulties of having state-based systems and integrating those. It has done that according to its reliability standards, which are set out by law. It has very much met those reliability standards. So in general AEMO has over time performed extremely well in meeting the reliability requirements set for it in the electricity law. Whilst we talk about particular events I really would like to ask you to please see that in the broader context of an operator that has really met its legal requirements and works under very stressful situations. We can go to those specific events and talk more generally about the reputation of AEMO.

Mr Heferen : As the secretary mentioned, AEMO has many tasks, but one of them is of course to keep the system running and keep the lights on. The reliability standards are done a year afterwards, when the AEMC will look at how the system has gone the year before. For the last 10 years prior to last September the overall reliability standard for each region has always been within the 0.002 standard set. In other words, AEMO has done its job to make sure that the power system in the NEM is provided in a safe, secure and reliable manner. In a system like ours, where there are all the challenges of a federated system, and at the same time when we are going through the transition the electricity system is going through, it would seem to be a pretty outstanding effort. I think all people who work closely with AEMO would acknowledge that.

Senator URQUHART: Do you think there is a case for reform of AEMO and their procedures, if we think about what happened in September?

Mr Heferen : I think that certainly at the last council meeting—

Senator URQUHART: The Australian Energy Council?

Mr Heferen : Yes, I beg your pardon, the Australian Energy Council. There is always the recognition that AEMO has a particularly difficult job. Ministers, when they are faced with a situation that is difficult may say, 'This is something we need to look at,' but in terms of the council sitting back and making a decision they did recognise that AEMO was doing its work.

Senator URQUHART: Has the minister asked you to investigate AEMO's recent performance?

Mr Heferen : No.

Dr de Brouwer : Under the normal processes of the electricity market institutions and operations, the regulator will look at the performance of AEMO under those circumstances. In think in the Finkel review Dr Finkel will also be looking at some of the governance issues around AEMO. With those issues, everyone always looks to improve their performance and to reflect on lessons learned.

Mr Heferen : The electricity rules will specifically say that where there is a system black event, the regulator—

Senator MOORE: Sorry—where there is a system black—

Mr Heferen : A system black, so a blackout.

Senator MOORE: Yes.

Mr Heferen : What occurred in South Australia on 28 September last year. The electricity rules state that the Australian Energy Regulator—the AER—needs to go and review what AEMO did and what other participants did. So that is going on, but that is a function of the rules kicking in to say that, given what occurred, there needs to be an examination. It is not to be interpreted as, 'Actually, that job hasn't been done and therefore needs to be examined.' So there is that specific thing that has been—

Senator Birmingham: And obviously, in addition to that there is the review by the Chief Scientist, Dr Finkel Clearly, that has a wide remit to look at the policy and settings around the NEM, as well as the way an entity like AEMO operates—if he so chooses

Mr Heferen : I think your question was in three parts. The last bit referred to something to do with New South Wales and Victoria. I did not quite—

Senator URQUHART: Sorry, I cannot hear you.

Mr Heferen : I think the question you asked was in three parts—ANAO's performance in respect of three things, and the last thing was something to do with New South Wales and Victoria. I just did not quite catch that.

Senator URQUHART: Yes. It was basically appearing to prioritise New South Wales over Victorian customers.

Mr Heferen : Sorry, I am not aware of that in relation to—

Senator URQUHART: It was about the performance of AEMO. That was what the question was about. My last question, which I thought you were answering, was: has the minister asked you to investigate AEMO's recent performance? You said no, and then I think Dr de Brouwer came on and talked about the Finkel review and a whole range of other reviews of the AER that happened as a—

Senator Birmingham: I think that Dr de Brouwer or Mr Heferen said that there are automatic events that are triggered by a system black—

Senator URQUHART: Yes, I understand that.

Senator Birmingham: and that creates the AER review process. The government has asked Dr Finkel to undertake a more comprehensive review.

Senator URQUHART: Yes, I got all that. So is the South Australian electricity system any less reliable than other states?

Senator Birmingham: That would suggest yes.

Mr Heferen : In relation to the system black event: the reliability standards are that the system is reliable for 99.998 per cent of the time. In practical terms I think that means that there are 11 minutes a year where people have 'unserved' energy, I think the expression is—that is, not have it. The Australian Energy Market Commission, the AEMC, will look at the events of the previous year. When they come around to looking at the events of the financial year 2016-17, in which the September blackout occurred, it may well be the case that the reliability standard for South Australia might be breached. But that is still yet to come.

Senator URQUHART: So is there an objective, fact-based measure of electricity supply reliability that could shed light on the relative reliability of South Australia as compared to other states? Do you have a fact-based measure that you would use?

Mr Heferen : I think the amount of unserved energy would be the one that AEMO would use and the one that AEMC would measure.

Senator Birmingham: That update obviously relates to a financial year measure, which clearly will be updated close to the end of the current financial year.

Senator URQUHART: Are you able to give us a summary of how South Australia compared to other states?

Mr Heferen : Yes. We can take that on notice.

Dr de Brouwer : Some of those features will go to the strength of the system and the risk of islanding and being isolated from the rest of the system. Some states at the end of the line only have one or two lines, and there is a greater risk of stranding or islanding. That would then go to the reliability of the system. The stability of the system then goes to some of the features of those ancillary services.

So if more storage had been available, would the events of 8 February have occurred, or could they have been avoided? It does depend on where you are in the market: are you at the centre or are you at the end? Those sorts of features we will come back to, but that is how I think people describe the risk of islanding.

Senator URQUHART: Is the SAIDI, the System Average Interruption Duration Index, a good measure of the reliability of an electricity system?

Mr O'Toole : I will have to take that on notice.

Senator URQUHART: You do not know? Can you tell me what it actually measures, in layman's terms?

Mr O'Toole : I would have to take that on notice.

Senator URQUHART: Can you tell us what the latest SAIDI was for the states that make up the NEM?

Mr Heferen : I think we have established that this—SAIDI?

Senator URQUHART: Yes, SAIDI—System Average Interruption Duration Index.

Mr Heferen : No, we are not aware of that. In relation to the SAIDI measures that make up the NEM, we will have to take that on notice as well.

CHAIR: I thought Defence was bad for acronyms.

Senator URQUHART: No, they are everywhere.

Mr Heferen : They are not as nice as ours.

Senator URQUHART: I guess, given that you cannot answer any of the questions on SAIDI, then—

CHAIR: Do you have any more questions, Senator Urquhart?

Senator URQUHART: I have, but I am just trying to look for ones—there is no point in me asking if the officials cannot answer the questions.

Senator Birmingham: Just while Senator Urquhart is looking, in relation to Senator Di Natale's question before, I just looked up the SA Power Networks' statement of 15 February 2017, with the headline, 'Statement re load shedding event (8 February 2017)'. In their statement, I see the Q and A section includes the question: why was this not communicated at the time? This is in relation to the cause of the high level of load shedding? SA Power Networks state:

We have been undertaking an investigation—which is still continuing—to determine the specific cause of the issue with the load shedding software, and we made a decision to apologise and release the updated information we had to coincide with release of AEMO’s report into the event.

So I think that statement by SA Power Networks makes it pretty clear that they chose to release that information at that time of their own volition.

Senator URQUHART: I understand that South Australia performs well and that it is in the top three most reliable on average in terms of reliability. Do you know if that is correct?

Mr Heferen : I have just taken the opportunity to look up SAIDI, and I think our equivalent is the reliability standard. I have the System Average Interruption Duration Index—SAIDI—as the length of time each customer is without supply when averaged over all customers in the distribution network—

Senator URQUHART: That was the 11 minutes you talked about earlier.

Mr Heferen : Almost.

Mr O'Toole : If it is by distribution network then the reliability standard that we are talking about—and we are on much clearer ground now, thank you—applies by region, so it covers the entire state. I think you are talking about a narrower definition if it is by distribution network. In answer to your first question in terms of whether it is a good measure, I suspect that the state-wide measure is probably a better measure.

Senator URQUHART: Do you think it is helpful for the functioning of the NEM and, indeed, the broader economy for people in positions of influence to be perpetuating a view about the reliability of the South Australian power supply that does not seem to be supported by objective measures of reliability?

Senator Birmingham: That sounds like a request for an opinion.

Senator URQUHART: It is a question.

CHAIR: Can you rephrase your question.

Senator URQUHART: I guess I want to know what the possible consequences of people reporting a particularly reliability of a power system is not what it actually is.

CHAIR: Is that a hypothetical?

Senator Birmingham: If one were to accept the premise of your question, which I do not, Senator, the consequences could be many and varied, I imagine, in terms of decisions to invest in energy infrastructure occurring on the way.

Senator URQUHART: I will move on. According to AEMO, the average wholesale electricity price in South Australia was significantly lower than in both New South Wales and Queensland during this month, and South Australian prices were also much lower than in Queensland during January. Can you confirm this?

Mr O'Toole : If it is AEMO data, I suspect it is correct, yes.

Senator URQUHART: That information been provided to the minister for the Prime Minister?

Mr O'Toole : Yes. It is publicly available. We would have provided a weekly or monthly update on the prices, but I suspect they are probably aware.

Senator URQUHART: Has electricity privatisation affected would reliability of supply? Have we seen any changes since privatisation?

Senator Birmingham: I think you are looking for a cause and effect there, and of course there are many different changes that have occurred in the National Electricity Market and in the generation mix of energy since any privatisation events, particularly in South Australia, have occurred. The officials might have something to add to there.

Mr Heferen : The data I have in front of me provide reliability standards across the five NEM jurisdictions back to 2005-06. For those that are privatised and those that are not privatised from generation, they are all pretty well zero. As the minister said, there is probably no substantial difference anyway. But if there was then the elements that would be attributable to privatisation, as with other issues, would be a matter of some complexity, I suspect. But given that it is pretty well zero and they all meet reliability standards, the answer is probably not.

Senator URQUHART: Do you think there is evidence that larger electricity generators game the market by withholding supply to drive prices up?

Mr Heferen : That is often issue that is put forward in commentary.

Senator URQUHART: Is there any truth to it?

Mr Heferen : I think it is important to note that when the wholesale prices go over—at the moment, it is $5,000 a megawatt hour—under the rules, the AER are required to have a look and provide a report. If in doing that, they then consider that there may be reasons to suspect there ought to be compliance action, they will then take that compliance action. The reports that the AER are undertaking are available on their website. They are examining a number of price spikes over the last few months, so they will be looking at that. One of the tricky things is that if the AER took the view that there is reason to believe that there is activity that is inappropriate and they took the proponents to court, of course, some of those details would remain confidential. So sometimes is not altogether apparent until after the action is complete, but that is one of the key roles of the regulator to pursue that.

Senator URQUHART: Can you provide any evidence of that or is there any that that has occurred?

Mr O'Toole : I would be just add to Rob's answer. Just recently, the AER was given additional powers to monitor wholesale market behaviour. The most recent reports until recently, and then it is a number which AER are going to report on, I think was South Australia in July when a number of high-price incidents occurred. AER did three reviews, I believe, of three high-price events. The evidence at that time dictated that the rebidding behaviour actually lowered prices, that generators rebid to a lower price in order to be dispatched during those high-price periods.

Senator URQUHART: The AER are looking at that on an ongoing basis? There is no need for further analysis of possible failures.

Mr O'Toole : Whenever there is an event over $5,000, under the rules they will investigate and report within 40 days.

Senator URQUHART: Okay. Is the government looking to investigate possible gaming in the sector or is that purely left up to the AER?

Mr Heferen : That is left to the regulator. I think, as with most areas of public policy, if the regulator suspects that there is activity going on and other rule changes may be required then they will recommend that. Otherwise, given the current rules and given what power they do have, if there is deliberate gaming in order to artificially increase prices, I think the rules would allow them to take action.

Senator URQUHART: Is the government or the department made aware of that, if that does happen? Is that part of the responsibility of the AER?

Mr Heferen : No, only insofar as if they are to take someone to court. The way it has been explained—and, as you can tell, I am still new to this area—the equivalent would be the tax office undertaking an audit for the taxpayer. The fact that they are auditing does not get in the public domain, but the consequences of that will not be in the public domain until such time as, if there is court action, the outcome of that. Then it comes into the public domain.

Senator URQUHART: So you are not aware of that until that actually happens, until it gets to that point?

Mr Heferen : That is right. They would not be informing us of information that needs to stay confidential to the regulator and the affected generator.

Senator URQUHART: Does the regulator report to government? It is all part of the report?

Mr Heferen : Yes. The regulator is sort of part of the ACCC. It sits within the Treasury portfolio. In practice, the regulator is more accountable to the Energy Council as a group of ministers. It has a range of obligations, including providing an annual report and updating on its activities, as most publicly funded regulators have.

CHAIR: I understand you have one quick question, Senator Duniam.

Senator DUNIAM: Thank you, Chair. We have talked a bit about wholesale prices. Are you able to provide a synopsis or an overview of the wholesale prices for this financial year, 2016-17?

Mr O'Toole : In terms of by state?

Senator DUNIAM: Yes, by state.

Mr O'Toole : The volume weighted average prices for 2016 by state were $62.24 in New South Wales, $71.26—this is per megawatt hour—in Queensland, $91 in South Australia, $50.45 in Victoria and $90.41 in Tasmania. Obviously Tasmania was affected due to the Basslink being disconnected for six months.

CHAIR: Do you have Western Australia there?

Mr O'Toole : Western Australia is not part of the NEM.

CHAIR: Okay. There would be a good reason for that.

Senator BIRMINGHAM: I refer to Senator Urquhart's question before when she was asking about the data or making assumptions about the average wholesale price by state. Obviously that data you have just given indicates that South Australia, thus far in the 2016-17 year, has the highest average wholesale price.

Senator DUNIAM: Yes, it has. Tasmania, affected by the Basslink outage, has escaped it.

CHAIR: Thank you very much.